The Active Quest for Alpha: A Loser's Game [View article]
Hester, I think you got it perfectly right!! "I like to say, the market is a lot less efficient than most academics think and much more efficient than most active managers/investors think." That about sums it up! What is quite interesting is how relatively simple Rule Based strategies beat almost all fundamental "Graham Dodd" approaches. I outline just such a strategy in the post below on "How to Beat 99% of Investment Advisors". seekingalpha.com/insta...
The Active Quest for Alpha: A Loser's Game [View article]
Jallen, I checked out your website and I saw some info on your picks from 2008-2010, but nothing before that. What are your stats (Compound Annual Return, Max Drawdown, etc.) from 2000-2010?
The Active Quest for Alpha: A Loser's Game [View article]
Jallen, I know of a guy that also tripled his "account" over the last 2 years. He went to Atlantic City and did really well on the slot machines. The fact this guy got lucky doesn't mean he's going to triple his account again over the next 2 years! Remember that there were a lot of "geniuses" in the Dot-com days - but they didn't look so smart in 2001-2002!
I've noticed that among a great many market participants there is a rejection of empirical (i.e. statistical) validation of strategies. For example, Chuck says "Frankly, I believe beyond a shadow of even a modicum of doubt, that calculating intrinsic value based on cash flows is infinitely more predictive than any statistical analysis could ever hope to be."
So the view is that I can just calculate "intrinsic value" and not worry about whether the approach being taken to calculate such value has delivered above average risk-adjusted returns in the past. This seems nonsensical to me. Would you want to implement a strategy that when back tested has underperformed the market? Or a strategy that has NEVER been thoroughly back tested?
People forget that in the search for above-average market returns we are COMPETING AGAINST EACH OTHER. Hence, the only logical a priori assumption must be that any arbitrarily selected strategy has NO VALUE unless it has been empirically and statistically validated (i.e. thoroughly back and forward tested), and then of course implemented successfully.
@amalgoli - You are quite correct to champion Shiller's CAPE valuation model. It is one of the few approaches that has been empirically validated. Most other approaches to determine overall market valuation have no historical validity, and depend on future earnings estimates that are notoriously unreliable. But here's the thing - Shiller's CAPE is very good at explaining market returns 7 to 10 years in the future. It is NOT a good tool to use for short or intermediate term market timing. John Hussman (of hussmanfunds.com) has a great article on this (see below). Bottom line - although the market is not as overvalued as it was at the top of the Tech Bubble, it is currently poised to deliver very poor returns for the next 10 years! www.hussmanfunds.com/w...
Ben Graham's Stock Valuing Formula: It Really Works [View article]
These type of theoretical valuation models are very pretty but they have several serious problems:
1. In the case of Graham's valuation model everything depends on the value of "g". As is well known, analyst's estimates of future growth are notoriously unreliable, which is why these models have proven to be very poor predictors of future returns - except of course, when you use ACTUAL HISTORICAL growth numbers. This of course makes the model useless as a way of predicting FUTURE returns (i.e. it can only explain what happened in the past).
2. As is the case here with Mr. Carnevale, most individuals favoring theoretical fundamental models for stock valuation present precious little evidence that they provide superior risk adjusted returns.
3. If I had used Mr. Graham's method to select "undervalued" stocks using information publicly available at the time of the purchase, what would have been my return stats (e.g. Max Daily Drawdown, Compound Annual Return, Volatility, etc.) over the past 10 to 20 years? We have no idea!
As I explain in my post (see link below), the only thing that matters is being able to deliver risk adjusted returns that are better than those of the overall market. Otherwise you are better off simply buying an S&P500 Index Fund! Fiddling around with unproven models won't do it. seekingalpha.com/insta...
The first paragraph of this article has to be some of the worst unadulterated hype that I have a read in a long time! I mean just the phrase "Can’t you hear it? Today, the dividend lion rears its head and roars" makes me want to burst out laughing!
As far as substance, what exactly is the action I'm supposed to take as a result of reading this article? Go out and buy these stocks using because of a "strategy" (if it can be called that) with no verifiable track record of any kind? Such nonsense!
The Active Quest for Alpha: A Loser's Game [View article]
As I mention below: I believe there is a good reason that simple Rule Based strategies can beat the market. Most investors base\ their Buy/Sell decisions on the kind of unvalidated "information" presented by the financial media (and that includes most of the baloney put out as "analysis" on SA).
This information has not been verified empirically and is essentially useless. So you basically have millions of market participants making Buy/Sell decisions on worthless (i.e. "no value added") data. This allows simple empirically validated strategies to work.
Thanks Extreme! I think we are on the same page here, and I agree that there are many different Moving Average approaches that work.
BTW - I submitted this to SA for publishing but they rejected it for being "too technical". I guess they like articles of the "Seven Hot Stocks That Will Double by Year End" variety! LOL!
The Active Quest for Alpha: A Loser's Game [View article]
LS is correct in a couple of points:
1. 95% of the balderdash that is presented as "analysis" and "commentary" is absolutely worthless - and SA is no exception. For starters almost none of the individuals pontificating on this site even bother to present a track record, nor do their conclusions come from empirically validated historical information. All they do is spout worthless conjectures based on their "opinion".
2. Most investors are better off simply buying index funds. At least they will do better than 80% of investment managers by doing so! Taking action on information of doubtful or unproven value is worse than simply indexing.
3. Predictions are absolutely useless. Neither you nor I know can accurately predict what will happen in the future.
However, LS is WRONG on a number of other critical points:
1. It is possible to successfully time the market WITHOUT making predictions about the future. Please check my InstaBlog post this week on how to beat 99% of Investment Managers. seekingalpha.com/insta...
2. The secret to successfully generating alpha is to rely on clear "Rules Based" trading systems that have been thoroughly verified empirically (i.e. back and forward tested). While markets are not perfectly efficient, they are generally quite efficient - so it amazes me that so many investors (both professionals and individuals) think they can beat the market using systems that are either subjective or have no track record whatsoever!
3. The fact that so many individuals are making decisions based on totally worthless information is what makes it possible for well tested "Rules Based" trading strategies to work. I mean just think of it - we have millions and millions of people making decisions based on nothing but hogwash! Fortunately for those able to think logically, sites like SA are doing their part to ensure that the typical investor remains clueless. Thanks SA!
T2 Partners Attribute Poor Performance to Contrarianism [View article]
Don't worry Hysteria - if you keep following Cramer's advice you'll go broke soon enough. Did you also load up on Bear Sterns stock when Cramer recommended it?
Getting It Wrong About Governmental Fiscal Responsibility [View article]
The article below (see link) should be required reading for all soviet-style bureaucrats at the Fed who think they can set the price of money (i.e. interest rates) arbitrarily in order to "control" the economy. Of course, what they typically do is UNDER-PRICE credit with all the long-term damage that does to the economy. mises.org/daily/3165/T...
Sorry, but price controls didn't work in the Soviet Union and they aren't going to work here either!
Getting It Wrong About Governmental Fiscal Responsibility [View article]
Brad, As you mention, our overlevaraged banks did NOT have control over their risks. And the reason goes beyond the fact that their models "didn't work properly" as some have alleged - In reality it is impossible to have a sound financial system with the amount of leverage that is considered "normal" today in developed economies. Of course, the amount of leverage we have is a direct result of the mismanagement of our monetary system by the Federal Reserve who actively encourage this type of leverage - whether it is through implied liquidity guarantees, or ridiculously low interest rates. Too-Big-To-Fail banks exist only because of government intervention. It is ironic that many individuals now blame "Laissez Faire Capitalism" for our current problems. We haven't had a true free market with sound money for many decades!!
T2 Partners Attribute Poor Performance to Contrarianism [View article]
Very interesting article! I agree with T2's observation regarding shorting - over the long-term it is a losing, or at best a break even proposition. It's usefulness is really in SMOOTHING returns over time (i.e. reducing unwanted volatility).
I do use shorting in some of my trading strategies, although with the full realization that in the 1990's doing so would have had a negative impact on my returns. Of course, in the 2000's it more than made up for the losing years, and in fact I ended 2008 with a loss of less than 3% in my own diversified portfolio thanks to my short positions!
The Active Quest for Alpha: A Loser's Game [View article]
"I like to say, the market is a lot less efficient than most academics think and much more efficient than most active managers/investors think."
That about sums it up!
What is quite interesting is how relatively simple Rule Based strategies beat almost all fundamental "Graham Dodd" approaches. I outline just such a strategy in the post below on "How to Beat 99% of Investment Advisors".
seekingalpha.com/insta...
The Active Quest for Alpha: A Loser's Game [View article]
The Active Quest for Alpha: A Loser's Game [View article]
Remember that there were a lot of "geniuses" in the Dot-com days - but they didn't look so smart in 2001-2002!
Q1 2011: The S&P Is Fairly Valued [View article]
For example, Chuck says "Frankly, I believe beyond a shadow of even a modicum of doubt, that calculating intrinsic value based on cash flows is infinitely more predictive than any statistical analysis could ever hope to be."
So the view is that I can just calculate "intrinsic value" and not worry about whether the approach being taken to calculate such value has delivered above average risk-adjusted returns in the past. This seems nonsensical to me. Would you want to implement a strategy that when back tested has underperformed the market? Or a strategy that has NEVER been thoroughly back tested?
People forget that in the search for above-average market returns we are COMPETING AGAINST EACH OTHER. Hence, the only logical a priori assumption must be that any arbitrarily selected strategy has NO VALUE unless it has been empirically and statistically validated (i.e. thoroughly back and forward tested), and then of course implemented successfully.
Q1 2011: The S&P Is Fairly Valued [View article]
But here's the thing - Shiller's CAPE is very good at explaining market returns 7 to 10 years in the future. It is NOT a good tool to use for short or intermediate term market timing. John Hussman (of hussmanfunds.com) has a great article on this (see below).
Bottom line - although the market is not as overvalued as it was at the top of the Tech Bubble, it is currently poised to deliver very poor returns for the next 10 years!
www.hussmanfunds.com/w...
Ben Graham's Stock Valuing Formula: It Really Works [View article]
1. In the case of Graham's valuation model everything depends on the value of "g". As is well known, analyst's estimates of future growth are notoriously unreliable, which is why these models have proven to be very poor predictors of future returns - except of course, when you use ACTUAL HISTORICAL growth numbers. This of course makes the model useless as a way of predicting FUTURE returns (i.e. it can only explain what happened in the past).
2. As is the case here with Mr. Carnevale, most individuals favoring theoretical fundamental models for stock valuation present precious little evidence that they provide superior risk adjusted returns.
3. If I had used Mr. Graham's method to select "undervalued" stocks using information publicly available at the time of the purchase, what would have been my return stats (e.g. Max Daily Drawdown, Compound Annual Return, Volatility, etc.) over the past 10 to 20 years? We have no idea!
As I explain in my post (see link below), the only thing that matters is being able to deliver risk adjusted returns that are better than those of the overall market. Otherwise you are better off simply buying an S&P500 Index Fund! Fiddling around with unproven models won't do it.
seekingalpha.com/insta...
10 Dividend Lions Roaring Now [View article]
As far as substance, what exactly is the action I'm supposed to take as a result of reading this article? Go out and buy these stocks using because of a "strategy" (if it can be called that) with no verifiable track record of any kind? Such nonsense!
The Active Quest for Alpha: A Loser's Game [View article]
This information has not been verified empirically and is essentially useless. So you basically have millions of market participants making Buy/Sell decisions on worthless (i.e. "no value added") data. This allows simple empirically validated strategies to work.
The Active Quest for Alpha: A Loser's Game [View article]
How to Beat 99% of Investment Managers [View instapost]
BTW - I submitted this to SA for publishing but they rejected it for being "too technical". I guess they like articles of the "Seven Hot Stocks That Will Double by Year End" variety! LOL!
The Active Quest for Alpha: A Loser's Game [View article]
1. 95% of the balderdash that is presented as "analysis" and "commentary" is absolutely worthless - and SA is no exception. For starters almost none of the individuals pontificating on this site even bother to present a track record, nor do their conclusions come from empirically validated historical information. All they do is spout worthless conjectures based on their "opinion".
2. Most investors are better off simply buying index funds. At least they will do better than 80% of investment managers by doing so! Taking action on information of doubtful or unproven value is worse than simply indexing.
3. Predictions are absolutely useless. Neither you nor I know can accurately predict what will happen in the future.
However, LS is WRONG on a number of other critical points:
1. It is possible to successfully time the market WITHOUT making predictions about the future. Please check my InstaBlog post this week on how to beat 99% of Investment Managers.
seekingalpha.com/insta...
2. The secret to successfully generating alpha is to rely on clear "Rules Based" trading systems that have been thoroughly verified empirically (i.e. back and forward tested). While markets are not perfectly efficient, they are generally quite efficient - so it amazes me that so many investors (both professionals and individuals) think they can beat the market using systems that are either subjective or have no track record whatsoever!
3. The fact that so many individuals are making decisions based on totally worthless information is what makes it possible for well tested "Rules Based" trading strategies to work. I mean just think of it - we have millions and millions of people making decisions based on nothing but hogwash! Fortunately for those able to think logically, sites like SA are doing their part to ensure that the typical investor remains clueless. Thanks SA!
T2 Partners Attribute Poor Performance to Contrarianism [View article]
Getting It Wrong About Governmental Fiscal Responsibility [View article]
mises.org/daily/3165/T...
Sorry, but price controls didn't work in the Soviet Union and they aren't going to work here either!
Getting It Wrong About Governmental Fiscal Responsibility [View article]
Of course, the amount of leverage we have is a direct result of the mismanagement of our monetary system by the Federal Reserve who actively encourage this type of leverage - whether it is through implied liquidity guarantees, or ridiculously low interest rates.
Too-Big-To-Fail banks exist only because of government intervention. It is ironic that many individuals now blame "Laissez Faire Capitalism" for our current problems. We haven't had a true free market with sound money for many decades!!
T2 Partners Attribute Poor Performance to Contrarianism [View article]
I do use shorting in some of my trading strategies, although with the full realization that in the 1990's doing so would have had a negative impact on my returns. Of course, in the 2000's it more than made up for the losing years, and in fact I ended 2008 with a loss of less than 3% in my own diversified portfolio thanks to my short positions!
Check out my blog:
seekingalpha.com/user/...