Yesterdaysnews wrote:yogiyoda wrote:Martin wrote:yogiyoda wrote:Trading is zero sum game. Through much of the book’s backtest ETFs did not exist or were not popular. So no one was playing the game. Trading ETFs has become increasing popular lately. Especially after the market crash.
Here are some recent results for the last five years (2010 through first quarter of 2015):
S&P 500 had a CAGR of 14.86%; a max drawdown of -16.26%; Sharpe Ratio of 1.15 and Sortino of 2.01.
a portfolio 70/30 stocks/bonds had a CAGR of 11.94%; a max drawdown of -9.89%; a Sharpe Ratio of 1.34 and Sortino of 2.49.
60/40 had a CAGR of 10.95%; a max drawdown of -7.63%; a Sharpe Ratio of 1.45 and Sortino of 2.80.
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The book’s GEM timing method with VFINX, VEU, and SHY had a CAGR of 8.75%; a max drawdown of -17.98%; Sharpe Ratio of .72 and Sortino of 1.10.
By the way, the author has no credentials as academic or an investor. He does work hard to give his writing a very professorial tone though. And he does a great job of name dropping actual traders he's met. Personally, I’d weigh the advice of Bogle, Buffett, Bernstein, Swedroe, Ferri etc a little heavier.
Let's run another five years from 2004-2009 and average it with your results. I have back tested as far back as I can download data out of Yahoo and have yet to poke holes. Sure you can Cherry pick some short time frames but I am showing higher returns and lower SD with a momentum approach than with 100% S&P over the last twenty five years. Just for grins I am going to go back to the S&P data from 1950-1990, establish the momentum factors and run it against my 1990-current data for a multitude of funds. This will eliminate the one concern that I have with my testing, that I have used the same data set to optimize and test.
But bottom line, I have yet to poke holes in the concept though in the spectrum of too simple to too complex I believe the simple GEM approach is a bit too simple. There are other tools that can be used to minimize downside and fund switching.
I believe GEM has performed worse (relative to the standard 60/40 portfolio) in the last five years than for any previous five year period. I suspect that it is not a coincidence that occurred when trading asset clases ( ETFs) became popular. Unfortunately GEM can only be tested to the 70s, but take a look at how Absolute Momentum performed from 1937 to 2000 on the author's website. It had lower returns than the market 63 years, only to finally out perform between 2000 and 2009. Since you like the performance of GEM from 2004 to 2015. Try running GEM for Europe ( VPACX), Pacific (VEURX), and short term bonds (SHY) for that time frame. Not only does it perform worse than the market. On a risk adjusted basis it also performs worse than just buying and holding an equal weight of VPACX, VEURX, SHY.
So your hypothesis is that the easy availability of ETFs will reduce the momentum anomaly going forward in the future? Basically, you feel the momentum anomaly will not persist?
I feel one could make the opposite argument, as the momentum anomaly is based on human behavioral factors which easy ETF trading encourages.
I would say if the entire market went passive or robo-advisors took over all accounts I could see the risk of momentum not persisting.
Momentum is actually a more mysterious and subtle force than portrayed in the book. It does not manifest in all markets or in all time periods.Even where it does manifest it is more subtle than the book portrays. I’ve run test on US stocks from 1926 to 2015. The book’s Absolute Momentum guessed the direction of the market incorrectly more than 50% of the time. I’ve run the 800 year back test for the large cap US stocks from 1926 to 2015. Basically, it’s a version of the author’s Absolute Momentum where you short the market instead of sitting in bonds. Buy and hold actually trounced this version of Absolute Momentum. Why? Because momentum actually is not as powerful as the results of a hand picked method chosen in hindsight indicate.
I’ve also looked into the 200 year backtest. For at least nine decades during that time period Momentum underperformed. Why? Because momentum is less pervasive than the author would have you believe. The author’s recommended technique is hit or miss with out of sample data. Especially when excluding 2008 where pretty much all momentum techniques worked great globally.
Now, consider that although human nature does not change, the markets do. They reflect not only human nature but also reflect the changing collective wisdom of the market participants as well as the changes allowed by innovations in technology. Realize that Mr Antonocci is not presenting anything new. He’s just packaging old news in a way to appeal to the Boglehead crowd. Momentum trading has been practiced with stocks for decades. Since the crash, momentum trading with Asset Classes (ETFs) has become very popular, even with institutions. This has changed things. Run some thought experiments to see what having many people buying when you want to buy and sell when you want to sell has on your returns. And realize that there are people who try to take advantage of known trading patterns. I feel confident in predicting lower returns for GEM going forward. Can it still beat the benchmarks? Sure. But it can also under-perform.
Are there better ways to trade momentum than GEM? Maybe, but there are other forums where you’ll find more like minds. Also, if you find something you really like, you probably want to keep it close to your vest. Trading is a zero sum game. For Bogleheads looking to lower downside risk, something like Swedroe’s Reducing the Risk of Black Swans would probably be more appealing.