Author Topic: Dual Momentum Investing  (Read 190597 times)

arebelspy

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Re: Dual Momentum Investing
« Reply #250 on: April 27, 2015, 03:41:57 PM »
Did you read it hoded?

It doesn't address what we're asking.

It says stuff like: "The existence of momentum is a well-established empirical fact"... okay?

In fact, their conclusion to the "myth" says: "There are two alarming things with this myth. First, the data are undeniable" -- AGAIN, we're not asking about data.  To bring it up when asking about theory is to show a fundamental misunderstanding of the question.

"Second, the statement denies any possible efficient markets stories for momentum, which, as discussed above, do indeed exist"
We aren't denying any particular stories, just asking why momentum works, or why it should.  This reads more of a criticism of EMH theorists (a counter argument to their main opponents, basically) than anything.

Neither of their final two conclusion statements, above, are compelling in addressing theory, so in the end they throw up their hands and admit that you should just trust the data anyways, even if we don't understand why it works:

"Most importantly, while we can debate forever how efficient or inefficient markets are (indeed, the Nobel Prize committee this year couldn’t decide and split the prize between the two camps), none of this debate should diminish momentum as a valuable investment tool. The point is not to confuse the theoretical debate (which is ongoing, not just for momentum, but for other premia, like value, as well) with the empirical consensus on the efficacy of momentum. We discovered the world wasn’t flat before we understood and agreed why."

...Alright?

What I'd really like to know though, is this:
Quote
And I'm still waiting for your explanation as to why, say, a 6 month lookback period gives you a more useful signal than a 3 or a 12 month lookback period.  A reason that is not "I shook up all the answers and this one came out on top" because that is just as easily attributable to random chance as market foresight. 

If they say there's a theory (or "story" as they call it), what story tells us what the look back period should be, logically (not which look back period back tested the best).
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #251 on: April 27, 2015, 03:48:30 PM »
Quote
I think you've misunderstood, miles.  People don't choose indexing because it backtests well against an index.  They choose indexing because they want to get market returns, good or bad, without taking on any additional risk by trying to beat the system.  I choose indexing because I'm prepared to play the game straight and accept average returns the same as everyone else is getting, at the lowest cost to me.  I'm not trying to win at anyone else's expense.

Here is my understanding.  People (including me) choose indexing because it is cheap and because it consistently outperforms 80 % of the other strategies out there for periods of 10 years or greater.  We are only happy to take market returns because we (logically) have concluded that we don't have what it takes to beat the market over long time horizons.

Quote
Performance chasers exist, but that doesn't tell you anything at all about how to devise a momentum strategy.  What part "performance chasers exist" determines your lookback period?

I'm not arguing that performance chasers don't exist.  I'm arguing that your strategy is really about the timing and duration of those otherwise random motions.  And I'm still waiting for your explanation as to why, say, a 6 month lookback period gives you a more useful signal than a 3 or a 12 month lookback period.  A reason that is not "I shook up all the answers and this one came out on top" because that is just as easily attributable to random chance as market foresight. 

There is always going to be SOME technical trading strategy that backtests better than all of the others for any given period.  Historically, the winning strategy tends to change every few years.  Why should we believe that this one will continue to outperform?

Performance chasing describes the post facto justification for the persistent and ubiquitous phenomenon of relative momentum.  Momentum empirically and reproducibly exists in all markets investigated thus far for time periods between 3 and 12 months.  So any lookback period in that time frame should be fine.  Logically I would favor a 3,6. and 12 month split of lookback periods to diversify away whipsaw risk, but for now I have just chosen 6 months, because it's easy and allows me get out of bear markets a bit sooner, than with a 12 month look back period (at the cost of more trading.)  The lookback period ends up not being all that important in backtesting, FWIW.

Quote
You've really got to tone down the personal attacks, man.  It's kind of been your theme in this thread.  Remember to attack the argument, not the person making it.

Fair criticism.

Quote
I have a bunch of letters after my name that suggest I understand the scientific method better than most people.  To follow your lead here, what's your null hypothesis?  What useful insight can you extract from that?  Surely you already know that you can never test a hypothesis using existing data if you've used that data to generate the hypothesis, right?

You are responding personally here to to a comment directed at ARS.  I'm not not sure why that is.

Out of sample testing and prospective testing of an approach after it has been devised are both useful empirical tests of a strategies robustness.

I consider empirical knowledge to be the most useful approach to strategizing for the future,  that's the bottom line.  I am suspicious of people who claim deep philosophical fealty to any strategy. 

In my jaundiced view, we are all playing the odds in the way that we think is smartest, and justifying our decisions after the fact. 

I'll take the card counter at the blackjack table everytime over the guy who has the best story for why his card strategy should work.


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milesdividendmd

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Re: Dual Momentum Investing
« Reply #252 on: April 27, 2015, 03:54:26 PM »
Did you read it hoded?

It doesn't address what we're asking.

It says stuff like: "The existence of momentum is a well-established empirical fact"... okay?

In fact, their conclusion to the "myth" says: "There are two alarming things with this myth. First, the data are undeniable" -- AGAIN, we're not asking about data.  To bring it up when asking about theory is to show a fundamental misunderstanding of the question.

"Second, the statement denies any possible efficient markets stories for momentum, which, as discussed above, do indeed exist"
We aren't denying any particular stories, just asking why momentum works, or why it should.  This reads more of a criticism of EMH theorists (a counter argument to their main opponents, basically) than anything.

Neither of their final two conclusion statements, above, are compelling in addressing theory, so in the end they throw up their hands and admit that you should just trust the data anyways, even if we don't understand why it works:

"Most importantly, while we can debate forever how efficient or inefficient markets are (indeed, the Nobel Prize committee this year couldn’t decide and split the prize between the two camps), none of this debate should diminish momentum as a valuable investment tool. The point is not to confuse the theoretical debate (which is ongoing, not just for momentum, but for other premia, like value, as well) with the empirical consensus on the efficacy of momentum. We discovered the world wasn’t flat before we understood and agreed why."

...Alright?

What I'd really like to know though, is this:
Quote
And I'm still waiting for your explanation as to why, say, a 6 month lookback period gives you a more useful signal than a 3 or a 12 month lookback period.  A reason that is not "I shook up all the answers and this one came out on top" because that is just as easily attributable to random chance as market foresight. 

If they say there's a theory (or "story" as they call it), what story tells us what the look back period should be, logically (not which look back period back tested the best).

We discovered the world was round and circling the sun with empirical observation.  The theory was the church's, and the more data we had, the more apparently wrong it became.
I can teach you to play the miles game in 30 days.  http://www.travelmiles101.com/travel-rewards-course-registration.  (A free course by mustachians for mustachians)

arebelspy

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Re: Dual Momentum Investing
« Reply #253 on: April 27, 2015, 03:55:35 PM »
Quote
I have a bunch of letters after my name that suggest I understand the scientific method better than most people.  To follow your lead here, what's your null hypothesis?  What useful insight can you extract from that?  Surely you already know that you can never test a hypothesis using existing data if you've used that data to generate the hypothesis, right?

You are responding personally here to to a comment directed at ARS.  I'm not not sure why that is.

You're okay attacking me, but don't want sol to respond to it, even defending the same position as I am? 

Quote
I'll take the card counter at the blackjack table everytime over the guy who has the best story for why his card strategy should work.

And I'll take being the house.  Good luck.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
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arebelspy

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Re: Dual Momentum Investing
« Reply #254 on: April 27, 2015, 03:57:56 PM »
We discovered the world was round and circling the sun with empirical observation.  The theory was the church's, and the more data we had, the more apparently wrong it became.

Hey, I'm all for data proving a theory wrong.

Or providing supporting evidence for a theory.

But I'd still like a theory.

And data doesn't always come first. E=MC^2 was verified after being posited, for example.

Regardless of which comes first though, they should support each other, not throw one out because you're stuck on the other.

I'm fine getting rid of a theory with no evidence.  I'm fine developing a theory for which there's lots of evidence.

But disregarding one for the other means you're much more likely to be wrong, IMO, than if you have them supporting each other.
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hodedofome

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Re: Dual Momentum Investing
« Reply #255 on: April 27, 2015, 03:59:41 PM »
Did you read it hoded?

It doesn't address what we're asking.

We aren't denying any particular stories, just asking why momentum works, or why it should. 


From the paper, quoted once again from the previous page:

there are several reasonable theories.
Most theories fall into one of two categories: risk-based and behavioral. While the jury is still out on which of these explanations better fit the data, the same can also be said for the size and value premia.
The behavioral models typically explain momentum as either an underreaction or delayed overreaction phenomenon (it is of course possible that both occur, making it harder to empirically sort things out). In the case of underreaction, the idea is that information travels slowly into prices for a variety of reasons (e.g., investors being too conservative, being inattentive, facing liquidity issues, or displaying the disposition effect—the tendency to sell winners too quickly and hold onto losers too long). In the case of overreaction, investors may chase returns, providing a feedback mechanism that drives prices even higher.26
The other possibility is that the momentum premium is compensation for risk. One set of models argues that economic risks that affect firm investment and growth rates can impact the long-term cash flows and dividends of the firm that generate momentum patterns. The idea is that high-momentum stocks face greater cash flow risk because of their growth prospects or face greater discount rate risk because of their investment opportunities, causing them to face a higher cost of capital.27 In addition, others argue that the presence of a correlation structure across markets and asset classes of momentum strategies is indicative of a shared economic risk.


That's essentially the standard answer. There's a whole bunch of research done about that if you want to look into it. If you don't like that answer, sorry. Move on.


What I'd really like to know though, is this:
Quote
And I'm still waiting for your explanation as to why, say, a 6 month lookback period gives you a more useful signal than a 3 or a 12 month lookback period.  A reason that is not "I shook up all the answers and this one came out on top" because that is just as easily attributable to random chance as market foresight. 

If they say there's a theory (or "story" as they call it), what story tells us what the look back period should be, logically (not which look back period back tested the best).

Doesn't matter which lookback period you choose, just pick one. Reposting from the previous page:


MDM

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Re: Dual Momentum Investing
« Reply #256 on: April 27, 2015, 04:03:04 PM »
Logically I would favor a 3,6. and 12 month split of lookback periods to diversify away whipsaw risk
Ensuring I understand: by this do you mean you
  - have some money (e.g., 1/3 each) invested according to each of the different look back periods so you could be investing in up to 3 different places at any given time, or
  - you take some weighted average (e.g., 1/3 each) of the performances for the different look back periods, and use that to invest in only one place at any given time?
« Last Edit: April 27, 2015, 04:04:59 PM by MDM »

arebelspy

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Re: Dual Momentum Investing
« Reply #257 on: April 27, 2015, 04:03:39 PM »
Doesn't matter which lookback period you choose, just pick one.

Saying one of the fundamental things the trades are based on doesn't matter seems absurd to me.

How does that not strike you as crazy?

Okay... I choose 31.415 years!
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #258 on: April 27, 2015, 04:10:33 PM »
Doesn't matter which lookback period you choose, just pick one.

Saying one of the fundamental things the trades are based on doesn't matter seems absurd to me.

How does that not strike you as crazy?

Okay... I choose 31.415 years!

All right, I'll tell you ARS.  It has to do with the phases of the moon, and the average butter production in non leap years in Bangladesh. Satisfied?

If you still don't know the answer to this question after reading the above thread, I got nothing for you man.... Momentum exists in the 3-15 month timeframe, so a 3.14 year look back would betray a fundamental ingonrance about the momentum anomaly. 
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hodedofome

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Re: Dual Momentum Investing
« Reply #259 on: April 27, 2015, 04:13:07 PM »
He wants us to tell him why it works in those timeframes...

I got nothing bro. Apparently people react to price momentum in those timeframes. It's consistent across all asset classes across hundreds of years of price data. It's just there, and no amount of public research has arbitraged it away. If that's not good enough for you then stop wasting your time on this thread. It ain't gonna get much better. We all have our beliefs about the market. All of us have to choose a strategy that is consistent with our beliefs. I'm not going to be able to change your beliefs and neither will you be able to change my beliefs, unless we are open to them being changed.

I personally use multiple timeframes as I don't want to get locked into just 1. I asked this question to a retired hedge fund manager profiled in the Market Wizards' books. He told me to pick the timeframe I'm comfortable with and don't worry so much about the entries and exits. Any decent trend following system will get you on the right side of the trend. The more important stuff is choosing the markets you'll trade and your risk control and personal psychology/discipline.
« Last Edit: April 27, 2015, 04:19:00 PM by hodedofome »

milesdividendmd

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Re: Dual Momentum Investing
« Reply #260 on: April 27, 2015, 04:22:52 PM »
He wants us to tell him why it works in those timeframes...

I got nothing bro. Apparently people react to price momentum in those timeframes. It's consistent across all asset classes across hundreds of years of price data. It's just there, and no amount of public research has arbitraged it away. If that's not good enough for you then stop wasting your time on this thread. It ain't gonna get much better. We all have our beliefs about the market. All of us have to choose a strategy that is consistent with our beliefs. I'm not going to be able to change your beliefs and neither will you be able to change my beliefs, unless we are open to them being changed.

I personally use multiple timeframes as I don't want to get locked into just 1. I asked this question to a retired hedge fund manager profiled in the Market Wizards' books. He told me to pick the timeframe I'm comfortable with and don't worry so much about the entries and exits. Any decent trend following system will get you on the right side of the trend. The more important stuff is choosing the markets you'll trade and your risk control and personal psychology/discipline.

The best answer to that question of periodicity is structural has to do with the agency problem and the timeframe of flows into and out of active funds.  This is based on work at the London school of economics.

http://cgt.columbia.edu/wp-content/uploads/2013/12/Woolley-Santos-Jurek-Theoretical-Analysis-of-Value-and-Momentum.pdf
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arebelspy

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Re: Dual Momentum Investing
« Reply #261 on: April 27, 2015, 04:30:39 PM »
He wants us to tell him why it works in those timeframes...

I got nothing bro. Apparently people react to price momentum in those timeframes.

Or at least they have in the past, and you are betting on the fact that they will (consistently) in the future.

I asked this question to a retired hedge fund manager profiled in the Market Wizards' books. He told me to pick the timeframe I'm comfortable with and don't worry so much about the entries and exits. Any decent trend following system will get you on the right side of the trend.

Yeah, I was afraid it came down to a "the trend is your friend" classic technical trading scheme.
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hodedofome

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Re: Dual Momentum Investing
« Reply #262 on: April 27, 2015, 04:38:20 PM »


The best answer to that question of periodicity is structural has to do with the agency problem and the timeframe of flows into and out of active funds.  This is based on work at the London school of economics.

http://cgt.columbia.edu/wp-content/uploads/2013/12/Woolley-Santos-Jurek-Theoretical-Analysis-of-Value-and-Momentum.pdf

Thanks, I was looking for that paper and couldn't find it in my stash.


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milesdividendmd

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Re: Dual Momentum Investing
« Reply #263 on: April 27, 2015, 04:45:04 PM »
Logically I would favor a 3,6. and 12 month split of lookback periods to diversify away whipsaw risk
Ensuring I understand: by this do you mean you
  - have some money (e.g., 1/3 each) invested according to each of the different look back periods so you could be investing in up to 3 different places at any given time, or
  - you take some weighted average (e.g., 1/3 each) of the performances for the different look back periods, and use that to invest in only one place at any given time?

3 buckets with 3 with separate look back periods.  My feeling is that this would diversify away some of the unique period specific whipsaw risk.  so if there were repeated 3 month whipsaws only 1/3 of the portfolio would be maximally effected.

I haven't modeled it, I just see it as a away to diversify away one of the 2 main risks of trend following at the cost of a little more complexity and a little more trading.
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Re: Dual Momentum Investing
« Reply #264 on: April 27, 2015, 04:45:49 PM »
I've read lots of studies on the subject. I've also read Miles' excellent series of blogs on the subject.

There is a lot of information out there. I'm convinced that the theory and the data behind it are at least as robust (and more so) than "buy and hold" indexing, which can be pretty well summarized as "blindly plow money into the market and pray to the gods of long term averages."

Look at the DM information out there. Be convinced. Or don't. Whatever

milesdividendmd

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Re: Dual Momentum Investing
« Reply #265 on: April 27, 2015, 04:46:45 PM »
And ARS I apologize for my earlier snarkiness.  I got frustrated.  I take it back.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #266 on: April 27, 2015, 05:18:29 PM »
Quote
I have a bunch of letters after my name that suggest I understand the scientific method better than most people.  To follow your lead here, what's your null hypothesis?  What useful insight can you extract from that?  Surely you already know that you can never test a hypothesis using existing data if you've used that data to generate the hypothesis, right?

You are responding personally here to to a comment directed at ARS.  I'm not not sure why that is.

You're okay attacking me, but don't want sol to respond to it, even defending the same position as I am? 

Quote
I'll take the card counter at the blackjack table everytime over the guy who has the best story for why his card strategy should work.

And I'll take being the house.  Good luck.

You live in Vegas right?  Haven't you ever wondered why casinos blacklist card counters?  What's your theory there???
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forummm

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Re: Dual Momentum Investing
« Reply #267 on: April 27, 2015, 05:44:39 PM »
Thanks MDMD, you saved me some keystrokes. I'll add to your post that we need to first decide what the benchmark is going to be before we make any conclusions whatsoever. Is the benchmark just US stocks? Who gets to cherry pick the benchmark like that? It is much more realistic to use the entire global market, rather that cherry pick 1 country out of all the other possibilities. Since the dual momentum strategy as mostly described on this post uses both worldwide stocks and bonds, we should probably compare it to a balanced portfolio, rather than a 100% stock portfolio. ESPECIALLY if the small timeperiod that we're cherry picking to compare (late '80s to 2000) is literally the best period of US stocks in all of history. That to me sounds incredibly biased. Rather let's compare much greater periods of time than just that one.

FWIW a balanced portfolio of 30% US, 30% Int'l and 40% Total US Bonds from 1986-2014 did 9.09% CAGR, -22.32% Drawdown and 11.45% Std Dev.

You are absolutely correct that there is a good bit of sensitivity to what asset classes you throw in the momentum portfolio. Especially if you are only choosing 1 asset class at a time. You have to really think through which asset classes you are going to pick. It is the most important choice in a system like this. The lookback window is of much less importance than the choice of asses classes.

In the examples posted in the thread, people used the S&P 500 and one or 2 international funds. And I think all or almost all examples used just 1 fund at a time or showed that using just 1 fund at a time had superior overall returns. Hence my using those same parameters for my analyses. I thought MDMD's point with this whole approach is that you don't need a balanced fund at any point in time because the magic of momentum will get you out of the market before your equities go all the way down and get you back in when they are ready to roar.
I would just like to say that I really appreciate your contribution to this thread forummm. You took that bad feeling in the pit of my stomache and you justified it with hard numbers.

That said, I couldn't stop myself from taking your test and trying to make it work. So, I took out the small cap and international funds, and just ran it with S&P 500 and Treasuries. "Absolute Momentum" is what MDMD calls it on his website. The results were MUCH better:

(Please copy and paste the full link to your browser, I can't get it to format properly)
https://www.portfoliovisualizer.com/test-market-timing-model?s=y&timingWeights[2]=0&endYear=2014&volatilityPeriodWeight=0&movingAverageType=1&windowSize=6&timingUnits[2]=2&timingModel=4&volatilityWindowSize=0&startYear=1985&assetsToHold=1&multipleTimingPeriods=false&timingUnits[1]=2&outOfMarketAssetType=1&timingPeriods[0]=5&timingWeights[0]=100&volatilityWindowSizeInDays=0&riskControl=false&symbols=VUSTX%2C+VFINX&riskWindowSizeInDays=0&timingUnits[0]=2&timingWeights[1]=0&windowSizeInDays=105&volatilityPeriodUnit=1&riskWindowSize=6&rebalancePeriod=1

I'm inclined to agree with you that there was simply no free lunch that decimates the market with minimal effort. That said, the practice of timing the market between ONLY US Stocks and Treasuries does stand up to your test. I am going to test other periods to see if it holds up.

Thanks for this idea. Interestingly, the timing portfolio is also the worst for quite some time, then moves up slowly and eventually is the highest return. At one point, the stock portfolio is nearly double the timing portfolio. It's interesting how much variability there is just by changing the inputs a bit. Whether or not we're doing what MDMD is calling DM, it's interesting how variable the results can be depending on what asset class you use.

forummm

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Re: Dual Momentum Investing
« Reply #268 on: April 27, 2015, 05:54:14 PM »
Thanks.  Can you (or anyone) elaborate?

For one, Gary uses past returns as being either positive or negative to define an uptrend or downtrend. Portfoliovisualizer only gives you moving averages but not past returns (absolute momentum). Sure you can use moving averages, and it'll be close, but it's not the same thing.

Second, Gary uses absolute momentum for the stock indexes first, and if those don't have absolute momentum, then he switches to Aggregate Bonds. Portfoliovisualizer doesn't allow you to choose the 'safe' asset. You just have to throw it in with the stock indexes.

Third, the international index Gary uses is not available on portfoliovisualizer.com back to the '80s as far as I know. Gary uses Standard & Poor’s 500, MSCI All Country World ex-US (MSCI World ex-US prior to 1988) and Barclays Capital U.S. Aggregate Bond (Barclays Capital U.S. Government and Credit prior to 1976) from here: http://www.optimalmomentum.com/trackrecord3.html

Thanks for starting to explain what DM is. It sounds to me like it's a lot more complicated than what I was reading in MDMD's posts. It sounded like MDMD was saying that you just see what index fund had the best performance the last 6 months (including a risk free fund) and you buy that with 100% of your portfolio. And that you could get this using just a risk free fund (for absolute), a US fund or two, and an international fund or two (for relative).

Unfortunately, I'm still not sure I understand fully what the steps are. Could you describe them in more detail the way you understand it? The whole DM idea seems interesting and I think it warrants some independent examination. You and others have said it's been validated by the book author. I'd just like to look at the data for myself using independent sources and learn more about it. Thanks in advance.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #269 on: April 27, 2015, 06:03:07 PM »
Step 1:  take 2 or more imperfectly correlated assets plus a risk free asset (cash, or short term treasuries)
Step 2:  Pick a lookback period between 3 and 12 months.
Step 3:  At the end of each month figure out the total returns for your assets over the look back period.
Step 4:  Invest 100% of your assets in the winner.

or you can make a portfolio with multiple pairs if uncorrelated assets + short term treasuries, and each month choose assets in each bucket as above

as an example....

S&P/EAFE/SHort term treasuries
Commodity/long term reasuries/Short term treasuries
Total bond/ High yield bond/Short term treasuries
Freighn REIT/Domestic REIT/Short term treasuries
Emerging Markets/Small cap value/Short term treasuries

Here is the seminal paper...

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042750
« Last Edit: April 27, 2015, 06:05:53 PM by milesdividendmd »
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Re: Dual Momentum Investing
« Reply #270 on: April 27, 2015, 06:35:02 PM »
You live in Vegas right?  Haven't you ever wondered why casinos blacklist card counters?  What's your theory there???

I don't understand the point of the card counting analogy.  Card counters perform better because they have an edge in handicapping the next card to be drawn, for the logical reason that card counters know which cards have already been drawn.  Card counters do not perform better for the reason that card counters have always performed better.

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Re: Dual Momentum Investing
« Reply #271 on: April 27, 2015, 06:39:29 PM »
Card counters are empiricists.  They use readily available data to shift the probability of winning in their favor.
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Re: Dual Momentum Investing
« Reply #272 on: April 27, 2015, 06:55:39 PM »
They are also executing a strategy that logically makes sense.  They are counting cards and thereby shifting the odds in their favor.  It's a strategy that logically makes sense, even if it had never been done before (i.e., it would make sense in the total absence of any empirical evidence that it works).

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Re: Dual Momentum Investing
« Reply #273 on: April 27, 2015, 06:56:04 PM »
Momentum is the phenomenon that securities which have performed well relative to peers (winners) on average continue to outperform, and securities that have performed relatively poorly (losers) tend to continue to underperform....
/snip

From this and the rest of the discussion, my understanding is that the hypothesis of dual momentum investing is something like:

Quote
Assets that have done well [in the last 3 – 12 months] will continue to do so [in the short-term*], and vice-versa
because 1. the underlying reasons they are doing well or not (e.g. economic policy, the government, the labour force, mood of the populace, interest rates, PE ratios, liquidity, credit ratings, etc. and whatever else influences whole asset classes and/or markets) are likely to remain stable in the short-term (i.e. for the next month); and 2. investors as a group tend to flock to what’s doing well and to abandon what isn’t over time.

*specifically, for at least the next month

Is that more or less correct?  It seems like a fair argument.

And the sub-hypothesis is:

An investor can take advantage of dual momentum by
Step 1:  take 2 or more imperfectly correlated assets plus a risk free asset (cash, or short term treasuries)
Step 2:  Pick a lookback period between 3 and 12 months.
Step 3:  At the end of each month figure out the total returns for your assets over the look back period.
Step 4:  Invest 100% of your assets in the winner.

smilla

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Re: Dual Momentum Investing
« Reply #274 on: April 27, 2015, 07:21:07 PM »
Also assumptions.

I think an underlying assumption of indexing is that, in the long term and in real terms, the market will grow and market returns will continue to permit a SWR of 4% because the curious, creative, clever and industrious nature of humankind will keep bringing new ideas to the market because it always has. 

An underlying assumption of dual momentum is that market returns and losses will continue to be amplified because the greedy, fearful, conforming and often irrational nature of humankind will keep bringing emotion into the market because it always has.

Indexing comes from a more positive mindset, and I know MMM is a crazy optimist but maybe dual momentum is more realistic.  Either way, the DM assumption seems just as reasonable as the Indexing assumption.

hodedofome

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Re: Dual Momentum Investing
« Reply #275 on: April 27, 2015, 07:22:03 PM »

They are also executing a strategy that logically makes sense.  They are counting cards and thereby shifting the odds in their favor.  It's a strategy that logically makes sense, even if it had never been done before (i.e., it would make sense in the total absence of any empirical evidence that it works).

Interesting you bring up card counting and what we're talking about here. The man who discovered how to beat blackjack himself, Ed Thorp, gave up beating the casinos after they tried to kill him. He turned to the biggest casino: stock/bond/commodity/currency markets and set up a hedge fund that did 20%+ returns over decades with very low risk. He eventually began trading a diversified trend following strategy very similar to what we've been discussing for the past 6 pages. He views the markets the same way as blackjack. He looks for an edge and exploits it.


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Re: Dual Momentum Investing
« Reply #276 on: April 27, 2015, 07:48:25 PM »

They are also executing a strategy that logically makes sense.  They are counting cards and thereby shifting the odds in their favor.  It's a strategy that logically makes sense, even if it had never been done before (i.e., it would make sense in the total absence of any empirical evidence that it works).

Interesting you bring up card counting and what we're talking about here. The man who discovered how to beat blackjack himself, Ed Thorp, gave up beating the casinos after they tried to kill him. He turned to the biggest casino: stock/bond/commodity/currency markets and set up a hedge fund that did 20%+ returns over decades with very low risk. He eventually began trading a diversified trend following strategy very similar to what we've been discussing for the past 6 pages. He views the markets the same way as blackjack. He looks for an edge and exploits it.


BG didn't bring it up; miles did.

And what Ed does (did) is quite different than following a rigid momentum strategy.

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Dual Momentum Investing
« Reply #277 on: April 27, 2015, 08:21:56 PM »
Okay. Here's a sincere question for Brooklyn, ARS, forummm, sol.

What is your current asset allocation in terms of asset class and why?
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Re: Dual Momentum Investing
« Reply #278 on: April 27, 2015, 08:26:39 PM »
Okay. Here's a sincere question for Brooklyn, ARS, forummm, sol.

What is your current asset allocation in terms of asset class and why?

How is that relevant?  You started a thread promoting a specific investing idea.  How is anyone else's investment portfolio going to support or discredit your strategy?

I prefer you stick to the topic at hand, I thought maybe we were finally getting somewhere.

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Re: Dual Momentum Investing
« Reply #279 on: April 27, 2015, 08:35:51 PM »
Miles didn't start it, someone else did.


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Re: Dual Momentum Investing
« Reply #280 on: April 27, 2015, 08:41:46 PM »
Check the thread. I didn't start it.
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Dual Momentum Investing
« Reply #281 on: April 27, 2015, 08:43:32 PM »
And where is it that you thought we were getting to Sol?
« Last Edit: April 27, 2015, 08:55:35 PM by milesdividendmd »
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Re: Dual Momentum Investing
« Reply #282 on: April 27, 2015, 09:00:12 PM »


They are also executing a strategy that logically makes sense.  They are counting cards and thereby shifting the odds in their favor.  It's a strategy that logically makes sense, even if it had never been done before (i.e., it would make sense in the total absence of any empirical evidence that it works).

Interesting you bring up card counting and what we're talking about here. The man who discovered how to beat blackjack himself, Ed Thorp, gave up beating the casinos after they tried to kill him. He turned to the biggest casino: stock/bond/commodity/currency markets and set up a hedge fund that did 20%+ returns over decades with very low risk. He eventually began trading a diversified trend following strategy very similar to what we've been discussing for the past 6 pages. He views the markets the same way as blackjack. He looks for an edge and exploits it.


BG didn't bring it up; miles did.

And what Ed does (did) is quite different than following a rigid momentum strategy.

Look at Ed's interview in Hedge Fund Market Wizards. He set up a trend following fund about 10 years ago and it was very promising, but his wife got sick so he shut it down. He admitted that it works, but that it's hard to stay with it (something that I wholeheartedly agree with). It was 100% systematic although more sophisticated that what is described in this thread. And that echoes what I've said before here - that Gary's implementation is nothing more than a simple diversified trend following fund, the same that's been used successfully since the early 1970s.


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691175002

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Re: Dual Momentum Investing
« Reply #283 on: April 27, 2015, 09:01:38 PM »
Interesting you bring up card counting and what we're talking about here. The man who discovered how to beat blackjack himself, Ed Thorp, gave up beating the casinos after they tried to kill him. He turned to the biggest casino: stock/bond/commodity/currency markets and set up a hedge fund that did 20%+ returns over decades with very low risk. He eventually began trading a diversified trend following strategy very similar to what we've been discussing for the past 6 pages. He views the markets the same way as blackjack. He looks for an edge and exploits it.
Wikipedia points out that Ed Thorp only has unverifiable claims that his personal accounts returned 20%+ a year.  His hedge fund liquidated after blowing itself up in junk bonds.
Anecdotal evidence is worth nothing, especially since thousands (if not hundreds of thousands) of mutual/hedge funds that failed have been forgotten.

Either way, the DM assumption seems just as reasonable as the Indexing assumption.
The rational for indexing is very different than the arguments for factor indexing. 

The argument for indexing is an unavoidable mathematical truth:  Investors in aggregate must achieve the market return, as they are by definition the market.  Every time an active investor beats the market, there is some sucker counterparty who has footed the bill.  Throw in fees and everyone (in aggregate) loses.

An individual active investor might have confidence that he can continuously take money from other, less sophisticated investors.  He might even be right for a period of time, but losing players will eventually leave the market or become more sophisticated themselves.

The choice to invest passively is a conscious decision to separate yourself from that financial arms race.  A belief that dual-momentum will produce superior risk-adjusted returns going forward is the exact opposite, you must believe that unsophisticated investors will continue to repeat the same mistakes.  Dual momentum achieves its returns by methodically exploiting other investors.

When the market rolls over and you sell your S&P500 ETF it doesn't spontaneously turn into cash.  Some guy on another computer has one more ETF unit and a little less cash.
« Last Edit: April 27, 2015, 09:06:19 PM by 691175002 »

milesdividendmd

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Re: Dual Momentum Investing
« Reply #284 on: April 27, 2015, 09:08:52 PM »
The same is true when you buy or sell an etf for investment, rebalancing, or liquidation purposes.

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Re: Dual Momentum Investing
« Reply #285 on: April 27, 2015, 09:19:47 PM »

Interesting you bring up card counting and what we're talking about here. The man who discovered how to beat blackjack himself, Ed Thorp, gave up beating the casinos after they tried to kill him. He turned to the biggest casino: stock/bond/commodity/currency markets and set up a hedge fund that did 20%+ returns over decades with very low risk. He eventually began trading a diversified trend following strategy very similar to what we've been discussing for the past 6 pages. He views the markets the same way as blackjack. He looks for an edge and exploits it.
Wikipedia points out that Ed Thorp only has unverifiable claims that his personal accounts returned 20%+ a year.  His hedge fund liquidated after blowing itself up in junk bonds.
Anecdotal evidence is worth nothing, especially since thousands (if not hundreds of thousands) of mutual/hedge funds that failed have been forgotten.

Let's not lie here. His hedge fund didn't blow up. He shut it down after his parter on the other side of the U.S. was charged with with security violations. Nobody served time in jail, Ed was never even questioned and he only shut it down because he decided he didn't need the headache of working with his partner. He set up his own hedge fund afterwards and did very well.

We have no reason to believe a man like Ed would lie about the returns of a private partnership (where his investors could come out and show the real story) any more than Buffett's track record during his partnership days.


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Re: Dual Momentum Investing
« Reply #286 on: April 27, 2015, 09:33:04 PM »
Also assumptions.

I think an underlying assumption of indexing is that, in the long term and in real terms, the market will grow and market returns will continue to permit a SWR of 4% because the curious, creative, clever and industrious nature of humankind will keep bringing new ideas to the market because it always has. 

An underlying assumption of dual momentum is that market returns and losses will continue to be amplified because the greedy, fearful, conforming and often irrational nature of humankind will keep bringing emotion into the market because it always has.

Indexing comes from a more positive mindset, and I know MMM is a crazy optimist but maybe dual momentum is more realistic.  Either way, the DM assumption seems just as reasonable as the Indexing assumption.

Indeed.

-------------------------------------
"<Insert Strategy Here> is part of the 1% of strategies which beat over half of all invested dollars in the past X amount of years.  While this information is public, I do not expect the losers to adopt my published strategy, or change to a better strategy, so I expect it to continue beating over half of all invested dollars in the future."

Compared to:

"Indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future."
-------------------------------------

The whole "human emotion" justification to explain why a particular strategy backtests well, is by no means new.  There's always a hook.  In fact, I'd say the majority of active strategies I've come across over the years, play that same hook to much fanfare.  The funny thing is, it can be used both for trend following strategies, and for reversal strategies!  I've seen it argued for strategies like the one in this thread, and I've seen it argued for buy and hold indexing, I've seen it argued for day trading strategies, and everything from "buy the dips", to "buy the breakout", to "buy only when you see this specific chart pattern over the last 15 minutes - 3 hours"...I could go on and on.  For someone new to active trading, as I suspect many people on this forum are, you might not have seen this before:

-------------------------------------
"The market is made up of humans, and by human nature we are afraid of loss, therefore you should sell when the market looks SCARY and moves up to X!"

"The market is made up of humans, and by human nature we are afraid of loss, therefore you should buy when the market looks GREAT and moves up to X!"
-------------------------------------

With X being the same value each time.  Sometimes the strategies even link to psychology experiments, which point to certain deficiencies in the brain, which lead to seeing patterns which aren't there, therefore you should buy/sell at X.  My favorite was the mouse experiment.  They took a group of Yale students, and showed them two boxes.  A piece of cheese would show up 60% in the left box, and 40% in the right box, but the students weren't told this.  They were just told to try and get the most amount of cheese possible.  The students ended up creating some complex algorithm to try and predict where the cheese should show up.  In the end, they only got the cheese 52% of the time, and when asked they were all convinced they were making headway in solving the riddle.

At the same time, they ran the experiment with a mouse in a maze.  After the first few trials, the mouse figured out that the cheese shows up on the left more often than not, and as a result just choose left each time.  The mouse got the cheese 60% of the time, beating the Yale students!

Now comes the fun part!  The trading strategy says, "Be like the mouse!  Buy/Sell at X!"  The trouble was, you could make the argument either way.  "X has just moved up considerably.  Be like the mouse, you already have the cheese, stop trying to capture more, just settle for what the market gives you.  Sell everything!"  Or, "X has just moved up considerably.  Be like the mouse, the market is telling you where the cheese is.  Buy everything!"

Indeed, these type of hooks can seem promising, even exciting.  My advice to any newbies in this thread, don’t fall into the trap.  You buy the market not because it promises to exploit the “human emotion” factor, making you rich in the process.  You buy VTSAX, the Total US Stock Market Index Fund, simply because you want to capture the market.  Again, indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future.

You don’t buy VBTLX, the Total US Bond Market Index Fund because it less volatile in the past, but because bonds are a written contract, where you are paid periodic interest payments, and in the end you get your full investment back.  In most cases (70% of VBTLX) the contract is guaranteed by the government.  This makes it a relatively safe place to put your money.

Sol put it perfectly:
-------------------------------------
People don't choose indexing because it backtests well against an index.  They choose indexing because they want to get market returns, good or bad, without taking on any additional risk by trying to beat the system.  I choose indexing because I'm prepared to play the game straight and accept average returns the same as everyone else is getting, at the lowest cost to me.  I'm not trying to win at anyone else's expense.
-------------------------------------

As did Brooklynguy:
-------------------------------------
If you use backtesting alone, you have proven nothing more than the fact that the strategy has worked in the past.  It is textbook survivorship bias to draw a conclusion solely from backtesting, because you are ignoring the infinite number of conceivable and backtestable strategies that failed to work in the past.  If you backtest enough strategies, you are bound to find one that worked through random chance alone.
-------------------------------------

Assuming the strategy in this thread is indeed based solely on backtesting, my advice to any newbies would be to proceed with caution.  Survivorship bias is the single greatest fallacy in investing, and it’s better to find out now, than after 16 years of underperformance.
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hodedofome

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Re: Dual Momentum Investing
« Reply #287 on: April 27, 2015, 09:33:24 PM »
Instructions from Gary's book on how to implement his strategy



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hodedofome

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Re: Dual Momentum Investing
« Reply #288 on: April 27, 2015, 09:47:44 PM »
Returns based on various look back periods since 1974


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smilla

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Re: Dual Momentum Investing
« Reply #289 on: April 27, 2015, 11:15:46 PM »
The argument for indexing is an unavoidable mathematical truth:  Investors in aggregate must achieve the market return, as they are by definition the market. Agreed  Every time an active investor beats the market, there is some sucker counterparty who has footed the bill.  Throw in fees and everyone (in aggregate) loses. 

An individual active investor might have confidence that he can continuously take money from other, less sophisticated investors.  He might even be right for a period of time, but losing players will eventually leave the market or become more sophisticated themselves. 

The choice to invest passively is a conscious decision to separate yourself from that financial arms race.  Agreed  A belief that dual-momentum will produce superior risk-adjusted returns going forward is the exact opposite, you must believe that unsophisticated investors will continue to repeat the same mistakes.  Dual momentum achieves its returns by methodically exploiting other investors.

I agree with what you say about indexing but I am not sure about the rest.  I understand the math, that the market is a zero sum game in and of itself but is it zero sum in the experience of investors over their investing life?

If a DMer or other active trader is selling when they get the signal surely an Indexer is buying and each believes they are winning and maybe in the end they both are. 
And as retirees are selling their shares for income, while we who are still accumulating are buying them, which is the winner and which the loser? 
And then there are the overall market gains, (this is above my head, sorry if it's a stupid question) if the return on my portfolio averages 8% a year does that come on the back of some poor loser?  Or is there just a loser when I start selling my investments like the retirees above?
Now if someone is selling at the bottom of the market, I can see they are losing but surely even an Indexer would be buying what he could. 

You make it sound as if it is immoral to be an active investor but maybe what you are taking issue with specifically is that trend-following (and maybe other active methods) amplifies the bulls and bears and that is more likely to make us all losers?  That makes more sense to me.

OTOH the DMer buys on the high side (top performer) so wouldn't that morally balance out the buying back in on the low side?  :)

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Re: Dual Momentum Investing
« Reply #290 on: April 27, 2015, 11:28:26 PM »
"Indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future."
-------------------------------------

Sol put it perfectly:
-------------------------------------
People don't choose indexing because it backtests well against an index.  They choose indexing because they want to get market returns, good or bad, without taking on any additional risk by trying to beat the system.  I choose indexing because I'm prepared to play the game straight and accept average returns the same as everyone else is getting, at the lowest cost to me.  I'm not trying to win at anyone else's expense.
-------------------------------------

And also

The choice to invest passively is a conscious decision to separate yourself from that financial arms race. 

Thanks Dodge and 691175002.  I didn't like watching my investments plummet in 2008/09 and although I knew enough not to sell, I am sorry to say I was too nervous to buy and funnelled most of my savings to my mortgage for 2 years.  The idea of avoiding the next bear is very very seductive but....

milesdividendmd

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Re: Dual Momentum Investing
« Reply #291 on: April 27, 2015, 11:28:40 PM »
Can you answer why a dual momentum strategy should work going forward without using any previous historical data or saying "it empirically has worked" or anything like that?

I have some vague answers for that question.  I don't generally ask people for answers without having some idea of what I might expect in response.

As we laid out earlier, the success of this strategy hinges upon choosing a lookback period that gives you useful signals of when to enter and exit the asset classes you've chosen.  It should outperform a passive index investor if the market moves in predictable cycles, like every 10% drop over a 6 month period eventually becomes a 20% or greater drop, or something equivalent.  Or every 10% rise over a 6 month period signals an oncoming period of market stability and growth that will exceed 6 months.  And it doesn't have to be perfect to outperform the index, just right slightly more than half the time.

And in broad strokes I think I can buy that idea.  Recessions are not randomly distributed.  They are more likely to last between six and 18 months than between 1 and 3 months.  They don't usually happen only six months apart.  They are unlikely to last more than three years, not just empirically unlikely but fundamentally unlikely, because the US government takes steps to pull us out of recession.  They lower interest rates, they vote for stimulus plans, they start wars.  Similarly, periods of prosperity tend to engender more prosperity, because they are indicative of fertile economic ground.  The economy flourishes when we have abundant (but not too abundant) labor with the right mix of technical skills for the current marketplace, when taxes are higher, when the middle class has surplus cash to spend on discretionary items, and when resource extraction and manufacturing industries are running at full throttle.  Those things generate wealth and stability, and it takes some sort of external shock to the system to upset that period of prosperity.

So now it sounds like I'm defending dual momentum investing.  I'm just trying to hypothesize what types of underlying economic forces might cause the future market to behave in predictable patterns, and government intervention in the markets is one possibility.  Government works hard to keep the economy humming, so when the economy falters they tend to step in with proposed remedies, and the timescale of that intervention is not totally random.  It takes a few months for policies to be drafted or laws to get passed and implemented.  It takes a few more months for any effect of those changes to become evident.   Maybe the net results is that recessions will never last more than 12 months ever again?

I'm certainly not going to trade on that assumption, but it is an assumption one could build a "technical trading" system around and that system might look a lot like dual momentum.

A bear market, recession or depression can last 6 months or 18 months or 60 months, and it won't matter.  Dual momentum (or any trendfollowing strategy) will shine in such a circumstance, and the longer the recession, the more trendfollowing will outpace the market.  As the stock market goes down the value of cash or short term treasuries will become relatively more.  this is precisely why such strategies always have markedly decreased drawdowns over long backtests.

The only truky problematic market scenarios for DM that I have identified are lookback period specific whipsaws (which can probably be diversified away partially by using multiple lookback periods) and BIG flash crashes with rapid recoveries largely contained within the lookback period, of which there has only been one in US market history, that I am aware of:  Black Monday. 

Long bear markets are a blessing to a trendfollower (or dual momentum investor)  who wishes to outperform the broad market. 

Whether or not dual momentum will outperform on any 10 year period is truly a coin flip, but it will almost always have decreased drawdowns.  No exceptions to date, but past performance does not........

This is the whole point of Dual momentum or any trendfollowing strategy.

It is cheap.
It is a "cowards strategy"  aka it is designed to minimize drawdowns.
Because it is a coward's strategy it allows one to take on more risk most of the time, ie be 100 % stocks unless your strategy signals that you are in a bear market.
Also for me it's behaviorally easy.  I don't have to worry about my actual risk tolerance being lower than I think it is.  I will flee to short term treasuries when the going gets tough, and get back in when the market starts trending up again according to my lookback period.  All of which makes day to day market volatility much less uncomfortable, despite my more concentrated portfolio.

In other words I'm willing to suffer through significant negative tracking error in bull markets, in order to avoid most of the pain in most bear markets. That's the bargain as I see it.

But not in my taxable accounts.  For those I will remain a plain vanilla buy and holder (with a small value tilt and 50% international exposure.)



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Re: Dual Momentum Investing
« Reply #292 on: April 28, 2015, 07:43:29 AM »
Instructions from Gary's book on how to implement his strategy



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Interesting. So Gary is saying 12-month lookback and to buy aggregate bonds based on Tbills. That sounds different than what MDMD is saying (6-months and holding T-bills or equities only). Thanks for the chart.

Is there an explanation for why aggregate bonds are better than T-bills for holding during times when T-bills outperform equities?

forummm

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Re: Dual Momentum Investing
« Reply #293 on: April 28, 2015, 07:46:01 AM »
Returns based on various look back periods since 1974


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Also interesting. I wonder why a 12 month lookback would have a better associated return. It seems like this would maybe avoid whipsaw more. But also would leave you in market crashes (and out of initial bull markets) longer.

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Re: Dual Momentum Investing
« Reply #294 on: April 28, 2015, 07:47:28 AM »
The argument for indexing is an unavoidable mathematical truth:  Investors in aggregate must achieve the market return, as they are by definition the market. Agreed  Every time an active investor beats the market, there is some sucker counterparty who has footed the bill.  Throw in fees and everyone (in aggregate) loses. 

An individual active investor might have confidence that he can continuously take money from other, less sophisticated investors.  He might even be right for a period of time, but losing players will eventually leave the market or become more sophisticated themselves. 

The choice to invest passively is a conscious decision to separate yourself from that financial arms race.  Agreed  A belief that dual-momentum will produce superior risk-adjusted returns going forward is the exact opposite, you must believe that unsophisticated investors will continue to repeat the same mistakes.  Dual momentum achieves its returns by methodically exploiting other investors.

I agree with what you say about indexing but I am not sure about the rest.  I understand the math, that the market is a zero sum game in and of itself but is it zero sum in the experience of investors over their investing life?

If a DMer or other active trader is selling when they get the signal surely an Indexer is buying and each believes they are winning and maybe in the end they both are. 
And as retirees are selling their shares for income, while we who are still accumulating are buying them, which is the winner and which the loser? 
And then there are the overall market gains, (this is above my head, sorry if it's a stupid question) if the return on my portfolio averages 8% a year does that come on the back of some poor loser?  Or is there just a loser when I start selling my investments like the retirees above?
Now if someone is selling at the bottom of the market, I can see they are losing but surely even an Indexer would be buying what he could. 

You make it sound as if it is immoral to be an active investor but maybe what you are taking issue with specifically is that trend-following (and maybe other active methods) amplifies the bulls and bears and that is more likely to make us all losers?  That makes more sense to me.

OTOH the DMer buys on the high side (top performer) so wouldn't that morally balance out the buying back in on the low side?  :)

The market is not zero-sum. 

Imagine there is no stock market.  I create a company called Nacho Inc.  I have a great idea, but not enough money, so I sell ownership in the form of stock, 1000 shares for $1,000.  You buy the shares and now own the company, along with it's future profits (or losses).  The company starts doing good, and the price of stock doubles (because everyone anticipates those future earnings from Nacho Inc. to be good since the company is doing good), so you sell it to Sol for double what you paid.  The company continues doing well, and the price doubles again, so Sol sells it to miles for $4,000.  Assuming $4/share is a fair price and miles didn't buy it simply because he was irrational or trend following, then the profit you and Sol made didn't come at the expense of someone else, it was real wealth generated. 

The same is true for the market as a whole.  The entire market uses the capital invested to generate real wealth and economic growth.

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Re: Dual Momentum Investing
« Reply #295 on: April 28, 2015, 08:26:58 AM »
I agree with what you say about indexing but I am not sure about the rest.  I understand the math, that the market is a zero sum game in and of itself but is it zero sum in the experience of investors over their investing life?
You are basically right.  I tried to be fairly careful in my post to qualify that it only applies to abnormal risk-adjusted returns which has a fairly narrow definition.

If you borrow a bunch of money and go into the S&P500 with 200% leverage you can absolutely beat the market without taking from other active investors.  The difference is that you have not beaten the market on a risk-adjusted basis.

Similarly, if you believe that momentum investing is risky in some way, you can obtain superior long term returns without exploiting other investors.

Continuing that line of thought, you can say momentum returns are uncorrelated to equity/bonds.  Just like adding bonds to a portfolio can increase its risk adjusted returns, adding momentum to a portfolio can increase its risk adjusted returns as well.  In this situation, investors who do not participate in momentum have simply chosen not to allocate to that factor.  It may feel like a cop-out, but consider that we don't say bond investors are getting exploited by equity investors.  Bond investors simply have a different risk profile.


You might have realized that I've written a lot but said very little.  The point is that if you are investing it is helpful to understand where your returns are coming from.  I believe it is more logical to assume momentum returns are compensation for additional risk (which can be mitigated via diversification)

Risk includes more than just historical standard deviation.  I believe a major contributor to momentum returns is the generally held belief that it cannot persist.

forummm

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Re: Dual Momentum Investing
« Reply #296 on: April 28, 2015, 09:29:38 AM »
I agree with what you say about indexing but I am not sure about the rest.  I understand the math, that the market is a zero sum game in and of itself but is it zero sum in the experience of investors over their investing life?
You are basically right.  I tried to be fairly careful in my post to qualify that it only applies to abnormal risk-adjusted returns which has a fairly narrow definition.

If you borrow a bunch of money and go into the S&P500 with 200% leverage you can absolutely beat the market without taking from other active investors.  The difference is that you have not beaten the market on a risk-adjusted basis.

Similarly, if you believe that momentum investing is risky in some way, you can obtain superior long term returns without exploiting other investors.

Continuing that line of thought, you can say momentum returns are uncorrelated to equity/bonds.  Just like adding bonds to a portfolio can increase its risk adjusted returns, adding momentum to a portfolio can increase its risk adjusted returns as well.  In this situation, investors who do not participate in momentum have simply chosen not to allocate to that factor.  It may feel like a cop-out, but consider that we don't say bond investors are getting exploited by equity investors.  Bond investors simply have a different risk profile.


You might have realized that I've written a lot but said very little.  The point is that if you are investing it is helpful to understand where your returns are coming from.  I believe it is more logical to assume momentum returns are compensation for additional risk (which can be mitigated via diversification)

Risk includes more than just historical standard deviation.  I believe a major contributor to momentum returns is the generally held belief that it cannot persist.

I tend to agree with you that momentum is actually more risky in some ways. The proponents in this thread have repeatedly said that it's 'proven' to be less risky. But I think that momentum carries additional risks that are not accounted for in the standard deviations cited. This could explain why the technique may work but is still not a free lunch (i.e. doesn't have higher returns and lower risk simultaneously).

arebelspy

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Re: Dual Momentum Investing
« Reply #297 on: April 28, 2015, 09:37:06 AM »
Also assumptions.

I think an underlying assumption of indexing is that, in the long term and in real terms, the market will grow and market returns will continue to permit a SWR of 4% because the curious, creative, clever and industrious nature of humankind will keep bringing new ideas to the market because it always has. 

An underlying assumption of dual momentum is that market returns and losses will continue to be amplified because the greedy, fearful, conforming and often irrational nature of humankind will keep bringing emotion into the market because it always has.

Indexing comes from a more positive mindset, and I know MMM is a crazy optimist but maybe dual momentum is more realistic.  Either way, the DM assumption seems just as reasonable as the Indexing assumption.

Indeed.

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"<Insert Strategy Here> is part of the 1% of strategies which beat over half of all invested dollars in the past X amount of years.  While this information is public, I do not expect the losers to adopt my published strategy, or change to a better strategy, so I expect it to continue beating over half of all invested dollars in the future."

Compared to:

"Indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future."
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The whole "human emotion" justification to explain why a particular strategy backtests well, is by no means new.  There's always a hook.  In fact, I'd say the majority of active strategies I've come across over the years, play that same hook to much fanfare.  The funny thing is, it can be used both for trend following strategies, and for reversal strategies!  I've seen it argued for strategies like the one in this thread, and I've seen it argued for buy and hold indexing, I've seen it argued for day trading strategies, and everything from "buy the dips", to "buy the breakout", to "buy only when you see this specific chart pattern over the last 15 minutes - 3 hours"...I could go on and on.  For someone new to active trading, as I suspect many people on this forum are, you might not have seen this before:

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"The market is made up of humans, and by human nature we are afraid of loss, therefore you should sell when the market looks SCARY and moves up to X!"

"The market is made up of humans, and by human nature we are afraid of loss, therefore you should buy when the market looks GREAT and moves up to X!"
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With X being the same value each time.  Sometimes the strategies even link to psychology experiments, which point to certain deficiencies in the brain, which lead to seeing patterns which aren't there, therefore you should buy/sell at X.  My favorite was the mouse experiment.  They took a group of Yale students, and showed them two boxes.  A piece of cheese would show up 60% in the left box, and 40% in the right box, but the students weren't told this.  They were just told to try and get the most amount of cheese possible.  The students ended up creating some complex algorithm to try and predict where the cheese should show up.  In the end, they only got the cheese 52% of the time, and when asked they were all convinced they were making headway in solving the riddle.

At the same time, they ran the experiment with a mouse in a maze.  After the first few trials, the mouse figured out that the cheese shows up on the left more often than not, and as a result just choose left each time.  The mouse got the cheese 60% of the time, beating the Yale students!

Now comes the fun part!  The trading strategy says, "Be like the mouse!  Buy/Sell at X!"  The trouble was, you could make the argument either way.  "X has just moved up considerably.  Be like the mouse, you already have the cheese, stop trying to capture more, just settle for what the market gives you.  Sell everything!"  Or, "X has just moved up considerably.  Be like the mouse, the market is telling you where the cheese is.  Buy everything!"

Indeed, these type of hooks can seem promising, even exciting.  My advice to any newbies in this thread, don’t fall into the trap.  You buy the market not because it promises to exploit the “human emotion” factor, making you rich in the process.  You buy VTSAX, the Total US Stock Market Index Fund, simply because you want to capture the market.  Again, indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future.

You don’t buy VBTLX, the Total US Bond Market Index Fund because it less volatile in the past, but because bonds are a written contract, where you are paid periodic interest payments, and in the end you get your full investment back.  In most cases (70% of VBTLX) the contract is guaranteed by the government.  This makes it a relatively safe place to put your money.

Sol put it perfectly:
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People don't choose indexing because it backtests well against an index.  They choose indexing because they want to get market returns, good or bad, without taking on any additional risk by trying to beat the system.  I choose indexing because I'm prepared to play the game straight and accept average returns the same as everyone else is getting, at the lowest cost to me.  I'm not trying to win at anyone else's expense.
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As did Brooklynguy:
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If you use backtesting alone, you have proven nothing more than the fact that the strategy has worked in the past.  It is textbook survivorship bias to draw a conclusion solely from backtesting, because you are ignoring the infinite number of conceivable and backtestable strategies that failed to work in the past.  If you backtest enough strategies, you are bound to find one that worked through random chance alone.
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Assuming the strategy in this thread is indeed based solely on backtesting, my advice to any newbies would be to proceed with caution.  Survivorship bias is the single greatest fallacy in investing, and it’s better to find out now, than after 16 years of underperformance.

Well said Dodge!

This is what we meant we we said people invest in indexing based on theory, not back testing.  That doesn't mean you throw out back testing (if a theory doesn't test well, you want to know why).

This is a much better explanation of why someone might index not based on it testing better than other strategies, and a good explanation of why these technical trading systems often sound silly, regardless of how well they back test.  Are they going to work in the future, and why?  That's much more important to me than how much they've outperformed in the past, unless you're giving me a time machine to go with it.
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Re: Dual Momentum Investing
« Reply #298 on: April 28, 2015, 11:02:18 AM »
Did you read it hoded?

It doesn't address what we're asking.

It says stuff like: "The existence of momentum is a well-established empirical fact"... okay?

In fact, their conclusion to the "myth" says: "There are two alarming things with this myth. First, the data are undeniable" -- AGAIN, we're not asking about data.  To bring it up when asking about theory is to show a fundamental misunderstanding of the question.

"Second, the statement denies any possible efficient markets stories for momentum, which, as discussed above, do indeed exist"
We aren't denying any particular stories, just asking why momentum works, or why it should.  This reads more of a criticism of EMH theorists (a counter argument to their main opponents, basically) than anything.

Neither of their final two conclusion statements, above, are compelling in addressing theory, so in the end they throw up their hands and admit that you should just trust the data anyways, even if we don't understand why it works:

"Most importantly, while we can debate forever how efficient or inefficient markets are (indeed, the Nobel Prize committee this year couldn’t decide and split the prize between the two camps), none of this debate should diminish momentum as a valuable investment tool. The point is not to confuse the theoretical debate (which is ongoing, not just for momentum, but for other premia, like value, as well) with the empirical consensus on the efficacy of momentum. We discovered the world wasn’t flat before we understood and agreed why."

...Alright?

What I'd really like to know though, is this:
Quote
And I'm still waiting for your explanation as to why, say, a 6 month lookback period gives you a more useful signal than a 3 or a 12 month lookback period.  A reason that is not "I shook up all the answers and this one came out on top" because that is just as easily attributable to random chance as market foresight. 

If they say there's a theory (or "story" as they call it), what story tells us what the look back period should be, logically (not which look back period back tested the best).




Arebelspy, I can't help but notice that you have acknowledged the ability to use momentum in the past as a loss-avoidance strategy when no concrete numbers were involved (see the quotes below), but you seem to balk when a specifically implementable strategy is involved. To me, it doesn't appear to make much difference whether your lookback period is 6 months, 12 months, 200 days, whatever. The anomaly is there. It exists. It seems hard (to me anyway) to argue otherwise. I don't intend to pursue it as a serious investing strategy, because frankly, I know myself well enough to know that I would probably not have the nerves to stick with it through a decade or more of underperfomance. I also think that (as others have mentioned) the benefits seem more appealing at this moment than they probably should, given that the last two drawdowns were pretty much perfect candidates for the strategy. I would think that a reversion to the mean (with regards to performance of this strategy) in the future is just as likely as continued outperformance. But I completely accept the psychology at play behind momentum investing.





Quote from: SoCal Spartan
While I don't think it will ever return to the glory it once was, I do believe it can only improve from where it is now -- and significantly so.
...
While the very bottom might have been last year around this time, I still think it would be nearly impossible to take a loss in the long run with property investment in Detroit. Am I missing something?


I'm guessing you aren't familiar with the investing phrase about catching a falling knife.

There's a reason prices are what they are there.


Quote from: hodedofome
Because that's about a 50% loss for the S&P, if we had another financial crisis or whatever you could lose all your money if today is the top. THAT'S WHY YOU ONLY DO THIS IF THE INDEX IS DOWN HARD. I'd wait for at least a 20% pullback before attempting this. That would increase the odds that the S&P won't fall enough to give you a margin call.

That was a large part of what hurt market timer - catching a falling knife.

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arebelspy

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Re: Dual Momentum Investing
« Reply #299 on: April 28, 2015, 11:13:10 AM »
Arebelspy, I can't help but notice that you have acknowledged the ability to use momentum in the past as a loss-avoidance strategy when no concrete numbers were involved (see the quotes below)

...

Quote from: SoCal Spartan
While I don't think it will ever return to the glory it once was, I do believe it can only improve from where it is now -- and significantly so.
...
While the very bottom might have been last year around this time, I still think it would be nearly impossible to take a loss in the long run with property investment in Detroit. Am I missing something?


I'm guessing you aren't familiar with the investing phrase about catching a falling knife.

There's a reason prices are what they are there.


Quote from: hodedofome
Because that's about a 50% loss for the S&P, if we had another financial crisis or whatever you could lose all your money if today is the top. THAT'S WHY YOU ONLY DO THIS IF THE INDEX IS DOWN HARD. I'd wait for at least a 20% pullback before attempting this. That would increase the odds that the S&P won't fall enough to give you a margin call.

That was a large part of what hurt market timer - catching a falling knife.

I don't think you understand the phrase "catching a falling knife"--it means don't attempt to time the market, and say "oh, momentum is down, so let me buy it" because you'll get cut as it falls further.

My quotes were indicative of why market timing can be a fool's game, even when you're right.  They don't indicate that one should "use momentum in the past as a loss-avoidance strategy," as you claim.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (occasionally) blog at AdventuringAlong.com.
You can also read my forum "Journal."