Author Topic: Dual Momentum Investing  (Read 160668 times)

forummm

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Re: Dual Momentum Investing
« Reply #500 on: May 15, 2015, 08:43:48 AM »
I think the upshot is: spreadsheets Я hard!

Thanks for checking the numbers and finding this.  Damn $ in the wrong spot!

This is obviously a simplistic version of the strategy we are talking about but it is interesting to see it working even with only absolute momentum.

Attached is the corrected chart and spreadsheet.

Note: This spreadsheet is showing calculations in real terms. The results may have been a little different if using nominal terms since, other than in a deflationary situation, you would have stayed in stocks longer. Since most people are not adjusting today's recent returns for inflation, they are unlikely to do any market timing based on real returns.

With this spreadsheet, the maximum drawdowns are 50.9% (AM 1933) and 76.8% (B&H 1932). The Stdevs are 14% (AM) and 18% (B&H).

I changed the spreadsheet to use the nominal (instead of real) 6mo total returns as the price signal (as I imagine people would do in practice--and was stated to be the practice many times on this thread). The result is that AM and B&H each "win" 7 of the 14 decades. The final tallies in real terms are pretty close ($1.8M vs $1.2M--which over 140+ years of compounding is almost nothing). The drawdowns and StDevs are essentially the same.

sirdoug007

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Re: Dual Momentum Investing
« Reply #501 on: May 15, 2015, 02:42:07 PM »
Can you share this revised version?

milesdividendmd

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Re: Dual Momentum Investing
« Reply #502 on: May 16, 2015, 12:55:24 AM »

No, someone asked 'is it possible to use PV to backtest this' and the response was no. Not about my specific attempts. Not a big deal.

It's because Portfolio Visualizer uses a moving average to determine the trend of the asset and not past returns. DM as defined by Gary (we're talking about his implementation of DM in this thread, but you are free to use whatever you want to determine the trend) uses past returns to determine if an asset is going up or down. So PV would need to give you this option in order for it to be accurate.

PV's market timing module includes a relative strength model that lets you "Invest in best performing assets out of a ranked list of assets based on recent relative performance."  You can use a moving average as a risk control, but you don't have to select one.  Seems like this lets you replicate DM exactly, provided you include short term treasuries as one of your assets.  Am I missing something?

You're not missing anything!

Using the relative strength timing model on PV you can  backtest dual momentum theory with variable look back periods.

The limiting factor is that most passive funds only go back to the mid 80s at earliest.

I have a list of the oldest passive funds that I have found for multiple asset classes of anyone's interested.
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Monkey Uncle

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Re: Dual Momentum Investing
« Reply #503 on: May 16, 2015, 04:46:18 AM »
PV's market timing module includes a relative strength model that lets you "Invest in best performing assets out of a ranked list of assets based on recent relative performance."  You can use a moving average as a risk control, but you don't have to select one.  Seems like this lets you replicate DM exactly, provided you include short term treasuries as one of your assets.  Am I missing something?

It's kissing cousins but using past returns (absolute momentum) vs a moving average will be a little different in their signals.

For 2003-2015, on ETFReplay I put in VTSMX (US Stocks) and VGTSX (Int'l Stocks) using 6 month returns for relative strength. For the cash asset I use VBMFX (Bonds). If I just put those 3 assets into 1 basket and use relative strength to pick the top asset each month, I get:

CAGR: 14.1%
Volatility: 12.5%
Max DD: -16.6%
Sharpe Ratio: 0.73

vs a 100% VTSMX of:

CAGR: 10.2%
Volatility: 19.7%
Max DD: -55.4%
Sharpe Ratio: 0.34

Using a moving average of 6 months and switching to VBMFX if VTSMX and VGTSX are below their 6 month moving average I get:

CAGR: 16.3%
Volatility: 13.1%
Max DD: -16.6%
Sharpe Ratio: 0.83

Using absolute momentum and switching to VBMFX if VTSMX and VGTSX are below their 6 month returns I get:

CAGR: 14.1%
Volatility: 12.5%
Max DD: -16.6%
Sharpe Ratio: 0.73

It just so happened that in this time period the performance was about the same. However, I've seen noticeable differences in other tests with other asset classes and other time periods. The idea is the same though. Pick the best performing asset classes that are actually in an uptrend. It's up to you how you define what is an uptrend and what is performing the best.

But I'm talking about using PV's relative strength model WITHOUT a moving average.  In this form, the model bases the asset switching solely on recent relative performance.  I.e., leave the "risk control" input set to "no moving average."
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Monkey Uncle

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Re: Dual Momentum Investing
« Reply #504 on: May 16, 2015, 04:47:40 AM »

No, someone asked 'is it possible to use PV to backtest this' and the response was no. Not about my specific attempts. Not a big deal.

It's because Portfolio Visualizer uses a moving average to determine the trend of the asset and not past returns. DM as defined by Gary (we're talking about his implementation of DM in this thread, but you are free to use whatever you want to determine the trend) uses past returns to determine if an asset is going up or down. So PV would need to give you this option in order for it to be accurate.

PV's market timing module includes a relative strength model that lets you "Invest in best performing assets out of a ranked list of assets based on recent relative performance."  You can use a moving average as a risk control, but you don't have to select one.  Seems like this lets you replicate DM exactly, provided you include short term treasuries as one of your assets.  Am I missing something?

You're not missing anything!

Using the relative strength timing model on PV you can  backtest dual momentum theory with variable look back periods.

The limiting factor is that most passive funds only go back to the mid 80s at earliest.

I have a list of the oldest passive funds that I have found for multiple asset classes of anyone's interested.

I'd be interested in that list.  Thanks for offering to share it.
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hodedofome

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Re: Dual Momentum Investing
« Reply #505 on: May 16, 2015, 04:56:27 AM »


But I'm talking about using PV's relative strength model WITHOUT a moving average.  In this form, the model bases the asset switching solely on recent relative performance.  I.e., leave the "risk control" input set to "no moving average."

Yes, that was the first test I did on my post, no risk control. Depending on the assets you use and the period in time we're talking about, it may make no difference. The problem arises when all your assets, including your 'safe' one, goes down together. That's why some recommend using dual momentum, not just relative momentum.

forummm

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Re: Dual Momentum Investing
« Reply #506 on: May 16, 2015, 09:33:33 AM »
Can you share this revised version?

The switch to nominal is just for the signaling (column L). I left the tallies in real terms.
« Last Edit: June 27, 2015, 06:40:35 PM by forummm »

milesdividendmd

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Re: Dual Momentum Investing
« Reply #507 on: May 16, 2015, 11:16:11 AM »


But I'm talking about using PV's relative strength model WITHOUT a moving average.  In this form, the model bases the asset switching solely on recent relative performance.  I.e., leave the "risk control" input set to "no moving average."

Yes, that was the first test I did on my post, no risk control. Depending on the assets you use and the period in time we're talking about, it may make no difference. The problem arises when all your assets, including your 'safe' one, goes down together. That's why some recommend using dual momentum, not just relative momentum.

Right Hoded,

But including SHY in your assets makes a relative strength timing model identical to a DM timing model.
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hodedofome

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Re: Dual Momentum Investing
« Reply #508 on: May 16, 2015, 12:04:11 PM »
Sure, if you use SHY it should be the same.


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milesdividendmd

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Re: Dual Momentum Investing
« Reply #509 on: May 16, 2015, 01:53:02 PM »


No, someone asked 'is it possible to use PV to backtest this' and the response was no. Not about my specific attempts. Not a big deal.

It's because Portfolio Visualizer uses a moving average to determine the trend of the asset and not past returns. DM as defined by Gary (we're talking about his implementation of DM in this thread, but you are free to use whatever you want to determine the trend) uses past returns to determine if an asset is going up or down. So PV would need to give you this option in order for it to be accurate.

PV's market timing module includes a relative strength model that lets you "Invest in best performing assets out of a ranked list of assets based on recent relative performance."  You can use a moving average as a risk control, but you don't have to select one.  Seems like this lets you replicate DM exactly, provided you include short term treasuries as one of your assets.  Am I missing something?

You're not missing anything!

Using the relative strength timing model on PV you can  backtest dual momentum theory with variable look back periods.

The limiting factor is that most passive funds only go back to the mid 80s at earliest.

I have a list of the oldest passive funds that I have found for multiple asset classes of anyone's interested.

I'd be interested in that list.  Thanks for offering to share it.

Sure thing. Here it is

Format is mutual fund, year started, asset class, ETF.

If you can find older funds than these for any of the classes please let me know.

VFISX  92 short term treasury SHY
VFITX int term treasury
VBMFX total bond 92 BND
VUSTX LONGTERM TREASURY TLT
PCRIX, commodity, dbc
GMCDX, EM BOND  95

DFEMX EM 92 VWO
DFSVX SCV 95 RZV
DISVX INT SCV 95 DLS
DFSCX 87  US MICRO. IWS

VTSMX TOTAL US 93
VGTSX TOTAL INT 98ikn
VWEHX. HIGH YIELD 85
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Monkey Uncle

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Re: Dual Momentum Investing
« Reply #510 on: May 16, 2015, 03:23:45 PM »


No, someone asked 'is it possible to use PV to backtest this' and the response was no. Not about my specific attempts. Not a big deal.

It's because Portfolio Visualizer uses a moving average to determine the trend of the asset and not past returns. DM as defined by Gary (we're talking about his implementation of DM in this thread, but you are free to use whatever you want to determine the trend) uses past returns to determine if an asset is going up or down. So PV would need to give you this option in order for it to be accurate.

PV's market timing module includes a relative strength model that lets you "Invest in best performing assets out of a ranked list of assets based on recent relative performance."  You can use a moving average as a risk control, but you don't have to select one.  Seems like this lets you replicate DM exactly, provided you include short term treasuries as one of your assets.  Am I missing something?

You're not missing anything!

Using the relative strength timing model on PV you can  backtest dual momentum theory with variable look back periods.

The limiting factor is that most passive funds only go back to the mid 80s at earliest.

I have a list of the oldest passive funds that I have found for multiple asset classes of anyone's interested.

I'd be interested in that list.  Thanks for offering to share it.

Sure thing. Here it is

Format is mutual fund, year started, asset class, ETF.

If you can find older funds than these for any of the classes please let me know.

VFISX  92 short term treasury SHY
VFITX int term treasury
VBMFX total bond 92 BND
VUSTX LONGTERM TREASURY TLT
PCRIX, commodity, dbc
GMCDX, EM BOND  95

DFEMX EM 92 VWO
DFSVX SCV 95 RZV
DISVX INT SCV 95 DLS
DFSCX 87  US MICRO. IWS

VTSMX TOTAL US 93
VGTSX TOTAL INT 98ikn
VWEHX. HIGH YIELD 85

Thanks much.  I've been just looking at Vanguard's all-inclusive list of funds by category.  Many of the oldest index funds are on that list.  Also, there are a number of relatively low-cost funds that aren't index funds, but might serve as a decent proxy for certain asset classes that don't have any old index funds (e.g., VEXPX small cap growth with a 0.53% expense ratio goes back to 1967).

https://investor.vanguard.com/mutual-funds/vanguard-mutual-funds-list
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #511 on: May 17, 2015, 10:25:56 AM »
I would steer away from using actively managed funds in my analysis.

A small cap growth fund like VEXPX can stray from both small size and growth characteristics, making it difficult to impossible to tell if performance differences are due to tracking error or class effects.
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bdbrooks

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Re: Dual Momentum Investing
« Reply #512 on: May 18, 2015, 05:24:10 PM »
I just saw this thread 3 days ago, and in my limited spare time it took me 3 days to read the 11 pages worth of comments. First of all, DM is definitely 100% market timing. For all of the bad things said about market timing, I actually believe in systematic strategies that can beat the market on a risk adjusted basis (I have little to no confidence that I or a Fund Manager can do it by using his gut). I have worked as an investment analyst and have studied several of these anomalies. There are really only 2 "anomalies" that I think are incredibly robust enough to actually deviate from a B&H strategy. They are Value and Momentum. Neither wins all the time, but over the long run each has reliably beat the indexes. Specifically momentum has been found to work within equities, bonds, currencies, and commodities in a number of countries and the consensus is that it flat out works.

Why does it work? It works because of performance chasing. You may not find this a satisfactory answer, but that is the best explanation as to why it works. For example, the typical investor returns from 1994-2013 were around 2.5%...yes just .1% above inflation (http://www.businessinsider.com/typical-investor-returns-20-years-2014-8). How is that possible when the only asset classes that were under the typical investor returns were EM Asian Markets and Japan? They bought high, sold low, and repeated. They bought different asset classes when they were high and they would sell individual asset classes when they low. They bought would enter the market when it was high and sell when it crashed. If they simply could have took the B&H mentality they would have had returns of 9-10%. Now the response as to WHY the typical investor has underperformed is mostly just anecdotal, but I am convinced this is the main reason (fees being the next biggest reason). To give some more evidence that "I think" points to this, Morningstars top performing fund (over the previous decade) ending in 2009 had actually lost investor 11% throughout the decade. This shows that after a good performance people invest and it underperforms. After it underperforms people take their money out and it outperforms. I had read a research paper that showed if a mutual fund's future returns were inversely proportional to it's recent fund flows. In plain english, the better the fund did...the more people chased it...and the more it underperformed in the future. It is these behaviors that momentum is taking advantage of. However, it is reacting at the front end of the crowd and selling while people are still coming in.

Here is a dual momentum strategy worked out from 1928 (http://blog.alphaarchitect.com/2015/03/31/absolute-momentum-and-stock-momentum-strategies-friends-not-enemies/). This form of dual momentum involves investing in the top 10% of individual companies with the highest momentum. So this is different than the strategy originally proposed in this post. I think the evidence is strongest for relative momentum (aka cross sectional momentum). Relative Momentum alone outperformed the SP500 in 91% of rolling 5 year periods and 98% of rolling 10 year periods. While absolute momentum won't really add to returns (depending on your backtest timeframe), but it does help limit the drawdowns and help the risk adjusted returns. I see this aspect as huge for the "typical investor". It would enable him to limit those painful drawdowns, but stick with the system when they might not be able to stick with B&H or just a relative momentum strategy.

There are momentum ETFs out there. They are usually limited to the asset class (so they don't switch between stocks and bonds like this post discussed). Dorsey Wright is a big name in momentum etfs. His biggest 2 are PDP and FV. PDP has been around since 2007 and outperformed the sp500 by about 6% total (not annualized) including dividends. He uses a different type of momentum (called point and figure charting instead of highest return over a certain lookback). FV has only been around for a little over a year, but has beat the SP500 including dividends by 6%. This etf uses sector rotation (only investing in a few of the highest momentum sectors). The downside with these two funds is that they are expensive (at least for etfs) pdp is .65% and FV is .94%. The only cheap momentum ETF that I am aware of is MTUM at .15%. It has only been around for 2 years. It is more similar to PDP and I would prefer it to PDP due to the significant difference in ER.

Not that this long thread needs renewed energy, but had anyone thought of getting several asset classes (US Large, US Mid, US Small, Int Developed equities, EM equities, High Yield Bond, Corporate Bond, Long Duration treasuries, short duration treasuries, EM Bonds, Int Developed Bonds, real estate) and selecting the top 3 performing asset classes? That helps to limit any whipsawing from going 100% bonds to 100% equities. It is an approach that (personally) I would be more comfortable with. It is similar to what some people were talking about with using multiple lookback periods to get different exposure.

forummm

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Re: Dual Momentum Investing
« Reply #513 on: May 18, 2015, 06:04:55 PM »
Not that this long thread needs renewed energy, but had anyone thought of getting several asset classes (US Large, US Mid, US Small, Int Developed equities, EM equities, High Yield Bond, Corporate Bond, Long Duration treasuries, short duration treasuries, EM Bonds, Int Developed Bonds, real estate) and selecting the top 3 performing asset classes? That helps to limit any whipsawing from going 100% bonds to 100% equities. It is an approach that (personally) I would be more comfortable with. It is similar to what some people were talking about with using multiple lookback periods to get different exposure.

I'm pretty sure all the equities mentioned here did terribly in 2008. So you're still going to 100% bonds of some variety.

Question to anyone: All the "smart" talk I hear (Buffett, Bogle, people here) says "don't sell when the market goes down". That's exactly what DM does right? MDMD says it's the biggest feature for him. Why are Buffett and Bogle wrong here?

milesdividendmd

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Re: Dual Momentum Investing
« Reply #514 on: May 18, 2015, 07:48:57 PM »

I just saw this thread 3 days ago, and in my limited spare time it took me 3 days to read the 11 pages worth of comments. First of all, DM is definitely 100% market timing. For all of the bad things said about market timing, I actually believe in systematic strategies that can beat the market on a risk adjusted basis (I have little to no confidence that I or a Fund Manager can do it by using his gut). I have worked as an investment analyst and have studied several of these anomalies. There are really only 2 "anomalies" that I think are incredibly robust enough to actually deviate from a B&H strategy. They are Value and Momentum. Neither wins all the time, but over the long run each has reliably beat the indexes. Specifically momentum has been found to work within equities, bonds, currencies, and commodities in a number of countries and the consensus is that it flat out works.

Why does it work? It works because of performance chasing. You may not find this a satisfactory answer, but that is the best explanation as to why it works. For example, the typical investor returns from 1994-2013 were around 2.5%...yes just .1% above inflation (http://www.businessinsider.com/typical-investor-returns-20-years-2014-8). How is that possible when the only asset classes that were under the typical investor returns were EM Asian Markets and Japan? They bought high, sold low, and repeated. They bought different asset classes when they were high and they would sell individual asset classes when they low. They bought would enter the market when it was high and sell when it crashed. If they simply could have took the B&H mentality they would have had returns of 9-10%. Now the response as to WHY the typical investor has underperformed is mostly just anecdotal, but I am convinced this is the main reason (fees being the next biggest reason). To give some more evidence that "I think" points to this, Morningstars top performing fund (over the previous decade) ending in 2009 had actually lost investor 11% throughout the decade. This shows that after a good performance people invest and it underperforms. After it underperforms people take their money out and it outperforms. I had read a research paper that showed if a mutual fund's future returns were inversely proportional to it's recent fund flows. In plain english, the better the fund did...the more people chased it...and the more it underperformed in the future. It is these behaviors that momentum is taking advantage of. However, it is reacting at the front end of the crowd and selling while people are still coming in.

Here is a dual momentum strategy worked out from 1928 (http://blog.alphaarchitect.com/2015/03/31/absolute-momentum-and-stock-momentum-strategies-friends-not-enemies/). This form of dual momentum involves investing in the top 10% of individual companies with the highest momentum. So this is different than the strategy originally proposed in this post. I think the evidence is strongest for relative momentum (aka cross sectional momentum). Relative Momentum alone outperformed the SP500 in 91% of rolling 5 year periods and 98% of rolling 10 year periods. While absolute momentum won't really add to returns (depending on your backtest timeframe), but it does help limit the drawdowns and help the risk adjusted returns. I see this aspect as huge for the "typical investor". It would enable him to limit those painful drawdowns, but stick with the system when they might not be able to stick with B&H or just a relative momentum strategy.

There are momentum ETFs out there. They are usually limited to the asset class (so they don't switch between stocks and bonds like this post discussed). Dorsey Wright is a big name in momentum etfs. His biggest 2 are PDP and FV. PDP has been around since 2007 and outperformed the sp500 by about 6% total (not annualized) including dividends. He uses a different type of momentum (called point and figure charting instead of highest return over a certain lookback). FV has only been around for a little over a year, but has beat the SP500 including dividends by 6%. This etf uses sector rotation (only investing in a few of the highest momentum sectors). The downside with these two funds is that they are expensive (at least for etfs) pdp is .65% and FV is .94%. The only cheap momentum ETF that I am aware of is MTUM at .15%. It has only been around for 2 years. It is more similar to PDP and I would prefer it to PDP due to the significant difference in ER.

Not that this long thread needs renewed energy, but had anyone thought of getting several asset classes (US Large, US Mid, US Small, Int Developed equities, EM equities, High Yield Bond, Corporate Bond, Long Duration treasuries, short duration treasuries, EM Bonds, Int Developed Bonds, real estate) and selecting the top 3 performing asset classes? That helps to limit any whipsawing from going 100% bonds to 100% equities. It is an approach that (personally) I would be more comfortable with. It is similar to what some people were talking about with using multiple lookback periods to get different exposure.

This is the approach that CXO advisory utilizes, and the evidence (both retrospective and prospective) is good).

http://www.cxoadvisory.com/subscription-options/?wlfrom=%2F18886%2Fmomentum-investing%2Fsimple-asset-class-etf-momentum-strategy-performance%2F

Absolute returns increase with choosing more concentrated momentum positions. So the "top one" portfolio will generally outperform the "top 2" portfolio, though with greater volatility.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #515 on: May 18, 2015, 07:53:14 PM »

Not that this long thread needs renewed energy, but had anyone thought of getting several asset classes (US Large, US Mid, US Small, Int Developed equities, EM equities, High Yield Bond, Corporate Bond, Long Duration treasuries, short duration treasuries, EM Bonds, Int Developed Bonds, real estate) and selecting the top 3 performing asset classes? That helps to limit any whipsawing from going 100% bonds to 100% equities. It is an approach that (personally) I would be more comfortable with. It is similar to what some people were talking about with using multiple lookback periods to get different exposure.

I'm pretty sure all the equities mentioned here did terribly in 2008. So you're still going to 100% bonds of some variety.

Question to anyone: All the "smart" talk I hear (Buffett, Bogle, people here) says "don't sell when the market goes down". That's exactly what DM does right? MDMD says it's the biggest feature for him. Why are Buffett and Bogle wrong here?

The short answer is that you are not listening to "all" of the smart talk. You're only listening to only some of the smart talk.

Buffet and Bogle are very smart. But George Soros, and Paul Tudor Jones are pretty smart as well, and they favor trend following/momentum type approaches which advocate buying recent winners and selling recent losers.

So clearly there's more than one way to be smart and make money.
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bdbrooks

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Re: Dual Momentum Investing
« Reply #516 on: May 18, 2015, 10:01:05 PM »
I'm pretty sure all the equities mentioned here did terribly in 2008. So you're still going to 100% bonds of some variety.

Question to anyone: All the "smart" talk I hear (Buffett, Bogle, people here) says "don't sell when the market goes down". That's exactly what DM does right? MDMD says it's the biggest feature for him. Why are Buffett and Bogle wrong here?

The part that kills you with selling when the market goes down is selling at the bottom. Usually the point when most people can't handle the pain of staying invested (or actually rebalancing into equities during a crash) is close to where a crash will bottom. The point of absolute momentum is to get out when there are increased chances of a crash. So you are IDEALLY getting out before the bulk of the crash. Then when things start to improve, personally I wouldn't have an issue investing after the crash since I sold at higher prices (buy low sell high). While I believe in the power of momentum, there isn't enough evidence to show that absolute momentum will give a significant boost to returns. It can help lower drawdowns but don't expect to be selling within 5% of the top and buying within 5% of the bottom. Some periods like 2001-2003 and 2008-2009 you can actually invest back in significantly lower than you sold, but there will be other times like 2011 (with a 6-month look back) that you will be getting out at a good time to buy. If you know that b&h is just too much pain in a crash, then use absolute momentum. If you started investing after 2008 and don't think you can handle the pain, then use absolute momentum. Just don't tell yourself that this is the magic bullet that will sell at the top and buy at the bottom.

To my earlier post, anything from alpha architect doesn't have fees taken out of their backtest. So you should reduce returns around .5%-1% (not really an issue when they outperform sp500 by 6%). Also their strategies work much better within tax advantaged accounts. 

milesdividendmd

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Re: Dual Momentum Investing
« Reply #517 on: May 18, 2015, 11:06:43 PM »
BD,

Decreasing drawdowns is the single most powerful way to boost long term returns, in my view. Which is why I would always take absolute momentum over relative momentum if forced to choose.

Thankfully noone's forcing me, so I'll take both!

AZ

« Last Edit: May 19, 2015, 02:28:40 PM by milesdividendmd »
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mcgugrah

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Re: Dual Momentum Investing
« Reply #518 on: June 21, 2015, 06:34:58 AM »
So here is another way of thinking about this. If you use the Dual Momentum strategy but instead of back testing 6-12 months, you back test as far as you can go. You reach the result that the US stock market has produced the best returns over the period of time and should be invested in 100% in US stocks. This is the argument that MMM puts forth in his blog. So the question is do you think back testing for the whole historical period is a better choice then back testing 6-12 months? Back testing the whole historical period gives more data to work with, but could also be argued that much of the data is outdated. Back testing such a short period of time reduces the sample size but makes the data more relevant.

Gary talks about different asset allocations here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042750

improved risk adjusted returns, same basic algorithm as DM, but applied to several different module



ok so most models show a 6 month lookback (not backtest) used with dual momentum, when backtested significantly out performed the market over time.  if you're saying change your look back to 100+ years and see what was the best then yeah you will probably always be 100% invested in one asset class but thats not the point of this you're confusing back testing and lookback windows.

Okay, sorry I was not confusing what lookback and back test are, just the words to describe them. Let me try to flesh out my idea a bit more.

The strategy for DM is to look back 6-12 months and pick the winning asset class and go 100% in and reevaluate every month. This is an effort to capture momentum.
The strategy behind indexing is to buy and hold. Many people will state, if you can tolerate the risk, you can go 100% into US Stocks. Many state that, (such as jcollins and MMM) that US stocks are the highest preforming asset since something like 1900 and that is why you can be sure that long term that 100% US Stocks will make you money.

In order to compare the two investing theories, I think it is worth while as viewing the indexing plan as DM with a look back of 100+ years. Especially if you are one of those individuals 100% in US stocks because of the historical returns and you feel you can handle the ups and downs.

I would also be interested in a conversation about applying the portfolio theory regarding diversification and rebalancing if it was applied to DM. "The Intelligent Asset Allocator" (a book MMM recommends) states that a 90/10 portfolio out performs a 100/0 portfolio in both reward and risk when back tested. I am just thinking about if the same ideas could be applied to the DM plan, or if it is too inherently conflicting to the strategy.

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Re: Dual Momentum Investing
« Reply #519 on: June 21, 2015, 08:08:19 AM »
I'm sure this is a stupid question, but if your trading decisions for the next month are based on the lookback period, aren't you investing in high momentum areas AFTER they increase and selling low momentum areas AFTER they decrease? Doesn't that seem counter-intuitive?


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Re: Dual Momentum Investing
« Reply #520 on: June 21, 2015, 08:32:56 AM »
I'm sure this is a stupid question, but if your trading decisions for the next month are based on the lookback period, aren't you investing in high momentum areas AFTER they increase and selling low momentum areas AFTER they decrease? Doesn't that seem counter-intuitive?

Yes, the technique uses exactly that. The hope is that the "momentum" continues for a long time after you make your trades. By definition you will be selling below the peaks and buying above the bottoms. But the hope is that you avoid many of the losses on the way to the bottom of the valleys.

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Re: Dual Momentum Investing
« Reply #521 on: June 21, 2015, 10:04:27 AM »
I've been reading along for fun, even though I'm a dyed in the wool indexer who generally derides chartist fantasies like this.

As I understand this strategy, the secret sauce is entirely in the timing of how you ride the waves of market cycles. You ride early losses down until your signal tells you to get out, and then you miss early appreciation until your signal tells you to buy back in. In between you hope to catch the long upswings and avoid the prolonged downturns. Sounds about right?

If so, then the success of the strategy depends entirely on the relative magnitudes of price movements before vs after your signal to buy/sell.  You can outperform an indexer iff the bull runs gain more after your signal than before it and/or the bear runs lose more after your signal than before it, so the key is to find a lookback period that gives you a decision signal that is appropriately timed to the duration of those runs.

And that would totally make sense to me if we had confidence that the cycles were of a predictable pattern, but I'm not 100% convinced of that.  The fact that the past two recessions have had similar crash/recovery timings is going to give adherents of this strategy false confidence that the method will work in the future just because it has worked since 1995, but I see no good reason to believe that the next crash will look anything like the past two, as skyrefuge has convincingly pointed out elsewhere on this forum.  Are there reasons related to fiscal or monetary policy or other economic management to believe that the US economy will continue to behave the same way it has in the recent past? 

If you think that there are, and that the US business cycle is essentially now predictable in such a simple way, then technical trading metrics totally make sense.  Look for those 200 day moving average trendlines to cross the forward looking scaled P/E ratio, or trade those distinguishing shoulder charts and diagnostic dead cat bounces, and make a fortune because you can predict the future and no one else can.

Me, I don't believe in vampires or ghosts or crystal balls.  I believe the successful backtesting of this strategy is entirely coincidental, classic theory survivorship bias akin to buying a "how to win the lottery" book from a lottery winner.  I believe any strategy with a positive feedback loop like this is prone to being overhyped by people (not anyone here) looking to create and then cash in on a bubble by getting people to buy into it, like any other pump and dump scheme.

It's trivially easy to construct a hypothetical price history that would totally hose this strategy, though I don't claim to know how likely that potential price history is to actually unfold.  On the other hand, I'm not sure I exactly see an obvious downside here either so if your greed overcomes your skepticism then go for it.  Just don't be surprised if it turns out the fortune teller you just paid turns out to be a charlatan after all.

And who knows, maybe the crazy old gypsy lady is right for a while longer? If enough people fall for it, the strategy becomes a self fulfilling prophesy, temporarily.  The problem with a perfectly predictable stock market, as others have already pointed out upthread, is that it's too easy to exploit and all of those exploits make it unpredictable again.

See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1908469&download=yes for the myth of the ten best days -  pretty clear evidence about the returns of various markets with respect to moving averages

with regards your other points - if you actually read any of the literature on momentum you would find that it has a very solid underpinning in behavioral finance  (see thinking fast and thinking slow). it has been observed across asset classes in many countries over many centuries.

dual momentum is basically a best that human psychology isnt going to change any time soon.

interesting that Bogle has made a fortune off indexing... perhaps he too was just selling snake oil

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Re: Dual Momentum Investing
« Reply #522 on: June 21, 2015, 10:05:38 AM »
As I understand this strategy, the secret sauce is entirely in the timing of how you ride the waves of market cycles. You ride early losses down until your signal tells you to get out, and then you miss early appreciation until your signal tells you to buy back in. In between you hope to catch the long upswings and avoid the prolonged downturns. Sounds about right?

If so, then the success of the strategy depends entirely on the relative magnitudes of price movements before vs after your signal to buy/sell.  You can outperform an indexer iff the bull runs gain more after your signal than before it and/or the bear runs lose more after your signal than before it, so the key is to find a lookback period that gives you a decision signal that is appropriately timed to the duration of those runs.

The myth of the ten best days -  interesting commentary on the skewed nature of returns with respect to moving averages
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1908469&download=yes

Just highlighting this because it seems a particularly apt summary, and having it appear twice makes it more likely that others will comment....

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Re: Dual Momentum Investing
« Reply #523 on: June 21, 2015, 10:13:06 AM »
As I understand this strategy, the secret sauce is entirely in the timing of how you ride the waves of market cycles. You ride early losses down until your signal tells you to get out, and then you miss early appreciation until your signal tells you to buy back in. In between you hope to catch the long upswings and avoid the prolonged downturns. Sounds about right?

If so, then the success of the strategy depends entirely on the relative magnitudes of price movements before vs after your signal to buy/sell.  You can outperform an indexer iff the bull runs gain more after your signal than before it and/or the bear runs lose more after your signal than before it, so the key is to find a lookback period that gives you a decision signal that is appropriately timed to the duration of those runs.

The myth of the ten best days -  interesting commentary on the skewed nature of returns with respect to moving averages
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1908469&download=yes

Just highlighting this because it seems a particularly apt summary, and having it appear twice makes it more likely that others will comment....

FYI: When you include your comments inside the quote tags, people are less likely to see it and more likely to be confused/irritated and not read your stuff.

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Re: Dual Momentum Investing
« Reply #524 on: July 08, 2015, 09:15:59 PM »
A relatively balanced (and anodyne) review of DM....

http://awealthofcommonsense.com/my-thoughts-on-gary-antonaccis-dual-momentum/
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Re: Dual Momentum Investing
« Reply #525 on: July 09, 2015, 04:00:49 AM »
Question for those of you who are implementing DM.  The S&P 500 has been moving mostly sideways since November of last year.  Have you been getting whip-sawed?
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Re: Dual Momentum Investing
« Reply #526 on: July 09, 2015, 08:22:05 AM »
No whipsaws yet on a 6 month look back.
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Re: Dual Momentum Investing
« Reply #527 on: July 09, 2015, 11:25:27 AM »
miles, i've been slowly making my way through Antonacci's book. Thank you for posting the link to the book review, which seems to be a nice summary. Still working on getting all of my ducks in a row to implement it with some portion of my portfolio, but want to maximize my understanding of it before jumping in.

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Re: Dual Momentum Investing
« Reply #528 on: July 09, 2015, 01:54:48 PM »
No whipsaws yet on a 6 month look back.

I've had a few this year on mine. Pretty crummy year for my retirement accounts so far. All part of the game though.

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Dual Momentum Investing
« Reply #529 on: July 09, 2015, 09:44:05 PM »
miles, i've been slowly making my way through Antonacci's book. Thank you for posting the link to the book review, which seems to be a nice summary. Still working on getting all of my ducks in a row to implement it with some portion of my portfolio, but want to maximize my understanding of it before jumping in.

Zamboni,

Get your ducks in a row.  There's no shame in keeping it simple in the mean time.

I spent a lot of time on portfolio visualizer running through different scenarios before I committed.

It's hard to imagine a year of significant underperformance. But it will happen many times over. Can you handle it?

AZ
« Last Edit: July 09, 2015, 09:47:49 PM by milesdividendmd »
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Re: Dual Momentum Investing
« Reply #530 on: July 11, 2015, 08:52:18 AM »
Great thread!  I just discovered this one and have read the 11 pages over the last couple of days.  I'm not as knowledgeable about investing as most of the posters in this thread and I really enjoyed reading in-depth analysis of a strategy other than cost conscious buy and hold.  I have been investing (employed vs a student) for only 5 years and I admit indexing most closely fit my paradigm and through confirmation bias I mainly read content supporting it (Bogle, random articles and blogs, and eventually this blog mmm).  I have a few questions that I don't think were explicitly addressed in this thread so far. 

First for the critics.  I understand doubting a market timing strategy and being suspicious of data mining but disregarding thorough back testing as if knowledge of past market performance should not factor in our expectation of future market performance is crazy.  The whole 4% SWR, a crucial concept for FIRE, is completely distilled from back testing, is it not?  It is not looked as a guarantee that we know how the market will behave but believe there is a high probability that 4% SWR really is safe especially if you're flexible, and that trying to build to a 3% or 2% SWR is inefficient (ie Safety is an expensive illusion).   

For the proponents.  Something that immediately jumped out to me and I saw yogiyoda mentioned it in the amazon review is that comparing the peak draw down and showing that a momentum strategy consistently had lower peaks than B&H without mentioning peak "Draw Up" seems intentionally biased.  And here is where I agree with those wanting theory not just back testing: if we expect to markets to continue to grow at some rate and be a net positive why would you expect the momentum equation to save you more money by exiting at the beginning of a bear market than it loses by missing the beginning of a bull market?  I do not see a logical reason to believe that it will always be a net positive for the moment investor.  Couple that with whipsaw risks and trading expenses and I am having trouble understanding how so many intelligent investors would choose this route.  How much does the momentum investing have to beat indexing by to make the monthly monitoring, trading expenses, and whipsaw risk worth while.  And does it change you're 4% SWR rate, or will do you guys plan to switch back to indexing during the withdrawal phase?   

Ultimately I feel like cheddar stacker, I'm not yet intelligent or knowledgeable enough to be seriously tempted to take on a more time/energy/thought consuming strategy that may lead to slightly more gains in my investment horizon.  When I could easily keep stacking money up in indexes  expecting to gain purchasing power when I start withdrawing at some point in the next 15- 30 years.  But then again I do enjoy learning more and maybe after more research I will implement this strategy in one of my tax advantaged bucks as a form of diversification. 

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Re: Dual Momentum Investing
« Reply #531 on: July 11, 2015, 09:45:07 AM »
It would take a well timed whipsaw to throw DM off. Any whipsaws that are so quick that they happen in between your trading days do not affect DM. I thought the recent movements might force me to make a trade but even the drop in late June did not drop enough to change my investments. I think this is because foreign and US markets are moving pretty close together at the moment, and Bonds have been lousy for the last year.

Equities are still up from where they were 6 months ago and up from 12 months ago. They would have to drop almost 10% before any trading was done.
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Dual Momentum Investing
« Reply #532 on: July 11, 2015, 11:41:50 AM »
Great thread!  I just discovered this one and have read the 11 pages over the last couple of days.  I'm not as knowledgeable about investing as most of the posters in this thread and I really enjoyed reading in-depth analysis of a strategy other than cost conscious buy and hold.  I have been investing (employed vs a student) for only 5 years and I admit indexing most closely fit my paradigm and through confirmation bias I mainly read content supporting it (Bogle, random articles and blogs, and eventually this blog mmm).  I have a few questions that I don't think were explicitly addressed in this thread so far. 

First for the critics.  I understand doubting a market timing strategy and being suspicious of data mining but disregarding thorough back testing as if knowledge of past market performance should not factor in our expectation of future market performance is crazy.  The whole 4% SWR, a crucial concept for FIRE, is completely distilled from back testing, is it not?  It is not looked as a guarantee that we know how the market will behave but believe there is a high probability that 4% SWR really is safe especially if you're flexible, and that trying to build to a 3% or 2% SWR is inefficient (ie Safety is an expensive illusion).   

For the proponents.  Something that immediately jumped out to me and I saw yogiyoda mentioned it in the amazon review is that comparing the peak draw down and showing that a momentum strategy consistently had lower peaks than B&H without mentioning peak "Draw Up" seems intentionally biased.  And here is where I agree with those wanting theory not just back testing: if we expect to markets to continue to grow at some rate and be a net positive why would you expect the momentum equation to save you more money by exiting at the beginning of a bear market than it loses by missing the beginning of a bull market?  I do not see a logical reason to believe that it will always be a net positive for the moment investor.  Couple that with whipsaw risks and trading expenses and I am having trouble understanding how so many intelligent investors would choose this route.  How much does the momentum investing have to beat indexing by to make the monthly monitoring, trading expenses, and whipsaw risk worth while.  And does it change you're 4% SWR rate, or will do you guys plan to switch back to indexing during the withdrawal phase?   

Ultimately I feel like cheddar stacker, I'm not yet intelligent or knowledgeable enough to be seriously tempted to take on a more time/energy/thought consuming strategy that may lead to slightly more gains in my investment horizon.  When I could easily keep stacking money up in indexes  expecting to gain purchasing power when I start withdrawing at some point in the next 15- 30 years.  But then again I do enjoy learning more and maybe after more research I will implement this strategy in one of my tax advantaged bucks as a form of diversification.

Great comment!

As a DM practitioner I will only attempt to answer you "proponents" questions.

"comparing the peak draw down and showing that a momentum strategy consistently had lower peaks than B&H without mentioning peak "Draw Up" seems intentionally biased.  And here is where I agree with those wanting theory not just back testing: if we expect to markets to continue to grow at some rate and be a net positive why would you expect the momentum equation to save you more money by exiting at the beginning of a bear market than it loses by missing the beginning of a bull market?  I do not see a logical reason to believe that it will always be a net positive for the moment investor."

Some general observations about market movements

1.  Downside movements are much more destructive to returns, than upside movements are beneficial. (If your portfolio goes up 25% one day and down 25% the next day ((or vice versa)) you will have less than when you started.

2.  Bear markets tend to be shorter and to have steeper downward slopes than bull markets up slopes, so if you miss a couple months of a bear market and a couple months of a bull market you will generally be in better shape than if you had just bought and held. 

3.  Bear markets tend to be short, while bull markets tend to be long,  so past being prologue) the DM practitioner will miss most of the bear market (thanks to the rapid downslope of the bear market allowing an early exit) but will be present for most of the bear market (thanks to its long duration)

"Couple that with whipsaw risks and trading expenses and I am having trouble understanding how so many intelligent investors would choose this route.  How much does the momentum investing have to beat indexing by to make the monthly monitoring, trading expenses, and whipsaw risk worth while."

Whipsaw risk is very specific to the timing of your look back. So while it is possible, even probable to experience a whipsaw over the course of an investment timeframe, it is unlikely for whipsaws to repeat over and over again for they require one possible market movement out of millions to be present to the exclusion of all others.

Furthermore you can diversify this one unlikely scenario away by including multiple look back periods in your portfolio.

Trading costs are minimal and are on the order of rebalancing once per year with a buy and hold portfolio, or less with a 12 month look back period.
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Re: Dual Momentum Investing
« Reply #533 on: July 11, 2015, 12:18:01 PM »
First for the critics.  I understand doubting a market timing strategy and being suspicious of data mining but disregarding thorough back testing as if knowledge of past market performance should not factor in our expectation of future market performance is crazy.  The whole 4% SWR, a crucial concept for FIRE, is completely distilled from back testing, is it not?

The difference is that although the 4% rule is derived from examining the past, it is merely an observation of the maximum withdrawal rate that resulted in success under history's worst case scenarios, not a pattern that must persist into the future in order to remain successful.  It will work as long as the future is no worse than the worst of the past (an acknowledged assumption underlying the idea that strict adherence to the 4% rule will not fail).  In my view, that is a safer assumption than betting that the precise lookback periods or range of lookback periods of a data-mined historically-successful DM trading strategy will continue to be successful in the future (especially given that no one has been able to come up with any explanation for why we should believe that that specific pattern will continue into the future).

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Re: Dual Momentum Investing
« Reply #534 on: July 11, 2015, 01:17:17 PM »
First for the critics.  I understand doubting a market timing strategy and being suspicious of data mining but disregarding thorough back testing as if knowledge of past market performance should not factor in our expectation of future market performance is crazy.  The whole 4% SWR, a crucial concept for FIRE, is completely distilled from back testing, is it not?

The difference is that although the 4% rule is derived from examining the past, it is merely an observation of the maximum withdrawal rate that resulted in success under history's worst case scenarios, not a pattern that must persist into the future in order to remain successful.  It will work as long as the future is no worse than the worst of the past (an acknowledged assumption underlying the idea that strict adherence to the 4% rule will not fail).  In my view, that is a safer assumption than betting that the precise lookback periods or range of lookback periods of a data-mined historically-successful DM trading strategy will continue to be successful in the future (especially given that no one has been able to come up with any explanation for why we should believe that that specific pattern will continue into the future).

There is really no point in engaging on this point again, but I'm only human, I cant resist.

This statement is just maddeningly wrong:

"(especially given that no one has been able to come up with any explanation for why we should believe that that specific pattern will continue into the future)."

I am too lazy to go back through this 11 page thread to cite all of the posts that explained exactly this but here's an entire blog post on the subject in which I provide both behavioral and macroeconomic justifications for the dual momentum effect...

http://www.milesdividendmd.com/bedtime-stories/

So feel free to say that the explanations are unsatisfying to you intellectually, just don't claim that "no one has come up with an explanation."  It's factually inaccurate.




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Re: Dual Momentum Investing
« Reply #535 on: July 11, 2015, 01:35:36 PM »
There is really no point in engaging on this point again, but I'm only human, I cant resist.

This statement is just maddeningly wrong:

"(especially given that no one has been able to come up with any explanation for why we should believe that that specific pattern will continue into the future)."

I am too lazy to go back through this 11 page thread to cite all of the posts that explained exactly this but here's an entire blog post on the subject in which I provide both behavioral and macroeconomic justifications for the dual momentum effect...

http://www.milesdividendmd.com/bedtime-stories/

So feel free to say that the explanations are unsatisfying to you intellectually, just don't claim that "no one has come up with an explanation."  It's factually inaccurate.

I didn't mean that there is no explanation for why the momentum phenomenon exists, only for why the precise lookback period or range of lookback periods that worked in the past will still work in the future.  I fully agree that compelling reasons exist and have been described in this thread and in your blog posts for why trends in the market emerge and gain momentum.  But I don't recall seeing any explanation for the specific choice of lookback period(s) beyond "those are the ones that the data has shown to have worked in the past."

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Re: Dual Momentum Investing
« Reply #536 on: July 11, 2015, 02:21:34 PM »
There is really no point in engaging on this point again, but I'm only human, I cant resist.

This statement is just maddeningly wrong:

"(especially given that no one has been able to come up with any explanation for why we should believe that that specific pattern will continue into the future)."

I am too lazy to go back through this 11 page thread to cite all of the posts that explained exactly this but here's an entire blog post on the subject in which I provide both behavioral and macroeconomic justifications for the dual momentum effect...

http://www.milesdividendmd.com/bedtime-stories/

So feel free to say that the explanations are unsatisfying to you intellectually, just don't claim that "no one has come up with an explanation."  It's factually inaccurate.

I didn't mean that there is no explanation for why the momentum phenomenon exists, only for why the precise lookback period or range of lookback periods that worked in the past will still work in the future.  I fully agree that compelling reasons exist and have been described in this thread and in your blog posts for why trends in the market emerge and gain momentum.  But I don't recall seeing any explanation for the specific choice of lookback period(s) beyond "those are the ones that the data has shown to have worked in the past."

Kind of like the 4% SWR, eh?

Sorry, I couldn't resist. ;)
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Re: Dual Momentum Investing
« Reply #537 on: July 11, 2015, 02:46:39 PM »
That's been covered too Brooklyn.

Momentum is a factor that exists for timeframes between 3 and 12 months so the look back should axiomatically exist within this timeframe. And all look back periods within this window have in fact worked in the past.

Obviously the longer your look back. The less trading you will expect to do and the later you will expect to exit/re enter the market.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1919226

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Re: Dual Momentum Investing
« Reply #538 on: July 11, 2015, 03:24:11 PM »
Momentum is a factor that exists for timeframes between 3 and 12 months so the look back should axiomatically exist within this timeframe. And all look back periods within this window have in fact worked in the past.

Not to reopen same can of worms from earlier in this thread, but this is exactly my point -- no one (including the authors of the article you cited) seems to have offered any a priori reasons to explain why a 3-12 month lookback period is the precise window that has worked in the past and, by extension, will work in the future.  I get that it has in fact worked in the past, and that the lookback period to be utilized should "axiomatically exist" within that time frame, and that is precisely because it is entirely born out of historical backtesting (i.e., a posteriori).

And I agree with EngiNerd and Monkey Uncle that the same is true of the 4% Rule -- the 4% SWR is entirely born out of historical backtesting, and I can think of no a priori reason to believe that 4% represents a "safe" withdrawal rate (precisely because it is the arbitrary withdrawal rate that just so happened to be the upper limit of successful withdrawal rates under historical worst case scenarios).  But I'm more comfortable relying on a totally a posteriori justification for setting an upper limit on a withdrawal strategy than for the following of a pattern-based trading strategy.


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Re: Dual Momentum Investing
« Reply #539 on: July 11, 2015, 03:29:52 PM »

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Dual Momentum Investing
« Reply #540 on: July 11, 2015, 03:48:55 PM »
Momentum is a factor that exists for timeframes between 3 and 12 months so the look back should axiomatically exist within this timeframe. And all look back periods within this window have in fact worked in the past.

Not to reopen same can of worms from earlier in this thread, but this is exactly my point -- no one (including the authors of the article you cited) seems to have offered any a priori reasons to explain why a 3-12 month lookback period is the precise window that has worked in the past and, by extension, will work in the future.  I get that it has in fact worked in the past, and that the lookback period to be utilized should "axiomatically exist" within that time frame, and that is precisely because it is entirely born out of historical backtesting (i.e., a posteriori).

And I agree with EngiNerd and Monkey Uncle that the same is true of the 4% Rule -- the 4% SWR is entirely born out of historical backtesting, and I can think of no a priori reason to believe that 4% represents a "safe" withdrawal rate (precisely because it is the arbitrary withdrawal rate that just so happened to be the upper limit of successful withdrawal rates under historical worst case scenarios).  But I'm more comfortable relying on a totally a posteriori justification for setting an upper limit on a withdrawal strategy than for the following of a pattern-based trading strategy.

Right, so the explanation doesn't satisfy you. Fair enough. Many different roads to paradise and all that.

Just don't claim that there haven't been any explanations given, when they have been given ad nauseum.

And I believe, by the way, that macro-economic argument put forth gives a reasonable explanation for the time period specific effects of the momentum anomaly.

It seems to me that your argument is simply the efficient market hypothesis warmed over. And your objections towards momentum can be equally well deployed against value investing, size effects, and quality factors.

If you think the market is a perfectly efficient entity that is comprised of rational actors, then that is the fundamental point of our disagreement and we should just leave it at that.
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sol

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Re: Dual Momentum Investing
« Reply #541 on: July 11, 2015, 05:00:44 PM »
Just don't claim that there haven't been any explanations given, when they have been given ad nauseum.

Part of my distaste, miles, for this particular theory is that there IS a good explanation for why momentum strategies work, and it's an ugly one.  You personally profit by convincing other people to follow your strategy, because your strategy is a market amplifcation scheme that is self-reinforcing.  The more people believe in, the better it does.  So your motives are immediately suspect.  You cannot be an impartial judge.

I don't benefit in any way by convincing people to become indexers.  Momentum strategy traders, on the other hand, NEED people to want to trade momentum strategies for those strategies to work.  It has taken me a while to formulate my unease with it in these terms, but I think it helps clarify the positions of everyone involved.  You're arguing for momentum because winning over converts lines your personal pockets.  Truth is always secondary when there are profits on the line.


milesdividendmd

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« Reply #542 on: July 11, 2015, 05:16:31 PM »
Just don't claim that there haven't been any explanations given, when they have been given ad nauseum.

Part of my distaste, miles, for this particular theory is that there IS a good explanation for why momentum strategies work, and it's an ugly one.  You personally profit by convincing other people to follow your strategy, because your strategy is a market amplifcation scheme that is self-reinforcing.  The more people believe in, the better it does.  So your motives are immediately suspect.  You cannot be an impartial judge.

I don't benefit in any way by convincing people to become indexers.  Momentum strategy traders, on the other hand, NEED people to want to trade momentum strategies for those strategies to work.  It has taken me a while to formulate my unease with it in these terms, but I think it helps clarify the positions of everyone involved.  You're arguing for momentum because winning over converts lines your personal pockets.  Truth is always secondary when there are profits on the line.

Sol,

This is a stretch.

You make me out to be a prostletyser, which I emphatically am not.

I am eager to engage in the discussion about this theory because I have spent some time thinking about it, am interested in it, and because I am personally employing it.

Furthermore momentum predates its description and its underlying justification has nothing to do with people consciously pursuing a momentum strategy per SE, and everything to do with our intrinsic performance chasing tendencies.

It has never crossed my mind that if more people employed it it would benefit me and see no evidence that this is in fact the case.

Surely more people have consciously employed momentum since it was initially described, but the effect has merely persisted not increased (or diminished, to the best of my knowledge.)

Furthermore the more people who use this strategy, the more expensive short term treasuries will become when the next "sell" signal occurs, and the cheaper the position I am exiting.

So I can only tell you that your distaste strikes me as a bit conspiratorial and entirely unfounded.

But I am glad you raised the point, because before you wrote it it had never occurred to me. So it was....interesting.
« Last Edit: July 11, 2015, 05:19:34 PM by milesdividendmd »
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forummm

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Re: Dual Momentum Investing
« Reply #543 on: July 11, 2015, 06:14:35 PM »
I'm not sure the momentum trader needs people to follow momentum strategies as articulated here. I think they profit from people behaving irrationally. Now, this irrational behavior does look like a momentum strategy. But the momentum trader needs this irrational action to happen *after* the momentum trader has acted. They need people to irrationally bid up prices once the momentum trader has bought in, and they need people to irrationally panic and sell once the momentum trader has exited. Historically, the momentum trader has lost to the index when times were more rational, and has beaten the index when people were acting irrationally (both bubbles and panics).

So the self-interested momentum trader would evangelize about a lookback period of N+1 or N+6 or whatever, when they are an N period trader.

sol

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Re: Dual Momentum Investing
« Reply #544 on: July 11, 2015, 06:59:12 PM »
I think they profit from people behaving irrationally. Now, this irrational behavior does look like a momentum strategy. But the momentum trader needs this irrational action to happen *after* the momentum trader has acted. They need people to irrationally bid up prices once the momentum trader has bought in, and they need people to irrationally panic and sell once the momentum trader has exited. Historically, the momentum trader has lost to the index when times were more rational, and has beaten the index when people were acting irrationally (both bubbles and panics).

I think it's a bit deeper than that.  Miles himself has previously discussed in this very thread the way that DM is a self-reinforcing strategy, which is more successful the more people follow it. The basic premise of it is that it amplifies small price fluctuations into big price fluctuations by piling on the current trend.  The more people pile on, the longer and deeper the trend gets, the more successful a momentum strategy gets.


milesdividendmd

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« Reply #545 on: July 11, 2015, 07:25:18 PM »
Sol,

Dig up the quote, because while I can certainly remember making the point that the momentum effect couldn't be crowded away (like say value) or arbitraged away, and that relative strength momentum might even be amplified by crowding, I don't recall ever claiming that DM is more successful, the more people follow it.

More to the point what evidence do you have that DM is strengthened by popularity at all, as you have suggested?

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« Last Edit: July 11, 2015, 07:36:05 PM by milesdividendmd »
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brooklynguy

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Re: Dual Momentum Investing
« Reply #546 on: July 11, 2015, 08:06:11 PM »
Right, so the explanation doesn't satisfy you. Fair enough. Many different roads to paradise and all that.

Just don't claim that there haven't been any explanations given, when they have been given ad nauseum.

And I believe, by the way, that macro-economic argument put forth gives a reasonable explanation for the time period specific effects of the momentum anomaly.

It seems to me that your argument is simply the efficient market hypothesis warmed over. And your objections towards momentum can be equally well deployed against value investing, size effects, and quality factors.

If you think the market is a perfectly efficient entity that is comprised of rational actors, then that is the fundamental point of our disagreement and we should just leave it at that.

We're starting to go back in circles again, but it's not that the explanation doesn't satisfy me.  It's that, as far as I can see, no explanation has been given.  The explanation that a 3-12 month window works because that is what has worked is not an explanation.

But perhaps I missed the explanation, because I'm not sure what you're referring to about the macro-economic argument giving an explanation for the specific time period -- can you elaborate, or point me to where that is discussed in the thread or the linked materials?

I'm also not sure what argument you think I'm making in reliance on the EMH.  I'm not really making any argument, just questioning whether any logical explanations exist to believe that the specific lookback window that worked in the past will persist into the future.  As I said earlier, I agree that compelling reasons have been offered for the existence of momentum in price movements, and in general I usually find myself on the side of debates arguing against strong versions of the EMH (which is why I formed my fictitious eponymous corporation).

More to the point what evidence do you have that DM is strengthened by popularity at all, as you have suggested?

I can't tell if sol is being serious or just wrapping his commentary in his trademark deliberately inflammatory rhetoric, but the DM strategy relies on the persistence of a historical pattern into the future, so of course it would be strengthened by self-reinforcing popularity (as opposed to a change in market movement patterns that eliminates the momentum anomaly).

milesdividendmd

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Re: Dual Momentum Investing
« Reply #547 on: July 11, 2015, 11:30:27 PM »

Right, so the explanation doesn't satisfy you. Fair enough. Many different roads to paradise and all that.

Just don't claim that there haven't been any explanations given, when they have been given ad nauseum.

And I believe, by the way, that macro-economic argument put forth gives a reasonable explanation for the time period specific effects of the momentum anomaly.

It seems to me that your argument is simply the efficient market hypothesis warmed over. And your objections towards momentum can be equally well deployed against value investing, size effects, and quality factors.

If you think the market is a perfectly efficient entity that is comprised of rational actors, then that is the fundamental point of our disagreement and we should just leave it at that.

We're starting to go back in circles again, but it's not that the explanation doesn't satisfy me.  It's that, as far as I can see, no explanation has been given.  The explanation that a 3-12 month window works because that is what has worked is not an explanation.

But perhaps I missed the explanation, because I'm not sure what you're referring to about the macro-economic argument giving an explanation for the specific time period -- can you elaborate, or point me to where that is discussed in the thread or the linked materials?

I'm also not sure what argument you think I'm making in reliance on the EMH.  I'm not really making any argument, just questioning whether any logical explanations exist to believe that the specific lookback window that worked in the past will persist into the future.  As I said earlier, I agree that compelling reasons have been offered for the existence of momentum in price movements, and in general I usually find myself on the side of debates arguing against strong versions of the EMH (which is why I formed my fictitious eponymous corporation).

More to the point what evidence do you have that DM is strengthened by popularity at all, as you have suggested?

I can't tell if sol is being serious or just wrapping his commentary in his trademark deliberately inflammatory rhetoric, but the DM strategy relies on the persistence of a historical pattern into the future, so of course it would be strengthened by self-reinforcing popularity (as opposed to a change in market movement patterns that eliminates the momentum anomaly).

You've already stated that you believe that there are compelling reasons (behavioral) for price momentum (aka relative momentum.)

So your question is really why a specific look back period between 3 and 12 months should work as an absolute momentum filter.

Here is a direct copy and paste job from what I have termed the macro economic argument for the effectiveness of absolute momentum (or trend following) more specifically....

"So the question is obvious: Why should these approaches work? In other words what guarantee is there that just because bear markets have looked a certain way in the past, they will continue to look that way in the future?

There are no guarantees. And there is an example in the past where these approaches have not protected its practitioners from feeling the full brunt of a market downturn (The flash crash of 1987.) and there is no reason why whipsaws cannot randomly happen in the future.

But there is reason to believe that future bear markets will continue to look enough like past bear markets that trendfollowing approaches will continue to almost always work at mitigating draw downs.

Why do I say this? Because when we are talking about large scale expansion and recession, we are talking about the business cycle. And when we are talking about the business cycle we’re talking about the movements of a large economies. And large economies are like battleships, not Jet Ski’s. They cannot turn on a dime.

It takes time for bubbles to inflate. And it takes time for risks to work their way through a system. And when an economy begins shrinking, it takes time to for those in power to recognize that it is in fact shrinking. And when second order actions occur, and interest rates are dropped by central banks, and stimulus bills are passed by governments, it takes time for the pain to work its way through the system, and for the corrective actions to have any effect at all.

And past a point, no matter how long the bear market lasts, for the remainder of the draw down, the trend follower will outperform the broad stock market which will continue losing value even as the trend follower’s portfolio is sitting in safe assets.

So a bear market really cannot be too long. It can only be too short for a trend follower.

And how short is too short? A draw down is too short if only short-term treasuries do not outperform the risky assets for the lookback period in a dual momentum portfolio prior to the beginning of the next market recovery.

And note that in this instance the trend following approach does not underperform, it merely fails to outperform.

The only real problem arises when there is a very rapid drawdown followed by an immediate and slow recovery, as was the case with the Flash crash and recovery following Black Monday in 1987. Such an occurrence is a scary prospect for this approach, but it’s also been a very rare occurrence historically.

So when you combine the business cycle scale effects that make it very unlikely for future bear markets not to last for similar time frames as in the past (or longer,) with a strategy that is very good at recognizing bear markets as long as they do not occur too quickly, you have a compelling argument for why trend following should remain robust in its ability to diminish drawdowns long into an unknowable future."

As to the timing effects, these are clearly just empirical observations regardless of the strategy. So momentum is a medium-term phenomenon, reversals are a short term phenomenon, and value is a longer-term phenomenon.

We can come up with clever stories for why these time effects exist, post Facto, but why bother? If you want to invest in momentum it only makes sense to use a The timeframe for your investments in which momentum actually empirically exists.

Similarly if the value story of "buying things cheaply" makes sense to you, you will perform very poorly indeed if you try to daytrade using a value strategy. (This is why value investors tend to have long holding periods.)

Or to put it in your terms, equitieshave been observed to be risky on a short-term basis relative to bonds, but safer on a long-term basis when it comes to preserving capital. For this reason buy and  holders overweight equities for long-term goals, and overweight fixed income for short-term goals. It's using data to make decisions, which is usually smart.

As to the Sol question, I'll let him answer for himself, but I'll just point out that your explanation would work equally well for an equity overweighted buy-and-holder (like you and Sol) advocating for overweighting equities and having other people buying equities and bidding up the price of equities.

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brooklynguy

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Re: Dual Momentum Investing
« Reply #548 on: July 12, 2015, 08:16:08 AM »
Why do I say this? Because when we are talking about large scale expansion and recession, we are talking about the business cycle. And when we are talking about the business cycle we’re talking about the movements of a large economies. And large economies are like battleships, not Jet Ski’s. They cannot turn on a dime.

It takes time for bubbles to inflate. And it takes time for risks to work their way through a system. And when an economy begins shrinking, it takes time to for those in power to recognize that it is in fact shrinking. And when second order actions occur, and interest rates are dropped by central banks, and stimulus bills are passed by governments, it takes time for the pain to work its way through the system, and for the corrective actions to have any effect at all.

Ah, yes, I had forgotten about this argument explaining why macroeconomic factors cause markets to follow a predictable pattern and missed it on a skim re-read of the thread and your blog post.  Thanks.

Quote
As to the Sol question, I'll let him answer for himself, but I'll just point out that your explanation would work equally well for an equity overweighted buy-and-holder (like you and Sol) advocating for overweighting equities and having other people buying equities and bidding up the price of equities.

Yes, it would work equally well for "overweighting" equities, but not for any specific equity investing strategy (so, as sol said, it doesn't benefit indexers to persuade other investors to become indexers).  Once someone has made the threshold decision to invest in whatever asset class (or sub-class) the index covers, indexers are benefitted just the same as if the person invested in the entire index.  But hopefully sol will weigh in with additional thoughts, because I'm curious if he's really arguing that your advocacy for DM is knowingly motivated by a desire to increase personal gain, or merely that that's a subconscious bias existing in the background, or something else.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #549 on: July 12, 2015, 10:33:53 AM »

Why do I say this? Because when we are talking about large scale expansion and recession, we are talking about the business cycle. And when we are talking about the business cycle we’re talking about the movements of a large economies. And large economies are like battleships, not Jet Ski’s. They cannot turn on a dime.

It takes time for bubbles to inflate. And it takes time for risks to work their way through a system. And when an economy begins shrinking, it takes time to for those in power to recognize that it is in fact shrinking. And when second order actions occur, and interest rates are dropped by central banks, and stimulus bills are passed by governments, it takes time for the pain to work its way through the system, and for the corrective actions to have any effect at all.

Ah, yes, I had forgotten about this argument explaining why macroeconomic factors cause markets to follow a predictable pattern and missed it on a skim re-read of the thread and your blog post.  Thanks.

Quote
As to the Sol question, I'll let him answer for himself, but I'll just point out that your explanation would work equally well for an equity overweighted buy-and-holder (like you and Sol) advocating for overweighting equities and having other people buying equities and bidding up the price of equities.

Yes, it would work equally well for "overweighting" equities, but not for any specific equity investing strategy (so, as sol said, it doesn't benefit indexers to persuade other investors to become indexers).  Once someone has made the threshold decision to invest in whatever asset class (or sub-class) the index covers, indexers are benefitted just the same as if the person invested in the entire index.  But hopefully sol will weigh in with additional thoughts, because I'm curious if he's really arguing that your advocacy for DM is knowingly motivated by a desire to increase personal gain, or merely that that's a subconscious bias existing in the background, or something else.

No. if you are overweight equities, the only thing that will help you in terms of other investors behavior is if they invest in EQUITIES.  And If you have in the default MMM forum approved total market lazy portfolio approach, any equities will do. Gold?  Not helpful.  Commodities? Not helpful.  Junk bonds? Not helpful. You get the point

Now I'm not arguing that this is why you and others argue so persuasively for indexing.

I think it's a laughable premise that anything said here has any effect on the global markets at all.

I'm just pointing out that your explanation for Sol's argument fails to differentiate itself from advocating simple indexing.
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