Author Topic: Dual Momentum Investing  (Read 214803 times)

milesdividendmd

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Re: Dual Momentum Investing
« Reply #750 on: September 01, 2015, 12:12:47 PM »
I trade on the turn of the month, so my trade went through after close yesterday.  As you can see from this thread, different people have different trigger dates.  Trading a week early, like others did would have been even "smarter," in this case (thus far).  But long term, this random variability shouldn't make a great deal of difference.
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yoda34

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Re: Dual Momentum Investing
« Reply #751 on: September 04, 2015, 10:42:34 AM »
Hi all - long time lurker, not a prolific poster. I've followed this thread with interest given that I have some experience in this field. I have a few thoughts about active investing in general (not just dual momentum) and this seemed to be the current thread to have that discussion. My apologies in advance for the dense post - had a lot of thoughts over the past few weeks to get out.

First there are several identified market anomalies that do return more than a standard market index (S&P500, Total Market, what ever). These have been identified, studied and acknowledged through mountains of academic research. Two of those anomalies are value and momentum. These were first widely identified by fama and french (ironically enough the fathers of efficient market theory). Of course, the outstanding question is do these anomalies really return more on a risk adjusted basis (i.e. do you get more overall gain due to risk) but it depends on how you measure risk. Modern portfolio theory will measure volatility and standard deviation and declare that value and momentum do not beat the market on a risk-adjusted basis. Value investors will say that's a crazy way to measure risk (risk being more identified with "overpaying" for a security and a "margin of safety" from Ben Graham). Regardless it is not difficult at all to construct portfolios that exploit value or momentum (as dual momentum does) to reliably return absolute gains greater than any market index over long periods of time. I can give you three value methods off the top of my head that do so.

The question is then "If it is easy and provable to build a system based on value and momentum that returns absolute gains greater than the market, why doesn't everyone beat the market?"

First let's discuss index buy and hold approaches. First, if you believe in a strong efficient market theory (i.e. the market price is never wrong) then buy and hold is not only smart, it's literally the only approach that makes sense. You receive the average market return and assume the average market risk which is the best you can ever do. Even if you don't believe in totally strong efficient market, buy and hold could still make sense as you may be happy with receiving the mean return at the mean risk with very little work or stress.

But if you believe, as I do and as I believe research has shown, that there are at least two anomalies that return more than the market in value and momentum why is it so hard to take advantage of?

1. Behavioral bias errors
2. Frictional costs (especially in taxable accounts)

Behavioral bias errors refer to the fact that, as humans, we are incredibly poor at making informed decisions. Our decision making process is heuristic and pattern based and is incredibly fast. It had to be in order to survive through millions of years of evolution. Unfortunately that process also makes us extremely bad at making decisions that require non emotional thinking and we often fool ourselves by seeing patterns where none exist (thanks brain!). Joel Greenblatt (of MFI fame) did a 10 year study where he found that investors systematically avoid stocks with large returns and panic and sell during down turns at exactly the wrong times - repeatedly. Unless you can be extremely disciplined you can not make active investing work. Even knowing that Value approaches beat the index - can you ride a 50% drawdown or 30% standard deviation for 15 years? Because that's exactly what it takes. Most retail investors can't. Professionals have a short time bias problem due to having to keep their jobs and so they can't. In general people actively destroy any excess returns (and them some) through these errors.

Frictional costs are also a HUGE problem. Most of the value or momentum strategies that generate the large excess returns over the market (think 20% per anum) require trading at intervals of less than 1 year. Even putting aside the transaction costs for each trade the difference between the long term cap gains and the short term cap gains is enormous. If you assume a long term cap gain tax of 23.8% and a short term of 36.8 - 42.8% (the top two highest tax brackets) then the following is true: Assuming a market return of 8% per year you would have to earn 14% just to break even on the taxes (assuming that you continued to hold the index and didn't willy nillly sell). So you not only have to beat the market, you have to beat the market by 75% to just break even if your strategy causes you to incur short term capital gains!!! Also, the short term capital gains hits are compounded right along with your gains meaning over a 15 year period the difference in long term taxes and short term taxes can literally be 1000s of percents if you don't make at least that 75% premium to break even. This is extremely hard.

My personal opinion is this is why Warren Buffet is so successful. He buys using a value strategy (known anomaly to market returns) but then NEVER sells reducing not only his taxes but completely eliminating all behavioral bias errors. He doesn't mess up because he refuses to play the game.

Ok - so enough is enough. What does this all mean. Can dual momentum beat the a buy and hold index. Yes it certainly can. IF you (a) are a super iron man on discipline and never make behavioral mistakes and (b) find a momentum system that either only makes long term capital trades or beats the market by WIDE margin to make up the difference.

I think you'll find the reality of actually executing A and B very hard in real life, which is why for almost everyone a buy and hold index strategy will far and away be the superior choice. I would say just my 2 cents, but this post has to be way more than that. Sorry for the rambling and thanks for reading.
« Last Edit: September 04, 2015, 11:23:12 AM by yoda34 »

kvaruni

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Re: Dual Momentum Investing
« Reply #752 on: September 04, 2015, 11:31:03 AM »
Wow, long live the long time lurkers. This is a very clear post, and it probably made a lot more clear to me about dual momentum investing than I ever understood from just gleaning over all other posts on this topic. Kudos to you yoda34!

milesdividendmd

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Dual Momentum Investing
« Reply #753 on: September 04, 2015, 12:00:56 PM »
I agree completely. Good analysis.

The tax factor is why I am DM in my tax sheltered accounts and buy and hold in in my taxable. If Momentum and trend following hold form it would take a lot of friction indeed for DM to not outperform.

Which leaves the behavioral issue and tracking error. These are undoubtedly big issues.

The only point I would make is that buy and hold investors are not immune to behavioral errors. Plenty of evidence for that on these boards.

So in the end you're  left having to pick a system and stick to it no matter what
« Last Edit: September 04, 2015, 12:13:47 PM by milesdividendmd »
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yoda34

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Re: Dual Momentum Investing
« Reply #754 on: September 04, 2015, 12:59:50 PM »
I would add that taxes are not the only source of frictional costs, it's just the easiest to make the point with.

i agree that all investors, including buy and hold, are subject to behavioral errors. As an example, many buy and holder's lost their mind in the 07-09 time frame and cashed out to their detriment. I'll add though, that any active strategy magnifies the behavioral errors and gives you many more times where you have to hold firm.

As an example in the 07-09 time frame, everyone lost money - regardless of strategy so both Indexers and Active strategies had to show discipline and stick it out. So lets call that even. How about all the times, separate and apart from market crashes, where value and momentum both widely under perform a generally well performing market? 2015 is such a time for Value - growth and glamour stocks were out performing value significantly before the recent volatility in late August. During that timeframe, that is yet another time that value investors have to avoid behavioral errors that buy and hold indexers will never even be faced with. If value is out performing an index, the indexers by and large do not care. If the index is out performing value / momentum by a wide margin you better believe there are people questioning their systems and making mistakes - it's simply human.

One final point about behavioral errors that make it hard to exploit value and momentum. The fact that value and momentum exist at all as a market anomaly is also due to behavioral errors by others. They exist due to error yet they are hard to take advantage of due to error. I find that quite ironic.

For the purpose of full disclosure - I follow a value investing methodology in both my taxable and tax-sheltered accounts.
« Last Edit: September 04, 2015, 01:07:03 PM by yoda34 »

milesdividendmd

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Re: Dual Momentum Investing
« Reply #755 on: September 04, 2015, 01:07:46 PM »
Yoda. This is the tracking error issue.

Any active strategy must overcome

1. Cost of trades:commissions
2. Cost of trades: friction
3. Behavioral errors during periods of negative tracking error.

The one unique aspect of trend following approaches is that they outperform most during bear markets when the chance for behavioral errors is at its highest. It is completely intuitive to run for the hills when blood is in the streets. 
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FIPurpose

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Re: Dual Momentum Investing
« Reply #756 on: September 04, 2015, 04:25:16 PM »
Yeah when you're DM in your tax-advantaged accounts, it is typical a free trade. At least all trades for me are free. I've been 100% hold in VTSAX in my taxable account, but I doubt that I'll be hitting any 38% tax bracket anytime soon.
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mrpercentage

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Re: Dual Momentum Investing
« Reply #757 on: September 05, 2015, 09:33:28 PM »
I have just come to the conclusion that all the waves in the market place recently have been caused by chasing momentum. The grand finale will be when regular investors get tired of seeing so many waves and they will pull all their money out setting off a chain of events that lead most portfolios, including momentum, to their death. Its not only possible but it is probable.

The numbers actually support this. When isolated momentum stocks have gained at an execrated rate while value and quality have been in negative territory. Momentum stocks are also known to drop like a rock when momentum is over and there really isn't a momentum market big enough to accommodate peoples retirement portfolios chasing momentum in a bear market.

Conclusion is buy BRK-B because Warren Buffett is taking stuff private.
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mrpercentage

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Re: Dual Momentum Investing
« Reply #758 on: September 05, 2015, 09:55:02 PM »
I bet regulation is coming. It might take a while but its coming.
absolute truth... prison guard that has seen shanks does not makes 45k a year managing bullshit tech that was outsourced for what?.... cheaper tech and less taxes... probably

dungoofed

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Re: Dual Momentum Investing
« Reply #759 on: September 05, 2015, 11:43:07 PM »
execrated rate

I don't think that word means what you think it does.

mrpercentage

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Re: Dual Momentum Investing
« Reply #760 on: September 06, 2015, 12:37:22 AM »
execrated rate

I don't think that word means what you think it does.

Correct accelerated. I am amused enough to leave it as is.

I did mean everything I wrote though. I am aware that BRKB is still a stock but I believe in Mr Buffett, and he believes in value. Value is unloved, he buys unloved, and nothing has changed there. Momentum is speculation and speculation goes up in flames. Nothing of a surprise there. It wouldn't be a problem without the all too easy ETF and index they can play with. Now they can wreck the market for most.

I think my current strategy is still solid. Buying quality companies with a huge dividend when they are unloved and throwing equity out the window because it is being destroyed by momentum. I will actually have partial ownership in something of wealth producing power and will not be as subject to the paperloss of equity chasers.

Dont believe momentum is king? Look at Ford. Ford is screaming buy me. Forward PE of 7. PEG of 0.36. Price to sales of 0.39. Price to book of just 2. Did I mention its yielding 4% and paying out half its earnings? Are you serious? How can this happen-- simple-- momentum. Remember Warren Buffett's speach on the tech bubble. Well, here we go again. People better get naked cause they are going to get screwed.
« Last Edit: September 06, 2015, 01:17:35 AM by mrpercentage »
absolute truth... prison guard that has seen shanks does not makes 45k a year managing bullshit tech that was outsourced for what?.... cheaper tech and less taxes... probably

milesdividendmd

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Re: Dual Momentum Investing
« Reply #761 on: September 07, 2015, 08:07:31 PM »
This is not the free association thread. It's a very specific thread about a very specific strategy: dual momentum.

Let's leave the ink blot test  "momentum makes me think about tidal waves" comments elsewhere.

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Zamboni

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Re: Dual Momentum Investing
« Reply #762 on: September 07, 2015, 08:33:53 PM »
I keep thinking about trying dual momentum for part of my portfolio. This thread has been very interesting, and I've read Antonacci's book.

Yoda's post was very helpful in calming me about my reluctance to switch strategies. My main barrier to DM is that I am paranoid I will make a mistake in analysis or goof up somehow. Right now I have short and long positions in indexes and I rebalance twice per year (so one per year better than the couch potato method.) I am convinced dual momentum would do slightly better, particularly in bear markets, but I'm not convinced that I have the discipline to stick with the rules or the skills to avoid analysis mistakes. And yes, I think that the irony of DM profiting on the behavioral mistakes of others makes me worry even more about making my own behavioral mistakes using a strategy that is more active.

mrpercentage

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Re: Dual Momentum Investing
« Reply #763 on: September 07, 2015, 10:22:32 PM »
This is not the free association thread. It's a very specific thread about a very specific strategy: dual momentum.

Let's leave the ink blot test  "momentum makes me think about tidal waves" comments elsewhere.
Apologies. I will steer clear and keep my opinions to myself. You are right. You all deserve a thread to discuss your strategy without having to defend it.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #764 on: September 07, 2015, 10:44:04 PM »

This is not the free association thread. It's a very specific thread about a very specific strategy: dual momentum.

Let's leave the ink blot test  "momentum makes me think about tidal waves" comments elsewhere.
Apologies. I will steer clear and keep my opinions to myself. You are right. You all deserve a thread to discuss your strategy without having to defend it.

MP

It's nothing personal.

Your and anyone else's thoughts (specifically about DM) are welcome here.  It's just a very specific topic, that's all. Let's Keep it that way!
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dungoofed

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Re: Dual Momentum Investing
« Reply #765 on: September 08, 2015, 01:17:06 AM »
For what it's worth, Moosignal also signaled a switch this last weekend (to cash).

sirdoug007

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Re: Dual Momentum Investing
« Reply #766 on: September 08, 2015, 03:46:40 PM »
For what it's worth, Moosignal also signaled a switch this last weekend (to cash).

I can't help but think about Wallyworld with Moose momentum...

Part of the reason I am interested in DM is because it is transparent and testable by any reasonably knowledgeable person.  This moose signal thing I would not deal with simply because it is "proprietary" black box stuff.


Zacharias

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Re: Dual Momentum Investing
« Reply #767 on: September 12, 2015, 09:46:11 AM »
Hello all,

I've been lurking and reading through this thread a while now and read Antonacci's book. I have a question about DMSR though that I couldn't quite tell from the book. Does sector rotation use only the best performing sector in the lookback period or several sectors?

Thanks for any clarification.

brainfart

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Re: Dual Momentum Investing
« Reply #768 on: September 13, 2015, 05:16:34 AM »
@ Zacharias: I assume he looks at all of them. Could be wrong though.

Since DM is an active strategy trying to limit losses, does anyone use (trailing) stop loss orders?

innerscorecard

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Re: Dual Momentum Investing
« Reply #769 on: September 13, 2015, 11:59:30 PM »
@ Zacharias: I assume he looks at all of them. Could be wrong though.

Since DM is an active strategy trying to limit losses, does anyone use (trailing) stop loss orders?

Having stop loss orders would be disastrous. Either use the strategy, or don't. These little tweaks are what destroys returns. And ironically, in the end what makes the strategy actually work for those who don't tweak, since it's so damn tempting to tweak.
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Zacharias

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Re: Dual Momentum Investing
« Reply #770 on: September 14, 2015, 09:58:12 AM »
@ Zacharias: I assume he looks at all of them. Could be wrong though.


Thanks for the response brainfart. I think I may have been unclear in my question though. My understanding of DMSR is that one applies their lookback period to all 11 sectors as well as a bond or treasury etf then allocates all resources to the single best performing of those options.

What confused me was some language to the effect of selecting an equally weighted basket of the best performing sectors when Antonacci overviews the DMSR strategy in his book.

So what I am unclear on is if funds are allocated to more than one sector at a time in this strategy.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #771 on: September 14, 2015, 11:23:51 AM »
@ Zacharias: I assume he looks at all of them. Could be wrong though.


Thanks for the response brainfart. I think I may have been unclear in my question though. My understanding of DMSR is that one applies their lookback period to all 11 sectors as well as a bond or treasury etf then allocates all resources to the single best performing of those options.

What confused me was some language to the effect of selecting an equally weighted basket of the best performing sectors when Antonacci overviews the DMSR strategy in his book.

So what I am unclear on is if funds are allocated to more than one sector at a time in this strategy.

My recollection is that DMSR funds 100% into the top sector.  I believe Antonacci uses equal wighted sectors as his benchmark for comparison.  I'll dig out my book to confirm this memory.

CXO advisory has looked at this as well with asset class ETF momentum.  And what they find is that if you use top 2 or top 3  in place of top 1, you get less return with slightly less drawdown/volatility.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #772 on: September 14, 2015, 11:30:49 AM »
@ Zacharias: I assume he looks at all of them. Could be wrong though.

Since DM is an active strategy trying to limit losses, does anyone use (trailing) stop loss orders?

Having stop loss orders would be disastrous. Either use the strategy, or don't. These little tweaks are what destroys returns. And ironically, in the end what makes the strategy actually work for those who don't tweak, since it's so damn tempting to tweak.

I haven't done the backtest on this, but I tend to agree.

The key with any timing strategy is to find an acceptable level of signal to noise.  Adding complexity always adds noise, but seldom adds signal.  Specifically, the only area where a stop loss signal would be likely to help decrease drawdowns would be in a 1989 style flash crash.  And there's only been one of those.  The rest of the time it would definitely increase trading frequency and friction, with limited upside.
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brainfart

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Re: Dual Momentum Investing
« Reply #773 on: September 14, 2015, 11:48:42 AM »
That was my idea, trying to limit the effect of rare black swan events with stop loss orders, not having them fulfilled regularly. But if they really are that rare it doesn't make much sense.

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Re: Dual Momentum Investing
« Reply #774 on: September 14, 2015, 12:48:04 PM »
You just hope that bonds or cash start outperforming so that your system will switch to those before the crash happens. With momentum systems, hard stops almost always decrease performance. With pure trend following systems, hard stops usually help.


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sol

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Re: Dual Momentum Investing
« Reply #775 on: September 15, 2015, 06:15:19 PM »
Is this month going to be an example of DM investors getting whipsawed?  What price would the S&P500 have to close at on October 1 to cause you to sell out of treasuries/cash and buy back into the market?  What would your effective losses (missed appreciation plus transaction costs plus taxes) be on having followed a DM strategy in this case?

Conversely, what price would the S&P500 have to close at on October 1 for you to have profited, in this instance, on following a DM strategy?  Is it just the Sept 1 price of 1913.95 plus frictional costs plus the 1 month of returns on whatever other asset (treasuries/cash?) you moved into instead?

The month isn't over yet and volatility is so high these days that I won't pretend to know what the October 1 price will actually be.  But watching this strategy unfold in real time in this thread has highlighted for me that every asset class swap a DM trader makes is essentially a bet against the 30-day future price of the asset they sold out of, relative to the asset they bought into, minus any trading costs and/or taxes.  If every trade is just a bet against the 30-day future price, how does the strategy compare to just buying put options?

Every strategy is going to have good and bad months, and I'm not posing these questions to pick on one.  Whipsaws are a recognized risk of a DM strategy, an accepted infrequent loss that you swallow in exchange for the downside protection you expect to get most of the time.  I'm just trying to look forward a little, to establish expectations for how this strategy will perform compared to a buy and hold strategy depending on what the market might do in the short term. 

If I understand correctly, a DM trader who swaps out of stocks, as some people here seem to have done, is essentially betting that the short term price change of the stock market will continue to move down until it is below some new lower specific price determined by the frictional trading costs and the expected return of the alternative investment, which is typically well known for 30 day treasuries or cash.  If they are correct, they will have avoided a known amount of paper losses but maybe incurred some transaction costs.  If they are incorrect, they will have incurrred a known amount of paper losses, plus maybe some transaction costs.  I'm just not clear on the relative quantities of the losses in those two scenarios and how it relates to the real future market price relative to the price they're betting it will fall below.

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Re: Dual Momentum Investing
« Reply #776 on: September 15, 2015, 06:38:31 PM »
Interesting point. The S&P500 is up about 65 points from close on 9/1 to close today. I don't have a crystal ball, but I think if there's no interest rate increase things will push up over 2000 again this month. At that level, moving back into US equities would lock in a decent loss, and get you back into an overvalued market.

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Re: Dual Momentum Investing
« Reply #777 on: September 15, 2015, 06:41:33 PM »
I have been watching this spreadsheet and just last week (I think) it had both the 1 year and the average returns signaled to invest in VGSH, BND, VGSH and VGLT.  Which at the time made sense to me but now for instance the Equity category is back to VTI for the 1 year returns but still on VGSH for the average.  (Looking at the Vanguard Tab).  Is it supposed to flip back like that?  Is this what Sol is hinting at?  I suppose this is why you pick something like " the 3rd Friday" like others have mentioned in this thread for the trigger day.

The optimal strategy has a couple lined up together but it looks like it is back to VTI also on the equities.

https://docs.google.com/spreadsheets/d/1S5YVvjIXexBOjonrpgSM0ngr3O-82NGalGnfbj5hOxU/edit#gid=453055775

Edit for spelling.
« Last Edit: September 15, 2015, 06:51:36 PM by wienerdog »

sol

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Re: Dual Momentum Investing
« Reply #778 on: September 15, 2015, 07:14:05 PM »
Is this what Sol is hinting at?

I didn't mean to hint, just to ask if this month might turn out to be one of those unfortunate whipsaw events we talked about so much about in the early pages of this thread.

DM's nightmare scenario:  a long steady market followed by sharp drop triggers an asset class swap, then a market recovery triggers another one right back to where you were, and you've effectively lost out on a gaining month and had to trade twice to do it.  The past performance of the DM strategy suggests this sort of thing should be rare, which doesn't mean it can't happen right now.

milesdividendmd

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Dual Momentum Investing
« Reply #779 on: September 15, 2015, 08:45:55 PM »
Is this month going to be an example of DM investors getting whipsawed?  What price would the S&P500 have to close at on October 1 to cause you to sell out of treasuries/cash and buy back into the market?  What would your effective losses (missed appreciation plus transaction costs plus taxes) be on having followed a DM strategy in this case?

Conversely, what price would the S&P500 have to close at on October 1 for you to have profited, in this instance, on following a DM strategy?  Is it just the Sept 1 price of 1913.95 plus frictional costs plus the 1 month of returns on whatever other asset (treasuries/cash?) you moved into instead?

The month isn't over yet and volatility is so high these days that I won't pretend to know what the October 1 price will actually be.  But watching this strategy unfold in real time in this thread has highlighted for me that every asset class swap a DM trader makes is essentially a bet against the 30-day future price of the asset they sold out of, relative to the asset they bought into, minus any trading costs and/or taxes.  If every trade is just a bet against the 30-day future price, how does the strategy compare to just buying put options?

Every strategy is going to have good and bad months, and I'm not posing these questions to pick on one.  Whipsaws are a recognized risk of a DM strategy, an accepted infrequent loss that you swallow in exchange for the downside protection you expect to get most of the time.  I'm just trying to look forward a little, to establish expectations for how this strategy will perform compared to a buy and hold strategy depending on what the market might do in the short term. 

If I understand correctly, a DM trader who swaps out of stocks, as some people here seem to have done, is essentially betting that the short term price change of the stock market will continue to move down until it is below some new lower specific price determined by the frictional trading costs and the expected return of the alternative investment, which is typically well known for 30 day treasuries or cash.  If they are correct, they will have avoided a known amount of paper losses but maybe incurred some transaction costs.  If they are incorrect, they will have incurrred a known amount of paper losses, plus maybe some transaction costs.  I'm just not clear on the relative quantities of the losses in those two scenarios and how it relates to the real future market price relative to the price they're betting it will fall below.


As with the one month performance any active strategy, compared to the S&P this month will be an example of

1.  A convincing outperformance of dual momentum,

2.  A convincing underperformance of dual momentum,

Or.

3.  A rough equivalence of DM,


Which of the three is anybody's guess (aside from those who can predict the future.)

A whipsaw it will not be, as that would require a change in direction at the time of the next position switch.

The required action at the close of 9/30 is dependent on the future returns of short term treasuries, the future returns of the S&P, and the future returns of EFA, none of which are knowable. I can tell you what I would do today if today were my trade day, but that's about it.

Based on your comment, I am once again left with the impression That you don't really understand the strategy Sol,  the DM Practitioner is simply betting that absolute momentum will give him/her a reproducible signal for the beginning of a bear market.   He/she trades about an 80%probability of this signal being correct , for the knowledge that 20% of the time he will miss out on some upside. It's a trade of big downside for small upside.  And it's a trade that I'm happy to make again and again regardless of what happens for the rest of the month.

If you want a feel for the history of the strategy and how frequently it loses to the broader market on a monthly basis, feel free to do some homework and look through the wealth of data at optimalmomentum.com

Here's a link.

http://www.optimalmomentum.com/trackrecord2.html

An actual interesting facet of the current market situation is just how flat the market was for the first eight months of the year prior to the recent volatility. This essentially means that look back periods from 3 to 8 months are all equivalent in terms of their signal.
« Last Edit: September 15, 2015, 08:48:04 PM by milesdividendmd »
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sol

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Re: Dual Momentum Investing
« Reply #780 on: September 15, 2015, 11:12:45 PM »
Which of the three is anybody's guess (aside from those who can predict the future.)

I wasn't looking for a judgment on the strategy, that would be silly with one month's data.  I was trying to understand what the recent smallish price bump in stocks might mean for people who follow the strategy.

Quote
A whipsaw it will not be, as that would require a change in direction at the time of the next position switch.

If the S&P closes above 1914, would that indicate a change in direction?  If not, what closing price would?  The price at the beginning of your (recently flat) lookback period?

Maybe I misunderstood the whipsaws.  I thought that term referred to instances where the strategy caused you to switch asset classes multiple times because the asset price broke with the recent trend.  For example, a long slow decline in stocks might cause you to sell into treasuries, then a rapid stock recovery might turn the trend positive and cause you to buy back into stocks. 

In this case, what I see is approximately 8 months of a flat market, followed by a sudden sharp drop, followed by a less sudden recovery.  It sounds like some folks sold after the sudden drop, and are now missing the less sudden recovery.

If the current trend continues or if the market is flat for the next six months, anyone using a six month or less lookback is going to buy back into stocks, right?  And have missed the recovery between the sudden drop and now?

Quote
the DM Practitioner is simply betting that absolute momentum will give him/her a reproducible signal for the beginning of a bear market.

In this case, isn't there a specific numerical prediction about the severity of that bear market they're predicting?  Like the S&P500 has to close below 1913.85 five and a half months from now for this to have been a good signal, right?  Isn't that a bet that can be reproduced with put options?

milesdividendmd

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Re: Dual Momentum Investing
« Reply #781 on: September 15, 2015, 11:35:37 PM »
There is no magic number. The S&P 500 and/or Developed international equities must have a higher total return for the prior six months when compared to short term treasuries on the pre specified trading day (which in my case is the last day of the month. ) The ending price of the month prior (1913.5)  is totally irrelevant.

As to the put options, feel free to model a rules based trading model that uses put options to compare to DM. Make sure to include trading costs, downside risk, and lost dividends.
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« Reply #782 on: September 15, 2015, 11:54:20 PM »
Oh and one last thing. If today were the trading day, then the S&P would be 3% off of short term treasuries, and VEA would lose by 4.4%. So there would be another month of SHY for me if today were 9/30 ....despite the S&P being being at 1978 (well above 1913.5.)
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sol

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Re: Dual Momentum Investing
« Reply #783 on: September 16, 2015, 12:32:34 AM »
Oh and one last thing. If today were the trading day, then the S&P would be 3% off of short term treasuries, and VEA would lose by 4.4%. So there would be another month of SHY for me if today were 9/30 ....despite the S&P being being at 1978 (well above 1913.5.)

Right, the recent sudden drop was pretty severe compared to the scale of the recent price bump.  The trend over the past 3-6 months is still clearly down.  It's just the trend for the past two weeks that is up.

Help me through a hypothetical example.  It was at 2046.68 on July 8th.  On a three month lookback, to get the signal to buy back into stocks on October 8th the price would have to be 2046.68, plus whatever the returns of three months of short term treasuries was, right?  So if short term treasuries returned 0.1%, the S&P500 has to be at some value higher than 2046.68 * 1.001, on October 8th in order for you to get whipsawed?  Because that would mean the trend was back up?

I suppose that assumes the 8th is your trading day.  If you're trading on the 1st the numbers will be slightly different, but is the math otherwise sound?  If you're using a six month lookback, then on your next trade day of October 1, it would have to close at higher than ~1.001 times the price on April 1 (2059.69)?  Any 10-1-15 close below that avoids a whipsaw?

And that seems like the most lenient possible analysis.  The index is up 3.4% in the two weeks you've been sitting out of the market.  For DM to work out as superior to B&H in this case, doesn't the index have to give back those gains before you buy back in?  If it continues to climb from here, it could be months before you get the signal to buy stocks again, and the market would necessarily be even higher then than it is now, so wouldn't you have missed even more gains?

I thought the whole point of this thread was to be able to follow these trades in real time.  I'm just trying to follow along.

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Re: Dual Momentum Investing
« Reply #784 on: September 16, 2015, 12:56:26 AM »
That's right Sol. The important date for comparison is the first day of the lookback period.

But short term treasuries are not perfectly flat. They change in value related to market conditions, interest rate changes and flights to and from safety.  SHY had a monster move (for short duration treasuries) today down by 0.14% as an example.

I think a fair way to think about this approach is that as long as you are in safe assets, your last month in that position will almost always lose to the market, so the longer the down trend, the more you end up beating the market.

So a one month trip to cash will never be a beneficial exercise. It's just that the trade off of missing the big bear market moves ends up being a really valuable thing to trade for temporary underperformance.

I have always viewed DM as a (big) loss aversion strategy above all else.

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Re: Dual Momentum Investing
« Reply #785 on: September 16, 2015, 09:54:08 AM »
That's right Sol. The important date for comparison is the first day of the lookback period.

But short term treasuries are not perfectly flat. They change in value related to market conditions, interest rate changes and flights to and from safety.  SHY had a monster move (for short duration treasuries) today down by 0.14% as an example.

I think a fair way to think about this approach is that as long as you are in safe assets, your last month in that position will almost always lose to the market, so the longer the down trend, the more you end up beating the market.

So a one month trip to cash will never be a beneficial exercise. It's just that the trade off of missing the big bear market moves ends up being a really valuable thing to trade for temporary underperformance.

I have always viewed DM as a (big) loss aversion strategy above all else.

This thread is fascinating. I will have to read the whole thing from the beginning!
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Re: Dual Momentum Investing
« Reply #786 on: September 16, 2015, 09:58:29 AM »
This thread is fascinating. I will have to read the whole thing from the beginning!

You, my friend, are in for a wild ride.

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Re: Dual Momentum Investing
« Reply #787 on: September 16, 2015, 11:29:52 AM »

This thread is fascinating. I will have to read the whole thing from the beginning!

You, my friend, are in for a wild ride.

For the first time in this thread Sol, I 100% agree with you.
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Re: Dual Momentum Investing
« Reply #788 on: September 16, 2015, 03:14:03 PM »

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Re: Dual Momentum Investing
« Reply #789 on: September 16, 2015, 07:23:27 PM »
I'm jumping in, and well yes I haven't read the entire thread but glossing over it, I got some questions

how is this different than sector rotating, or the opposite of it, instead of rotating to the one that is underperforming, you rotate to the one that did best in the most recent period?

And if the "basket" broke and you had all your eggs in that market, how long does it take to salvage it? I understand not all the eggs will break, but if you met with a bad market timing, do you think it is possible to recover by the time you need the money? I think this is why index investing is popular, sure the returns are dragged down, but you dont lose as much when basket gets dropped too.

I get the high risk/high reward part, but well... how many people reach the high rewards part after the attrition of the broken baskets?

That said, why not just go to stock picking the "winners" from the last 6 months? Why even "keep" the pretense of diversifying with something like a fund of companies? I mean, you could in theory have even greater return if you pick the right companies, since you are picking markets, which seem to be a "larger" form of stock picking
« Last Edit: September 16, 2015, 07:26:10 PM by eyem »

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« Reply #790 on: September 16, 2015, 07:57:18 PM »
It's much easier and cheaper to trade a few ETFs than tens of stocks every month. With individual stocks you'll be rotating at least a few every month, but with 3 ETFs you may find yourself going months without making a trade, just riding a strong trend. This is what you want. All things being equal, trading less is better.

Not to mention, but once you really get into the system you'll find that the best way to do momentum investing is with assets that have low volatility but are trending up. Individual stocks are more volatile than an entire index so it's easier to build a winning ETF momentum system than an individual stock momentum system. Higher volatile assets increase the chance of being wipsawed.


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« Last Edit: September 16, 2015, 08:03:20 PM by hodedofome »

sol

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Re: Dual Momentum Investing
« Reply #791 on: September 16, 2015, 08:02:31 PM »
All things being equal, trading less in better.

Hah!

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Re: Dual Momentum Investing
« Reply #792 on: September 16, 2015, 08:05:02 PM »
All things being equal. Everything should be made as simple as possible but not simpler. I'd be a buy and hold guy if someone promised me there would never be a significant bear market again.


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Re: Dual Momentum Investing
« Reply #793 on: September 16, 2015, 08:18:22 PM »
I'd be a buy and hold guy if someone promised me there would never be a significant bear market again.
Because you don't like seeing the account balance go down temporarily? Or because you think you can beat buy and hold in an environment when there are occasional bear markets?

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« Reply #794 on: September 16, 2015, 09:16:48 PM »
For me it's that I feel it gives me the best chance for long term success.

I can take on more equity risk than would otherwise be comfortable with because I know I am protected against most big drawdowns.

Also behaviorally it is quite easy to stick to the system.
« Last Edit: September 16, 2015, 09:57:40 PM by milesdividendmd »
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Re: Dual Momentum Investing
« Reply #795 on: September 16, 2015, 09:26:55 PM »
Both, but also because I don't know how long that temporary period could last. I'd rather depend on the timing luck as little as possible for a FIRE date. As well, once in retirement it would be nice to know that the floor for my account is probably 20-30% from the top, not 50%+ like 100% equities would do. Holding a balanced portfolio would do the same thing but will also sacrifice returns. I'm trying to get the highest returns possible without blowing up.

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Re: Dual Momentum Investing
« Reply #796 on: September 17, 2015, 04:36:11 AM »
Quote
you'll find that the best way to do momentum investing is with assets that have low volatility but are trending up.....Higher volatile assets increase the chance of being wipsawed.
you lost me there... I thought that indexing the entire market was to reduce volatility along side having bonds to balance part of it out. So wouldn't the higher volatility occur when you move away from it and into this momentum trading? How can you say momentum trading is both good for low volatility then say it has a chance to return more than market average, which would include being more volatile?

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Re: Dual Momentum Investing
« Reply #797 on: September 17, 2015, 08:04:05 AM »

Quote
you'll find that the best way to do momentum investing is with assets that have low volatility but are trending up.....Higher volatile assets increase the chance of being wipsawed.
you lost me there... I thought that indexing the entire market was to reduce volatility along side having bonds to balance part of it out. So wouldn't the higher volatility occur when you move away from it and into this momentum trading? How can you say momentum trading is both good for low volatility then say it has a chance to return more than market average, which would include being more volatile?

He's not saying that at all.

The question  wasn't about overall portfolio volatility. It was about asset selection within the Momentum strategy.

What he's saying is that assets within the strategy perform better with less volatility.
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Re: Dual Momentum Investing
« Reply #798 on: September 17, 2015, 09:47:41 AM »
Miles I got that, my question was if he thought that having an asset with multiple companies would help diversify/spread risk to lower volatility, then why wouldn't that expand across multiple sectors, leading to holding a total market index to being the least volatile? I get that it won't have the highest returns because of it too. But it sounds like he (and you?) are saying that you want both low volatility and high returns? That is what doesn't make sense to me

How do you guys want to have it both ways at the same time? Someone mentioned a cake and eating it too? You are purposefully increasing volatility in my eyes by dropping sectors you think might underperform based on past 6 months because you don't know that it really will underperform or not
« Last Edit: September 17, 2015, 09:53:00 AM by eyem »

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Re: Dual Momentum Investing
« Reply #799 on: September 17, 2015, 10:05:55 AM »
You can use DM with sector rotation (DM sector rotation which antonacci covers in his book.)

Higher returns with lower volatility is a pretty reasonable goal for any active strategy, so I'm not really seeing your point here.

The selection of assets is just an attempt to play to the strengths, and avoid the weakness of this specific strategy.

There are plenty of people who use momentum/trend following with individual securities, they're just different strategies.
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