Author Topic: Dual Momentum Investing  (Read 206831 times)

forummm

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Re: Dual Momentum Investing
« Reply #800 on: September 17, 2015, 02:31:16 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.
Looks like I was right and then some. For about an hour....

The markets are so weird. I happened to be watching the ticker and it was straight up and then in less than a minute it went straight down and then went straight up above the high for the day, paused for 30 minutes and then went straight up again. And then fell very sharply to below close. It's crazy.

milesdividendmd

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Dual Momentum Investing
« Reply #801 on: September 17, 2015, 02:44:16 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.
Looks like I was right and then some. For about an hour....

The markets are so weird. I happened to be watching the ticker and it was straight up and then in less than a minute it went straight down and then went straight up above the high for the day, paused for 30 minutes and then went straight up again. And then fell very sharply to below close. It's crazy.

The markets are weird and the rates weren't raised but your analysis of what a non move would mean to the market and your dual momentum analysis were not correct.

As of now there would be no move to equities. (Nor would there be at an S&P level of 2000.) See Sol and my discussion above.

Don't feel bad. We all suck at prediction.
« Last Edit: September 17, 2015, 02:49:05 PM by milesdividendmd »
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forummm

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Re: Dual Momentum Investing
« Reply #802 on: September 17, 2015, 03:06:18 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.
Looks like I was right and then some. For about an hour....

The markets are so weird. I happened to be watching the ticker and it was straight up and then in less than a minute it went straight down and then went straight up above the high for the day, paused for 30 minutes and then went straight up again. And then fell very sharply to below close. It's crazy.

The markets are weird and the rates weren't raised but your analysis of what a non move would mean to the market and your dual momentum analysis were not correct.

As of now there would be no move to equities. (Nor would there be at an S&P level of 2000.) See Sol and my discussion above.

Don't feel bad. We all suck at prediction.
No, I was right about it going over 2000. For about an hour (as I said). :)

I said if you went back to equities at that level would lock in a loss. I didn't say you for sure would go in at that level. Just a hypothetical. I realize your signal isn't for another couple weeks and isn't just based on the S&P500.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #803 on: September 17, 2015, 04:12:37 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.
Looks like I was right and then some. For about an hour....

The markets are so weird. I happened to be watching the ticker and it was straight up and then in less than a minute it went straight down and then went straight up above the high for the day, paused for 30 minutes and then went straight up again. And then fell very sharply to below close. It's crazy.

The markets are weird and the rates weren't raised but your analysis of what a non move would mean to the market and your dual momentum analysis were not correct.

As of now there would be no move to equities. (Nor would there be at an S&P level of 2000.) See Sol and my discussion above.

Don't feel bad. We all suck at prediction.
No, I was right about it going over 2000. For about an hour (as I said). :)

I said if you went back to equities at that level would lock in a loss. I didn't say you for sure would go in at that level. Just a hypothetical. I realize your signal isn't for another couple weeks and isn't just based on the S&P500.

Fair enough you got me on a technicality. But let's be honest, we both know an intraday high means absolutely nothing to DM.

And more importantly 2000 is not a level that would trigger a move out of treasuries at this time.
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sol

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Re: Dual Momentum Investing
« Reply #804 on: September 17, 2015, 05:00:38 PM »
And more importantly 2000 is not a level that would trigger a move out of treasuries at this time.

No, but 2059 is.  That was the index price on April 1, so a DM trader using a six month lookback period, who traded out of stocks on September 1, would buy back into stocks on October 1 if the index price is then higher than 2059 (plus one month of cash/treasury return).

In this case, that person would have sold low at 1914 and bought high at 2059, for a realized loss of 7.5%.

I'm having a hard time seeing a scenario where last month's DM rotation out of stocks will turn out to be a good play.  The index would have to drop about 4% from here just for you to break even, right?

DM trades are designed to help you avoid prolonged bull markets by getting out of a downward trend early.  That strategy doesn't work in cases when the downward trend is short and steep and followed by steadily rising prices.

Maybe this was just an unlucky time for the DM strategy?

milesdividendmd

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Re: Dual Momentum Investing
« Reply #805 on: September 17, 2015, 05:18:11 PM »
It would have to be higher than 2059 (assuming that's the correct level) plus the 6 months (not the 1 month you mentioned)  total return on short term treasuries - the 6 month dividend yield on the S&P.

Here's a scenario where it was a good trade for you. A 3 month bear market with another 7% or more haircut to stocks. (That wasn't very hard )

At the end of the month it will be crystal  clear whether or not DM beat the index in September.

I am glad you are suddenly so interested in market timing and chartist fantasies.
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Mr. Rich Moose

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Re: Dual Momentum Investing
« Reply #806 on: September 18, 2015, 09:05:51 AM »
Miles, is there a certain threshold by how much one asset class has to outperform another (such as a full 1%) before you initiate your trades?
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #807 on: September 18, 2015, 09:11:00 AM »
No there isn't. You could try to decrease trading frequency by having a 1% rule, but the downside might be more drawdowns.

In reality it's a rare trade that would be effected, I believe. (I haven't backtested it though.)
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Re: Dual Momentum Investing
« Reply #808 on: September 18, 2015, 09:20:30 AM »
Over the last couple weeks I have been reading your blog, this thread, and Antonacci's blog on DM. There are certainly some compelling reasons why this investing strategy makes sense over a long term. Currently I have most of my portfolio in index ETFs with a small portion in Canadian dividend stocks all with a buy-and-hold strategy. I'm considering moving the index portion of my portfolio to DM style.

Based on your blog I believe you have been investing DM since Sept 2014. How many trades have you made since starting? Do you use ETFs or mutual funds? How many and which types of asset classes?
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #809 on: September 18, 2015, 09:26:10 AM »
I have made 2 trades. In my retirement accounts 5 months ago I moved from s&p to efa, last month I moved to short treasuries. I use mutual funds in my retirement accounts and etfs in my hsa/Roth accounts.

Assuming free trades, mutual funds are probably better because there's no bid/ask spread.
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Re: Dual Momentum Investing
« Reply #810 on: September 18, 2015, 09:41:38 AM »
I have made 2 trades. In my retirement accounts 5 months ago I moved from s&p to efa, last month I moved to short treasuries. I use mutual funds in my retirement accounts and etfs in my hsa/Roth accounts.

Assuming free trades, mutual funds are probably better because there's no bid/ask spread.

Thanks for sharing. As a buy and hold investor, I completely understand the logic behind buying an index or blue chip dividend stock, holding onto it forever, and benefiting from minimal costs. This would give a person performance that's roughly equal to the market. That being said, 2 trades in 12 months is not bad at all. Based on my own research with Canadian listed ETFs for different asset classes, I would have averaged 2-3 trades per year for the past couple years following a DM strategy. If I required at least a 0.5% out-performance over the past 160 days it would've saved me 2 trades.

In Canada we are pretty much limited to ETFs from a cost perspective (our mutual funds are quite pricey). This isn't too bad for me because my brokerage only charges for ETF sales, not ETF purchases. As such, I would only pay commission once on each trade (per account). Of course bid-ask spreads will add a couple dollars to each transaction as well.

Would I be correct in guessing you make your decisions on the following indices: S&P500, EAFE, EM, Short term government bonds?
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sol

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Re: Dual Momentum Investing
« Reply #811 on: September 18, 2015, 10:38:30 AM »
(not the 1 month you mentioned) 

Right.  Typo on my part.

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Here's a scenario where it was a good trade for you. A 3 month bear market with another 7% or more haircut to stocks. (That wasn't very hard )

I didn't mean that I can't do arithmetic. I meant that given a 4% bump right after you traded, and the short term appearance of a turnaround in progress, the odds of your signal predicting a prolonged bear market seemed lower in this case than might be hoped for.  I thought that would be clear from the context, but maybe I supposed too much.

Crazy market volatility can screw with most investing strategies, it just seems like all kinds of momentum strategies are more vulnerable to it.  The index hitting 2059 by October 1 would mean an 8% rebound in one month, and that seems crazy.  On the other hand, we saw a 4% rebound in the first two weeks and this whole thing was set off by a 10% drop in only four trading days.

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At the end of the month it will be crystal  clear whether or not DM beat the index in September.

Of course it will be, but why do you have to wait and see in order to put numerical values in your expectations?  I'm just shocked anyone would initiate that kind of trade without having those future monthly price targets seared into memory.  As soon as you trade, every time, you should be able to already know what index values would have to be in order to initiate another trade over the next six months.

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I am glad you are suddenly so interested in market timing and chartist fantasies.

I want you to make money, miles.  I'm always rooting for the underdog.

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Re: Dual Momentum Investing
« Reply #812 on: September 18, 2015, 10:40:43 AM »
My girlfriend's money is all buy & hold, and my money is all DM. I can't even make up my mind on what I want the market to do anymore!

They both seem like fantastic strategies over a 30+ year timeframe. It's hard to even imagine a scenario that would cause both to fail at the same time. But I still can't help but check the numbers daily to see how DM is holding up!

I might modify the strategy slightly, and add an extra rule for myself: A signal has to stay the same for at least 5 days before I'll act on it. Otherwise, you're kind of rolling the dice and hoping that the quick whipsaws don't happen at the wrong time of month. Otherwise, an October 15th 2014 or an August 25th 2015 would have been a disaster simply because you selected the wrong day of the month!

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Re: Dual Momentum Investing
« Reply #813 on: September 18, 2015, 11:02:16 AM »
I still find the slowly growing chorus of converts to this strategy disheartening, primarily due to one of the philosophical objections that sol raised which, thus far, has not been adequately addressed--not the extent to which followers of the strategy may or may not benefit from its widespread adoption (or any associated implications about the incentives that could potentially drive DM proponents to advocate for its soundness as a wealth-building (and wealth-protecting) strategy), but simply the actual evils that adoption of the strategy thrusts upon the market and its participants.

Miles, you indicated that there is untruth in the following statements, but I'm not seeing why:

Momentum traders are, by definition, irrational market timers.  They are a force of chaos in the market, seeking to disrupt the relationship between prices and earnings by amplifying short term volatility.  When stocks are down, they effectively short them because they want the downward trend to continue.  When stocks are up, they are long because they want the trend to continue.  In both cases they completely ignore market fundamentals.  They don't care about economic conditions or profitability or any sort of sector evolution projections, they only trade on price and they trade on price in such a way that amplifies market volatility.  It's not exactly evil, but it sure doesn't contribute to market stability either.  If you've ever wondered why markets appear to be so inefficient, it's at least partly due to momentum traders trying to cash in on volatility.

By jumping in and out of the stock market purely on the basis of pricing signals, is it not true that DM traders amplify market gyrations and thereby contribute to the destabilization of the market?

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Re: Dual Momentum Investing
« Reply #814 on: September 18, 2015, 11:24:29 AM »
By jumping in and out of the stock market purely on the basis of pricing signals, is it not true that DM traders amplify market gyrations and thereby contribute to the destabilization of the market?

I think you might be giving him too much credit on the philosophy side.  DM traders are trying to make money, for themselves alone, and they don't care about the market as a whole.  It's classic tragedy of the commons behavior.

Now I expect miles will argue that as long as only a minority of people try to exploit the system, they won't really have a measurable negative impact.  That's also classic tragedy of the commons reasoning, the thought that it's fine if I graze my sheep in the communal field as long as not too many other people make the same decision, until everyone makes the same decision using the same reasoning, and the field turns into a mudpit.

I also think that his objections in this thread have been largely based on interpreting this argument as a personal attack, rather than a criticism of the philosophy.  Nobody likes to believe that they are personally contributing to a problem. 

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Re: Dual Momentum Investing
« Reply #815 on: September 18, 2015, 11:44:40 AM »
Nobody likes to believe that they are personally contributing to a problem.

Yes, and before anyone complains that I am casting stones while claiming to be without sin, I will be the first to admit that, as both a rational self-interested profit maximizer and a liberal supporter of progressive policies concerned with the overall good of society, I constantly struggle with these types of issues.  No one takes comfort in the knowledge that their mustache might be evil, but sometimes it just is.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #816 on: September 18, 2015, 12:13:35 PM »
Brooklyn,

Look it's been a long thread. Lots of issues have been discussed.

Let's break down the issues one at a time to have a more specific conversation

Here some questions raised by Sol and you that are all being lumped together in your comments.

Am I talking about DM out of a self serving desire to gain converts to my way of investing because it would improve my returns?

Is DM investing causing the current market volatility?

Are DM and all forms of "momentum trading" similar enough to lump them into a single class of strategies?

Is DM more harmful to the market or investors than buy and hold?  Than standard management?

I am happy to discuss any interesting question, but not energetic or organized enough to discuss them all at once.
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brooklynguy

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Re: Dual Momentum Investing
« Reply #817 on: September 18, 2015, 12:29:08 PM »
Okay.

Am I talking about DM out of a self serving desire to gain converts to my way of investing because it would improve my returns?

I don't think you are and never thought you were, so unless anyone else disagrees, I see no reason to discuss this.

Quote
Is DM investing causing the current market volatility?

The answer to this question probably depends on the answer to the questions below, so let's hold off on discussing this one (though I think the question should really be whether DM is contributing to market volatility, not single-handedly causing it).

Quote
Are DM and all forms of "momentum trading" similar enough to lump them into a single class of strategies?

This seems like a threshold question that must be answered before we can answer any of the others, so let's tackle this one first.  Assuming the answer is no, then let's use the version of DM that you employ for purposes of discussing the question below.

Quote
Is DM more harmful to the market or investors than buy and hold?  Than standard management?

This is essentially the question I had asked, and the one I'm most interested in determining the answer to.

milesdividendmd

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« Reply #818 on: September 18, 2015, 12:47:55 PM »
(not the 1 month you mentioned) 

Right.  Typo on my part.

Quote
Here's a scenario where it was a good trade for you. A 3 month bear market with another 7% or more haircut to stocks. (That wasn't very hard )

I didn't mean that I can't do arithmetic. I meant that given a 4% bump right after you traded, and the short term appearance of a turnaround in progress, the odds of your signal predicting a prolonged bear market seemed lower in this case than might be hoped for.  I thought that would be clear from the context, but maybe I supposed too much.

Crazy market volatility can screw with most investing strategies, it just seems like all kinds of momentum strategies are more vulnerable to it.  The index hitting 2059 by October 1 would mean an 8% rebound in one month, and that seems crazy.  On the other hand, we saw a 4% rebound in the first two weeks and this whole thing was set off by a 10% drop in only four trading days.

Quote
At the end of the month it will be crystal  clear whether or not DM beat the index in September.

Of course it will be, but why do you have to wait and see in order to put numerical values in your expectations?  I'm just shocked anyone would initiate that kind of trade without having those future monthly price targets seared into memory.  As soon as you trade, every time, you should be able to already know what index values would have to be in order to initiate another trade over the next six months.

Quote
I am glad you are suddenly so interested in market timing and chartist fantasies.

I want you to make money, miles.  I'm always rooting for the underdog.

Sol,

You have a lot of strong beliefs about a strategy, that up to now, you have provided ample evidence that you don't understand.

You thought that the prior months close was germane to the trading signal.

You lumped DM in with HFT. These are 2 totally different strategies.

You blamed a strategy that trades less than 2X per year and at most once per month on average and by a small minority of individual investors with rapid intraday swings of asset prices.

The list goes on.

So it was truly quite hard to determine if you were wrong again or just are guilty of a typo. Apologies.

Second. Why would I worry about what the closing price of assets was at the end of the month, when knowing that now would have absolutely no effect on my behavior?

As to you hoping that I make money. I hope that's true, but I kind of doubt it. I say this because you only ask about the future performance of DM on days where the market moves against it. If you made speculative comments on days like today when DM was routing the market, your claim would be believable. But you never do.

Your actions suggest that you are quite threatened that DM will outperform your strategy in the long run, which is pretty sad.

I on the other hand really do want you to do well. Both because I'm a big believer in buy and hold low cost indexing, and because I am long that strategy in my taxable accounts.
« Last Edit: September 18, 2015, 12:53:45 PM by milesdividendmd »
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milesdividendmd

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« Reply #819 on: September 18, 2015, 01:19:05 PM »
Okay.

Am I talking about DM out of a self serving desire to gain converts to my way of investing because it would improve my returns?

I don't think you are and never thought you were, so unless anyone else disagrees, I see no reason to discuss this.

Quote
Is DM investing causing the current market volatility?

The answer to this question probably depends on the answer to the questions below, so let's hold off on discussing this one (though I think the question should really be whether DM is contributing to market volatility, not single-handedly causing it).

Quote
Are DM and all forms of "momentum trading" similar enough to lump them into a single class of strategies?

This seems like a threshold question that must be answered before we can answer any of the others, so let's tackle this one first.  Assuming the answer is no, then let's use the version of DM that you employ for purposes of discussing the question below.

Quote
Is DM more harmful to the market or investors than buy and hold?  Than standard management?

This is essentially the question I had asked, and the one I'm most interested in determining the answer to.

Brooklyn,

You are not going to like my honest answer, which is simply I don't know.

But let me give you an argument against this claim.

The market is at its most volatile during bear markets. This is a point very well made by this paper:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1908469

Which points out that the best and worst days in the stock market have a strong predilection for declining markets, and that avoiding these periods of volatility altogether (which is the very point of trend following or absolute momentum) is beneficial.

So let's take that observation and run with it.

What does a DM practitioner do during a bear market, and what does a buy and holder do?

Well a DM investor moves to cash early in the market which increases volatility of the market is down that day, and decreases it if it is up. 

Then for the remainder of the volatile period, he does nothing. He sits in short term treasuries.

What about the buy and holder?

He might rebalance as his portfolio moves away from his desired allocation.

He might continue to contribute into the market on payday.

He might just close his eyes and wait it out.

So the buy and holder has some probability of moving the market throughout its most volatile period, but the DM practitioner is totally agnostic, except for when he enters and exits.

Now the DM practitioner makes large moves, while the buy and holder doesn't unless he is investing a lump sum, so DMs moves will have more impact on average, but the fact is that neither of these strategies will move the market much during volatile periods (and DM  not at all for the bulk of bear markets) so their impact overall is quite small in the grand scheme of things and compared to most strategies.

Neither one is anywhere near as big a player as human traders just being human, or algorithmic traders just being algorithmic.

In the end It's kind of a non issue.
« Last Edit: September 18, 2015, 01:21:05 PM by milesdividendmd »
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starguru

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Re: Dual Momentum Investing
« Reply #820 on: September 18, 2015, 02:39:04 PM »
Yeah it seems like panic selling is more harmful to markets than any timing strategy, especially those that only trade at most once a month.

Has anyone done a thought experiment about what would happen if everyone followed DM?

1.  Most  positive market pressure would be new money coming in (e.g. 401k investments from paychecks)
2.  Most negative market pressure would be investors liquidating assets to cover expenses (e.g. retirement drawdown)
3.  Im not sure what would happen if a new company enters the market vis a vis new investors piling and selling other equities to fund purchasing the new shares.
4.  If interest rates rose sufficiently it would catastrophic to equities as everyone moves to bonds/cds etc.
5.  Recessions would have little effect on equities markets since for an asset shift to occur, people need a signal, if no-one is moving, then there would be no sell signal for equities.  i.e. there would be no panic selling on some nebulous hint of trouble, so the equity signal would remain strong.

Im not sure if it's really helpful but it's interesting, at least to me. 

sol

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Re: Dual Momentum Investing
« Reply #821 on: September 18, 2015, 02:47:12 PM »
You thought that the prior months close was germane to the trading signal.

Yea, in that example I was still stuck on the one month lookback period discussed above, which I realize is not what you are using.  Fortunately the math works out about the same in this case, given flat recent returns, as you yourself pointed out.

That doesn't address the criticism I was trying to make, though, that your strategy would perform poorly in a market that dips suddenly, triggering a trade, then recovers suddenly.  I think that's a very possible outcome in this case.

Your counter example of it performing well if this is the beginning of a long bear market only illustrates this point.  The DM strategy is counting on the signal being indicative of a long bear, so it does well if it is and poorly of it isn't.

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You blamed a strategy that trades less than 2X per year and at most once per month on average and by a small minority of individual investors with rapid intraday swings of asset prices.

I think this is a fair defense in practice, if maybe not in a theoretical sense.  Your argument that other actors are doing more harm than you are does not absolve you of the harm you do, does it?  If HFTs are Pol Pot, you're just like a run of the mill occasional hit man?

I've yet to see any explanation for why momentum traders don't amplify volatility by piling on to current price trends.  You can think your effect is minimal, but I think you have to agree the effect exists.

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Second. Why would I worry about what the closing price of assets was at the end of the month, when knowing that now would have absolutely no effect on my behavior?

This is probably just personal preference, but I like to know what my future options are going to be.  My savings rate isn't going to change today based in my current expectations for market returns, but I still have a forecasting spreadsheet and I'm not even making trading decisions.  You know you'll be making trading decisions, so I don't understand the mindset of not trying to forecast what they will be.

Quote

you only ask about the future performance of DM on days where the market moves against it. If you made speculative comments on days like today

Wait, are you accusing me of not discussing this topic today?  Because I'm pretty sure it's today right now, and here I am.

DM strategy performance had little to do with today's moves, as you know, and everything to do with the motion relative to the price at which you sold it.  You sold out on Sept 1 at 1913.85.  Today's 1.6% drop gets it back down to 1958.08, so you only need to see another 2.6% drop in the index before you buy back in to come out ahead.  If it doesn't drop at least 2.6% from today's price before you buy in, then this will have been a bad time for the DM strategy.  You won't get a buy in signal until the index at least crosses the price at your six month lookback period, which was never below 2059 for the past six months, so you won't buy back into stocks for at least six more months unless the index exceeds that price.  See why I want to forecast?

If that does happen in the next six months, you will have locked in losses of at minimum 7.5%. More likely, I think, is that your signal won't trigger a trade until six months out from the Sept 1 price of 1914, since I think it more likely it will be above 1914 on March 1 2016 than above 2059 on October 1, or 2108 on November 1, or 2111 on December 1, etc. (Prices determined by six month lookback).

The flip side, and what you're hoping for, is that the market crashes from here by more than it crashed before you got the signal to sell (about 10%).  If that happens, you will have successfully avoided losses and you hope you get the signal to buy back in again before the next bull gets started by rising more than the losses you avoided.  That's always the trade off here, trying to avoid losses but not avoid the gains that follow.

Am I misunderstanding any of that?  You keep accusing me of misunderstanding the details, so I'm trying to lay it all out there for everyone to see. 

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Re: Dual Momentum Investing
« Reply #822 on: September 18, 2015, 06:30:22 PM »
The flip side, and what you're hoping for, is that the market crashes from here by more than it crashed before you got the signal to sell (about 10%).  If that happens, you will have successfully avoided losses and you hope you get the signal to buy back in again before the next bull gets started by rising more than the losses you avoided.  That's always the trade off here, trying to avoid losses but not avoid the gains that follow.

I think the bolded part is where your misunderstanding lies. The DM investor is not hoping for bear markets or volatility, they'd prefer a nice long climb just like everyone else. And when the market crashes and they get out on their signal, it is not in the hope that it continues to fall so that they can buy back in lower. They sell to minimize their loses in the event that it is a bear and they do this accepting that much of the time, by decreasing risk, they will be lowering returns.

This isn't to say it wouldn't be nicer to get back in lower than higher, but my understanding of DM is that that would be more of a surprise bonus and is not at all the prime motivating factor.

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« Reply #823 on: September 18, 2015, 06:46:19 PM »
There is no 1 month look back period in DM. There has never been a 1 month look back period. That's the point. You have strong opinions that preceded even a basic understanding of the strategy that you criticize.

As to your timing You chime in anytime you feel like it, but you seem write these unprovoked "forecasting" posts only on days like yesterday when DM has underperformance.

You have already admitted that your motivation in this thread is "save others" from DM, so I find your timing to be very telling.

As to whether or not DM will outperform in the coming months, who knows?  It's a probability play. It would be easy to look back at a month by month analysis in a backtest to get a sense for what the probabilities are for over versus underperformance based on the move to treasuries. If the question interests you, you are smart enough to answer your own question.

As for me I have already expressed my opinion on the matter. I'm not "hoping" for anything. I'm comfortable that the current market is in a vulnerable enough place that now is a smart time for me to take my skin out of the game, until it's time I put it back in.

If I underperform a bit, so be it. The knowledge that I have this downside protection is what has allowed me to be 100% equities for the past year until 9/1.

I find it truly bizarre that you do forecasting of the financial markets, or your returns in the short term, when there is abundant data that such forecasts are useless and when you admit that they have no bearing on your actions. But whatever floats your boat I guess.
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sol

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Re: Dual Momentum Investing
« Reply #824 on: September 18, 2015, 07:24:01 PM »
You have strong opinions that preceded even a basic understanding of the strategy that you criticize.

I laid our your numerical price thresholds for the next six months to clear up any confusion about my understanding.  If you think I have any of those numbers are wrong, or that they betray some misunderstanding, then please educated me by pointing out where and how I was mistaken.

Failing that, I think I understand the strategy fairly well.  Your market timing scheme involves using price charts to determine when to get in and out of the stock market, and right now you're "out" because you're betting the market will go down more before it goes up again.  Am I still on track?  I was using the exact price points on the first of each month to illustrate under what conditions over the next six months you could possible get back into the stock market, and how every single one of them involves realizing a loss.  The only way your September 1 trade works out better than B&H in this case is if the market tanks from here and stays down for at least 5.5 more months.  Which is totally possible, but I try to avoid betting against the stock market';s long term trend.

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As to your timing You chime in anytime you feel like it, but you seem write these unprovoked "forecasting" posts only on days like yesterday when DM has underperformance.

It's only because market volatility is so high right now that I think DM is a particularly bad strategy right now.  You have more ways to get screwed trying to time the market than you do with Buy and Hold, and this kind of volatility is at the top of that list. 

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You have already admitted that your motivation in this thread is "save others" from DM, so I find your timing to be very telling.

My motivation is to help people make good financial decisions, and I think market timing is a dangerous game that hurts more than it helps.  You obviously think you can use market timing to beat the market.

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It would be easy to look back at a month by month analysis in a backtest to get a sense for what the probabilities are

I didn't revive this thread because I wanted to discuss backtesting or probabilities.  I asked the question about this month so we could discuss how it works out this month, in this instance, this particular time.  It will be the first experience with DM trading for several people in this thread, and unless the market tanks from here I suspect they may be disappointed in their choices.

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I'm comfortable that the current market is in a vulnerable enough place that now is a smart time for me to take my skin out of the game

Right, this is what I meant by "hoping" for a market decline.  Your DM strategy will outperform B&H if the market tanks, and underperform if the market recovers.

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bizarre that you do forecasting of the financial markets, or your returns in the short term, when there is abundant data that such forecasts are useless and when you admit that they have no bearing on your actions. But whatever floats your boat I guess.

You don't have a net worth spreadsheet?  Or you have one that stops in the current month?  Mine goes all the way out to age 100, and to do that I have to make some assumptions about future market returns.

milesdividendmd

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« Reply #825 on: September 18, 2015, 07:46:54 PM »
When you are 100 is not "short term" unless we are talking in geological terms which we are not.

And no I don't have a net worth spreadsheet that I project into the future. What a naive exercise. What a silly waste of time.

You revive the thread when you "forecast" that DM will underperform short term, which is precisely my point.

You have hopes, I don't.

I'm not making any bet other than I bet that it's wise to exit the market when the risk of a bear market is high, as it is right now.

(It seems that Janet Yellen agrees with DM signals about the current state of the economy vis a vis downside risk too based on the Feds decision yesterday.)

I am glad that you are learning from all of your prior mistakes. I really am. It's just too bad that you reached a conclusion before you had even a cursory understanding of the strategy.
« Last Edit: September 18, 2015, 09:05:52 PM by milesdividendmd »
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Re: Dual Momentum Investing
« Reply #826 on: September 18, 2015, 07:48:34 PM »
By the way, one thing I do admire about you Sol, is your ability to neatly format quotes and respond to them on this forum. How do you do that?
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sol

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Re: Dual Momentum Investing
« Reply #827 on: September 18, 2015, 08:00:49 PM »
By the way, one thing I do admire about you Sol, is your ability to neatly format quotes and respond to them on this forum. How do you do that?

I type the word quote in square brackets before each part I want to quote, and the word /quote in square brackets after it.

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Re: Dual Momentum Investing
« Reply #828 on: September 18, 2015, 08:04:23 PM »
Thanks!
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Re: Dual Momentum Investing
« Reply #829 on: September 18, 2015, 08:20:47 PM »
And no I don't have a net worth spreadsheet that I project into the future. What a naive exercise. What a silly waste of time.

It's naive to think nothing could be gained from this exercise. It doesn't take much time at all. I've learned an immense amount of information about opportunity cost, the price or return of certain financial decisions I make, and gained a fairly good idea how long my journey to FI should be based on returns from -5% to + 10%.

I like reading you two bickering. It's always fun, and usually fairly respectful.

Indecision may or may not be my problem.

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« Reply #830 on: September 18, 2015, 08:59:25 PM »
And no I don't have a net worth spreadsheet that I project into the future. What a naive exercise. What a silly waste of time.

It's naive to think nothing could be gained from this exercise. It doesn't take much time at all. I've learned an immense amount of information about opportunity cost, the price or return of certain financial decisions I make, and gained a fairly good idea how long my journey to FI should be based on returns from -5% to + 10%.

I like reading you two bickering. It's always fun, and usually fairly respectful.

A long term wide range of projections makes perfect sense to me, and measuring your current net worth makes sense to me (it's motivational), and seeing how different variables effect future outcomes makes sense to me.

But predicting what will actually happen with the market next month or next year useless. Short term forecasting is a fools errand, and all of the research that I am familiar with suggests that it is futile.

This is not to say that figuring out a probabilistic model for future outcomes is not useful, it certainly is. It helps you to make decisions with a high probability of success (like buying and holding low cost funds) But imagining that you have any idea what will happen in the near future is simply not a high probability endeavor.
« Last Edit: September 18, 2015, 09:00:59 PM by milesdividendmd »
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Cheddar Stacker

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Re: Dual Momentum Investing
« Reply #831 on: September 18, 2015, 09:39:33 PM »
And no I don't have a net worth spreadsheet that I project into the future. What a naive exercise. What a silly waste of time.

It's naive to think nothing could be gained from this exercise. It doesn't take much time at all. I've learned an immense amount of information about opportunity cost, the price or return of certain financial decisions I make, and gained a fairly good idea how long my journey to FI should be based on returns from -5% to + 10%.

I like reading you two bickering. It's always fun, and usually fairly respectful.

A long term wide range of projections makes perfect sense to me, and measuring your current net worth makes sense to me (it's motivational), and seeing how different variables effect future outcomes makes sense to me.

But predicting what will actually happen with the market next month or next year useless. Short term forecasting is a fools errand, and all of the research that I am familiar with suggests that it is futile.

I agree with everything up there, but I think you should have stopped there.

This is not to say that figuring out a probabilistic model for future outcomes is not useful, it certainly is. It helps you to make decisions with a high probability of success (like buying and holding low cost funds) But imagining that you have any idea what will happen in the near future is simply not a high probability endeavor.

Did you forget what thread we're in? It's the one where you are imagining that you have an idea what will happen in the near future.

Sorry, I truly laughed out loud when I read that. Funny.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #832 on: September 18, 2015, 10:02:52 PM »

And no I don't have a net worth spreadsheet that I project into the future. What a naive exercise. What a silly waste of time.

It's naive to think nothing could be gained from this exercise. It doesn't take much time at all. I've learned an immense amount of information about opportunity cost, the price or return of certain financial decisions I make, and gained a fairly good idea how long my journey to FI should be based on returns from -5% to + 10%.

I like reading you two bickering. It's always fun, and usually fairly respectful.

A long term wide range of projections makes perfect sense to me, and measuring your current net worth makes sense to me (it's motivational), and seeing how different variables effect future outcomes makes sense to me.

But predicting what will actually happen with the market next month or next year useless. Short term forecasting is a fools errand, and all of the research that I am familiar with suggests that it is futile.

I agree with everything up there, but I think you should have stopped there.

This is not to say that figuring out a probabilistic model for future outcomes is not useful, it certainly is. It helps you to make decisions with a high probability of success (like buying and holding low cost funds) But imagining that you have any idea what will happen in the near future is simply not a high probability endeavor.

Did you forget what thread we're in? It's the one where you are imagining that you have an idea what will happen in the near future.

Sorry, I truly laughed out loud when I read that. Funny.

No I don't!  And that's precisely the point.

I have no clue if trading into short term treasuries on 9/1 will turn out to have been a good decision.

I have no clue if we are really going into a bear market now or not. (If I had to guess I would guess not, but I don't have to.)

I simply believe that DM will give me an excellent probability to exit most bear markets by exiting stocks altogether when they are at their riskiest, and to harvest the equity risk premium when they are less risky. Importantly I believe that I can do this by owning cheap index funds and by trading only rarely.

I believe that relative momentum will give me some added signal in determining which classes of stock are likely to perform well in the near future based on the recent past.

I believe there is a sound reason for the strategy to continue to perform well in the future. (People chase performance and people drive markets.)

I think these are all reasonable assumptions and I'm betting on them with my retirement money, because I've done my due diligence and I'm confident I can stick to the model during periods of negative tracking error.

But despite all that I don't imagine that I have an idea what will happen in the near future.

Whatever happens I just like my odds to keep on investing in this manner. And I like my odds to reach my investment goals.
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« Reply #833 on: September 18, 2015, 10:30:21 PM »
And I know that this sounds like semantics.

But it's an important distinction. 

Trying to guess the future is something we all do instinctively and emotionally. It is like putting money into a slot machine and praying for a jackpot. Sometimes you win but the odds aren't in your favor long term.

But figuring out the base rate probabilities of various actions and approaches is something else entirely.

It is a deliberate and calculating process.

It is like building a slot machine that gives you a 52% probability of making money over long time periods when noise cancels itself out and the probabilistic outcomes almost always end up happening.
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innerscorecard

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Re: Dual Momentum Investing
« Reply #834 on: September 18, 2015, 11:58:05 PM »
I find it funny how some people just don't get the idea of probabilistic systems, despite having it repeated over and over again.
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brooklynguy

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Re: Dual Momentum Investing
« Reply #835 on: September 19, 2015, 06:04:41 AM »
Neither one is anywhere near as big a player as human traders just being human, or algorithmic traders just being algorithmic.

Isn't this exactly the tragedy of the commons reasoning sol anticipated?

What makes momentum trading philosophically distasteful is that, by design (and unlike buy and hold investing), it reinforces irrational momentum in the market.  B&H investors don't look to other traders for their own trading cues, whereas momentum traders deliberately rush for the exit or the entrance when they see everyone else starting to head in that direction.  Don't you see how the self-reinforcing nature of this strategy necessarily amplifies market movements in a way that B&H investing does not? 

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Which points out that the best and worst days in the stock market have a strong predilection for declining markets, and that avoiding these periods of volatility altogether (which is the very point of trend following or absolute momentum) is beneficial.

Exactly.  Momentum traders attempt to avoid a run on the bank by being first in line to withdraw their deposits, effectively contributing to the realization of the self-fulfilling prophecy.  If too many investors start to follow this approach, the scheme will cease to work, because the market will cease to function.

milesdividendmd

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« Reply #836 on: September 19, 2015, 10:10:31 AM »
Quote
What makes momentum trading philosophically distasteful is that, by design (and unlike buy and hold investing), it reinforces irrational momentum in the market.

Buy and hold by design preferentially invests in companies with high market caps relative to their fundamental value (earnings/NAV/book value/cash flow) and so it preferentially reinforces "irrational" momentum.  Do you feel guilty about that?  Value investors can make the exact same argument to buy and holders that you just made to dual momentum traders.)


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Exactly.  Momentum traders attempt to avoid a run on the bank by being first in line to withdraw their deposits, effectively contributing to the realization of the self-fulfilling prophecy.  If too many investors start to follow this approach, the scheme will cease to work, because the market will cease to function.

No I don't see that. You are conveniently ignoring the fact that for the vast majority of the time that volatility actually occurs, buy and holders contribute a little bit to volatility while DM Traders contribute NOTHING to the volatility.

And frankly I find this whole line of questioning about which is the more "moral" way to invest masturbatory. The whole reason that markets work at pricing assets is because every investor is trying to maximize his own profit. This is equally true of all investors including buy and holders.

A far more interesting question to me is the ethics of investing capital in enterprises which are antithetical to my own ideas of morality. (For a lefty like me think big oil, big agriculture, guns, tobacco).

I find this whole worry about which strategy feeds into the "irrationality" of the market more to be ridiculous because none of us invests in the market in order to make the market more efficient. We invest to maximize gains with the minimum risk of capital loss.

If you or Sol believed you could avoid bear markets without incurring excess cost I believe that you of course would. You would be foolish not to.
« Last Edit: September 19, 2015, 11:29:02 AM by milesdividendmd »
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sirdoug007

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Re: Dual Momentum Investing
« Reply #837 on: September 19, 2015, 02:03:07 PM »
The markets are no place to look for ethical purity.

Billions of shares change hands on any given day. The thought that even a significant minority of individual investors could turn that tide does not appreciate the magnitude of "the market."

Does anyone think DM threatens the returns of B&H investors?  It seems like that is the implication of the concern of DM adding (infinitesimally) to volatility. That if only everyone would B&H the market would at long last be efficient and correctly value each companies fundamentals without causing anyone to lose sleep.  But that is not how markets work.

This is worth a read: http://thereformedbroker.com/2015/08/23/why-the-stock-market-has-to-go-down/


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milesdividendmd

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Re: Dual Momentum Investing
« Reply #838 on: September 19, 2015, 02:42:06 PM »

The markets are no place to look for ethical purity.

Billions of shares change hands on any given day. The thought that even a significant minority of individual investors could turn that tide does not appreciate the magnitude of "the market."

Does anyone think DM threatens the returns of B&H investors?  It seems like that is the implication of the concern of DM adding (infinitesimally) to volatility. That if only everyone would B&H the market would at long last be efficient and correctly value each companies fundamentals without causing anyone to lose sleep.  But that is not how markets work.

This is worth a read: http://thereformedbroker.com/2015/08/23/why-the-stock-market-has-to-go-down/


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Great article. Surprised I missed it when it was published.
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brooklynguy

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Re: Dual Momentum Investing
« Reply #839 on: September 19, 2015, 06:35:21 PM »
Buy and hold by design preferentially invests in companies with high market caps relative to their fundamental value (earnings/NAV/book value/cash flow) and so it preferentially reinforces "irrational" momentum.  Do you feel guilty about that?  Value investors can make the exact same argument to buy and holders that you just made to dual momentum traders.)

I'm not sure I follow the argument.  I assume you're talking about purely passive B&H indexing, because value investing can be B&H too (I'd categorize Warren Buffett, for example, as a B&H investor).  But indexers don't prefer overvalued companies, they just generally invest without regard to valuation, on the theory that the market is always correctly valued (or, alternatively, that it matters not whether the maker is currently overvalued, because its long term trend is always up).

Quote
You are conveniently ignoring the fact that for the vast majority of the time that volatility actually occurs, buy and holders contribute a little bit to volatility while DM Traders contribute NOTHING to the volatility.

I'm not ignoring that fact.  Every trade that ever occurs by anyone for any reason contributes to volatility.  But momentum trading, by its very nature (and in fulfillment of its very purpose), amplifies market-wide directional price movements, by identifying them, following them, and thereby enhancing them.

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If you or Sol believed you could avoid bear markets without incurring excess cost I believe that you of course would.

Yes, I probably would.  I invest to get rich.  If I thought DM would make me richer than B&H indexing, I would do it.  That doesn't mean I would pretend its adverse effects do not exist, just as I do not pretend the adverse effects of my chosen investment strategy do not exist (which is, in part, what I was getting at with my "not claiming to be without sin" comment).  Like you, I feel conflicted about owning shares in evil corporations.  I feel conflicted about exploiting our regressive tax system for personal profit.  I feel conflicted about the role my pursuit of financial independence plays in displacing my larger focus on my own values.  But my doing of evil doesn't stop me from seeing it or hearing it or speaking it.

To be clear, I'm making no moral judgments about momentum traders, just policy judgments about momentum trading.  One can evaluate a behavior's effects on society without passing moral judgment on the people carrying it out.  Sol made a good (and self-evidently accurate) observation about one particular adverse effect of momentum trading.  I don't begrudge anyone for adopting that investment strategy merely because it happens to have the effect of enhancing market irrationality.  I'm a capitalist and don't attempt to effect societal change through my investment decisions myself, and I likewise see no duty for anyone else to do so either.  But if we are to have an honest discussion about the specific investment strategy that is the subject of this thread, we shouldn't pretend sol's criticism is untrue or unfair just because it happens to be ugly.

I like reading you two bickering. It's always fun, and usually fairly respectful.

Me too.  It's also always colorful.  Although my own exchanges with Miles tend to pale in comparison to his interactions with Sol, I feel honored to have been accused (for the first time, as far as I know) of saying something "masturbatory."

milesdividendmd

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« Reply #840 on: September 19, 2015, 07:54:28 PM »
Quote
I'm not sure I follow the argument.  I assume you're talking about purely passive B&H indexing, because value investing can be B&H too (I'd categorize Warren Buffett, for example, as a B&H investor).  But indexers don't prefer overvalued companies, they just generally invest without regard to valuation, on the theory that the market is always correctly valued (or, alternatively, that it matters not whether the maker is currently overvalued, because its long term trend is always up).

Correct. I'm talking about passive capitalization weighted indexing which I believe to be what you and Sol advocate for.

If you invest in a capital weighted index then you will axiomatically invest more in companies with larger capitalization. Now clearly  there are times when there are asset bubbles.  A classic example being the .com bubble.  In such a time, as the expensive part of the market becomes overvalued, new purchases made by passive index investors Will preferentially flow towards the "overvalued" assets  as their price becomes ever more divorced from their intrinsic value. that is they will play into the momentum effect and against the value effect. Note that a value investor is a true contrarian who buys falling and cheap assets and sells rising and expensive ones.

Quote
I'm not ignoring that fact.  Every trade that ever occurs by anyone for any reason contributes to volatility.  But momentum trading, by its very nature (and in fulfillment of its very purpose), amplifies market-wide directional price movements, by identifying them, following them, and thereby enhancing them.

This is not correct. I would argue that every trade which moves WITH the dominant price movement  of the asset that is being traded at that moment contributes to volatility, and every trade that moves against the dominant movement of that asset decreases volatility. Volatility occurs when everybody moves to the same side of the boat at once. when there is an imbalance between buy and sell pressure is when you see big price movements.

So in order to answer whether or not any one strategy increases or decreases volatility overall you should know The probability that the trades being made with that strategy have of moving with or against the market at the moment they are made.

None of us knows this information, I guess. but I can tell you anecdotally that my trades have gone through both with and against price movement at the time they were traded thus far.


Quote
That doesn't mean I would pretend its adverse effects do not exist, just as I do not pretend the adverse effects of my chosen investment strategy do not exist (which is, in part, what I was getting at with my "not claiming to be without sin" comment).  Like you, I feel conflicted about owning shares in evil corporations.  I feel conflicted about exploiting our regressive tax system for personal profit.  I feel conflicted about the role my pursuit of financial independence plays in displacing my larger focus on my own values.  But my doing of evil doesn't stop me from seeing it or hearing it or speaking it.

I'm all for self inspection when it comes to the personal ethics of investing.

But I do have a few problems with this contention that using DM creates problems by contributing to "the irrational" volatility of markets.

1.  No evidence: There has been a lot of gestalt judgment about what happens when someone uses this strategy, and a complete paucity of evidence.  That is, I honestly don't know if DM contributes or takes away from volatility more or less than buy-and-hold index investing. And I think that worrying about the ethics of an effect before you have proven that the effect exists is putting the cart before the horse.

2.  Scale: Whatever the actual effect of dual momentum is, it's practitioners trade so infrequently, and it is such an uncommon strategy, that I suspect that there is virtually no effect at all.

3.  Moral hazard: There is implicit in this argument that you guys are making the idea that market volatility is bad, or harmful. Whether or not dual momentum has any effect on volatility, I have seen no evidence that the market  is harmed by volatility. I can think of plenty of good arguments for why periods of extreme market volatility might be of benefit.

4.  The distraction effect: The fact that we all capitalize companies that we don't believe in is a much bigger deal. The putative volatility argument in comparison is very very small. It reminds me of one blood diamond dealer criticizing another blood diamond dealer's ethics for leaving the toilet seat up after urinating. It's counterproductive. They should focus on the blood diamond trade.

5.  The puritanical tone: This is probably the biggest one if I'm being honest. I am a deeply unreligious person, and when people pass judgment on other people's (my) morality in order to make themselves feel more righteous it just disagrees with me on a guttural level.  AKA it's my own neuroses. (and don't be defensive, I am not calling anybody out for Puritanism in particular.)


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But if we are to have an honest discussion about the specific investment strategy that is the subject of this thread, we shouldn't pretend sol's criticism is untrue or unfair just because it happens to be ugly.

See above for my reasons. Different people think different things are ugly.  I don't think DM is ugly. I find it to be quite elegant actually conceptually. Ethically I am ambivalent. It's another flavor of investing.
« Last Edit: September 19, 2015, 08:48:11 PM by milesdividendmd »
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #841 on: September 19, 2015, 08:01:12 PM »
Ps I have no idea why the formatting failed there!
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sol

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Re: Dual Momentum Investing
« Reply #842 on: September 19, 2015, 08:20:30 PM »
Ps I have no idea why the formatting failed there!

You need one quote tag before each quote, and one /quote tag after each quote.  Extra ones mess it up.  Remember that the forum inserts one of each for you to begin with.

dungoofed

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Re: Dual Momentum Investing
« Reply #843 on: September 19, 2015, 08:21:45 PM »
also you need to use the other slash

milesdividendmd

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Re: Dual Momentum Investing
« Reply #844 on: September 19, 2015, 08:45:52 PM »
There actually is a bracketed quote tag at the beginning of each quote that I can only see in edit mode.

I will reverse the slash though.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #845 on: September 19, 2015, 08:50:48 PM »
It was the slash! Thanks dungoofed.
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brooklynguy

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Re: Dual Momentum Investing
« Reply #846 on: September 20, 2015, 07:50:24 PM »
If you invest in a capital weighted index then you will axiomatically invest more in companies with larger capitalization. Now clearly  there are times when there are asset bubbles.  A classic example being the .com bubble.  In such a time, as the expensive part of the market becomes overvalued, new purchases made by passive index investors Will preferentially flow towards the "overvalued" assets  as their price becomes ever more divorced from their intrinsic value. that is they will play into the momentum effect and against the value effect.

Ok, I think I follow now.  New purchases by market-cap-weighted index investors act as a rising tide that lifts all boats, increasing the valuation of every asset in the index.  Because indexers deliberately avoid discriminating between assets on the basis of valuation, their purchases have the effect of making overvalued assets even more overvalued (even though they have zero impact on any asset's pro rata share of the market's value as a whole).

That is true.  Passive indexers rely on everyone else to "correctly" set prices.  Each index investor accepts and follows whatever price the rest of the market has established for each asset.  To the extent the market overvalues an asset, each new capital injection made by an index investor pushes the market value of that asset even further away from its intrinsic value.  Like DM, a passive index investing strategy completely ignores underlying fundamentals.  In that sense, the two strategies are equally "irrational."

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I would argue that every trade which moves WITH the dominant price movement  of the asset that is being traded at that moment contributes to volatility, and every trade that moves against the dominant movement of that asset decreases volatility. Volatility occurs when everybody moves to the same side of the boat at once. when there is an imbalance between buy and sell pressure is when you see big price movements.

Good point.  Only in a vacuum would every trade increase volatility.  The point we've been trying to make, though, is that momentum traders, unlike indexers, always move to the crowded side of the boat.  The strategy, as sol said, is to pile on to current price trends.

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So in order to answer whether or not any one strategy increases or decreases volatility overall you should know The probability that the trades being made with that strategy have of moving with or against the market at the moment they are made.

None of us knows this information, I guess. but I can tell you anecdotally that my trades have gone through both with and against price movement at the time they were traded thus far.

No one argued that momentum trading amplifies volatility at the precise snapshot in time when its practitioners execute their trades.  What gets magnified is the market's overall upward or downward trend, as the case may be (the one that serves as the momentum investors' trading signal).  I agree that no evidence has been cited to support this claim (and I suspect that none exists, at least specifically with respect to DM itself, because you are probably correct that there are currently just too few DM traders in the market to have a meaningful effect), but must it not be true, as a matter of logic, that when traders pile on to market movements they will tend to push the market further along in the same direction?  Is there a flaw in the bank run analogy?

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5.  The puritanical tone: This is probably the biggest one if I'm being honest. I am a deeply unreligious person, and when people pass judgment on other people's (my) morality in order to make themselves feel more righteous it just disagrees with me on a guttural level.  AKA it's my own neuroses. (and don't be defensive, I am not calling anybody out for Puritanism in particular.)

I can understand this sentiment.  For what it's worth, I've tried to examine the practical effects of my own chosen strategy (and its potential widespread adoption) with the same critical eye.  In one old thread pondering that question, warfreak2 made the following insightful observation:

If index investing creates a value imbalance, investors will take advantage of it by buying the undervalued stock. Thus the cycle continues onward.
Put another way, the Efficient Market Hypothesis holds only because of the people who operate on the assumption that it doesn't.

Interestingly, in this thread we've been arguing that the reverse is true of the momentum anomaly:  it gets stronger because of the people who operate on the assumption that it will persist.  While, in practice, the "what if everyone indexed?" problem is self-correcting, in that it would be arbitraged out of existence before it ever came to pass, the "what if everyone practiced momentum trading?" problem, I think, is closer to being self-exacerbating.

milesdividendmd

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Dual Momentum Investing
« Reply #847 on: September 20, 2015, 09:46:19 PM »
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No one argued that momentum trading amplifies volatility at the precise snapshot in time when its practitioners execute their trades.  What gets magnified is the market's overall upward or downward trend, as the case may be (the one that serves as the momentum investors' trading signal).  I agree that no evidence has been cited to support this claim (and I suspect that none exists, at least specifically with respect to DM itself, because you are probably correct that there are currently just too few DM traders in the market to have a meaningful effect), but must it not be true, as a matter of logic, that when traders pile on to market movements they will tend to push the market further along in the same direction?  Is there a flaw in the bank run analogy?

In point of fact, the only way an individual can move the market is either directly by trading, or indirectly by convincing others to trade. There is no other way to impact a market that I can imagine.

The "overall trend" is only made by the summed impact of all transactions.  There's no getting around this.

The bank run analogy is flawed too, I think. The root cause of bank runs is the loss of confidence in the banking system. Withdrawing money during a bank run feeds into that instability (and is also smart.)

But because of the very nature of DM,  a trader would only participate in a "Bank run" type reflection of market sentiment long after it was initiated. It might accelerate the velocity of the movement (assuming that there are more sellers at the moment the momentum trader trades) but not necessarily.

Momentum is by definition a reactive exercise.

As to the "what if everyone DM'd" question. It's a fun exercise, but ultimately a pointless one. If it caused predictable parabolic price movements then those moves would be arbitraged away by smart traders who would stop participating in DM and front run them, I suspect.
« Last Edit: September 20, 2015, 09:52:23 PM by milesdividendmd »
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ChaseJuggler

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Re: Dual Momentum Investing
« Reply #848 on: September 21, 2015, 11:56:33 AM »
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As to the "what if everyone DM'd" question. It's a fun exercise, but ultimately a pointless one. If it caused predictable parabolic price movements then those moves would be arbitraged away by smart traders who would stop participating in DM and front run them, I suspect.

It's about as useful as asking, "what if everyone became a firefighter?"

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Re: Dual Momentum Investing
« Reply #849 on: September 22, 2015, 10:53:22 AM »
reading some more on thread, slowly getting me interested in this thing, but I'm still a 3 fund guy myself for the time being.

I don't see how DM would change stock market, it isn't like they are pulling money out of markets, I didn't see cash as part of the rotations of things to go into