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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Mr. McGibblets on April 14, 2015, 03:55:15 PM

Title: Dual Momentum Investing
Post by: Mr. McGibblets on April 14, 2015, 03:55:15 PM
Hey there -

I read an interesting comment on another thread about Dual Momentum Investing. I have heard of simple momentum investing, but have never heard of investing using the combination of relative strength and absolute momentum.

Here is a great PDF on the topic: http://alpharotation.com/resources/Momentum2%20White%20Paper.pdf

Does anyone have experience with this method? Or concerns/pitfalls?
Title: Re: Dual Momentum Investing
Post by: Cheddar Stacker on April 14, 2015, 04:43:15 PM
No experience. I read some of the discussion in the other thread, so I'm an interested follower. Proceed in learning, but with caution would be my advice, just like what was given previously.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 14, 2015, 06:36:43 PM
More importantly than understanding how a strategy works, is understanding WHY it works. Unless you have full confidence in a strategy and understand all the ups and downs, you won't stick with it when it's doing poorly. Unseen in the research paper is how many losing trades in a row it experienced. Since it rebalances monthly, it may have 4 or 5 consecutive losing trades. Most people give up after 2 or 3 losing trades, only to see the strategy start working again without them participating.

I recommend reading all you can about it including doing your own testing. Look through the back test on a trade by trade basis and ask yourself, 'is this what I would expect to happen? Would I still trade through this or would I give up?' You need to know it at that level of detail IMO.

FWIW I use my own flavor of dual momentum investing in my retirement and taxable accounts.
Title: Re: Dual Momentum Investing
Post by: The Beacon on April 14, 2015, 09:29:02 PM
More importantly than understanding how a strategy works, is understanding WHY it works. Unless you have full confidence in a strategy and understand all the ups and downs, you won't stick with it when it's doing poorly. Unseen in the research paper is how many losing trades in a row it experienced. Since it rebalances monthly, it may have 4 or 5 consecutive losing trades. Most people give up after 2 or 3 losing trades, only to see the strategy start working again without them participating.

Very true. one time, I suffered 10 consecutive losing trades over the course of 8 days. The psychological impact was unbearable at one point even if I knew my strategy was sound.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 14, 2015, 09:48:08 PM
Following, but I may hurt my face from palming it so hard if comments like "10 trades in 8 days" are the norm.  ;)
Title: Dual Momentum Investing
Post by: milesdividendmd on April 14, 2015, 10:55:34 PM
I have written an awful lot about dual momentum, because I've thought a lot about dual momentum.

I currently manage all of my tax sheltered  accounts in this manner, and have done so for about 6 months now. For the year before that I managed my HSA account using a form of Dual momentum.

I will include links to all of my articles on the subject below, rather then restating my thoughts sloppily here, but the real expert on the subject is Gary Antonacci Who wrote this book (which I highly recommend.)

http://www.amazon.com/Dual-Momentum-Investing-Innovative-Strategy/dp/0071849440

But before investing in the book I would recommend checking out his blog which is excellent…

http://www.dualmomentum.net/?m=1

Here then are my thoughts on the subject.

On why I personally chose to switch to a dual momentum strategy.

http://www.milesdividendmd.com/jumping-off-a-cliff/

On how dual momentum works...

http://www.milesdividendmd.com/two-faced-investing/

On the barriers to implementing a dual momentum strategy, and paradoxically why I believe dual momentum will persist as a viable strategy in the future.

http://www.milesdividendMD.com/dual-doubts/

And finally on the real world risks of dual momentum as I see them.

http://www.milesdividendmd.com/looking-under-rocks/

Enjoy!
Title: Dual Momentum Investing
Post by: milesdividendmd on April 14, 2015, 11:35:00 PM
Following, but I may hurt my face from palming it so hard if comments like "10 trades in 8 days" are the norm.  ;)

That's funny. But that trading frequency does NOT describe DM investing at all!

(I have been using global equities momentum (the simplest form of dual momentum ) in my retirement accounts since last September and have yet to make my first trade.)
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on April 15, 2015, 03:57:52 AM
Milesdividend,

I was wondering if you were the author of those blog posts- very good work. I was referred to your work from a Bogleheads thread. You lay out a very compelling case. In fact, I am executing your exact plan with my Vanguard Roths: S&P500 (VFIAX), Developed Markts (VTMGX), Emerging (VEMAX) and short treasury (VFISX), using a 6 month look back. I am following suit with my TSP funds: G,F,C, and I. (I am excluding the S fund with its medium and small US caps due to its volatility and redundancy to the US market in the C fund).

Question: I presume you chose US, developed International, and Emerging for their geographic diversity? I have unfortunately not read Gary Antonacci's book.


For others, if you google Adaptive or Tactical Asset Allocation, you will find academic papers published over the past few years that pretty much lay out other good arguments for this momentum strategy. Like Miles, I am executing the strategy in only tax sheltered accounts for now, but I'm in a low enough tax bracket that I may go "whole hog" with my taxable acct as well, if this strategy proves as valuable as the evidence suggests.
Title: Re: Dual Momentum Investing
Post by: Mr. McGibblets on April 15, 2015, 08:32:34 AM
Thanks everyone. I just put a hold on the book from my library. I am looking forward to getting into it.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on April 15, 2015, 09:34:09 AM
You can also read Antonacci's research papers here for free: http://www.optimalmomentum.com/papers1.html

I've read through them and have been messing around with backtest spreadsheets I developed independently using historical data from yahoo! finance and am becoming more and more convinced.   I copied my spreadsheet where I implement the strategy described in milesdividendmd's two faced investing post with VFINX, DFALX, DFEMX, and VFISX.  I was stunned that such a simple strategy could avoid the big market downturns in the early 2000s and 2008/2009.

Looking at the spreadsheet (with a 6 month lookback), it puts you in bonds on 1/2008 and puts you back in a stock fund on 1/2009.  You avoid a 33% drawdown during that period in the S&P500.  It has similar success in the dot com bust.

This strategy is really about absolute momentum (read that paper above) and getting completely out of stocks when they aren't doing well.  That of course is market timing which I am generally very wary of.  Usually people are burned badly by buying and selling at exactly the wrong times.  This rule based strategy seems to be an exception to the rule against market timing.  It just plain works.

I think it works on behavioral effects which is why it's so hard to understand logically.  So far I haven't found any fatal flaws and am starting to consider implementing this myself, but more digging needs to be done.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 15, 2015, 09:41:25 AM
Following, but I may hurt my face from palming it so hard if comments like "10 trades in 8 days" are the norm.  ;)

That's funny. But that trading frequency does NOT describe DM investing at all!

(I have been using global equities momentum (the simplest form of dual momentum ) in my retirement accounts since last September and have yet to make my first trade.)

How frequently have you had to check if a trade was necessary?
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on April 15, 2015, 09:47:37 AM
The strategy has you check monthly to see if you should make any changes.  Not bad at all.  In the papers I think he says the backtesting averages less than 2 trades per year.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 15, 2015, 09:59:58 AM

Following, but I may hurt my face from palming it so hard if comments like "10 trades in 8 days" are the norm.  ;)

That's funny. But that trading frequency does NOT describe DM investing at all!

(I have been using global equities momentum (the simplest form of dual momentum ) in my retirement accounts since last September and have yet to make my first trade.)

How frequently have you had to check if a trade was necessary?

Every month. I enjoy it   YMMV!
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 15, 2015, 10:25:57 AM
Spreadsheet showing the probability of consecutive losses based on winning percentage:
https://docs.google.com/spreadsheets/d/1pHYNz6RV-nx-9Ycz4yoVItLlK0Ur2VdHYTLuW4dzyEc/edit?usp=sharing

FYI most momentum strategies have a winning percentage of 60-80%. The white paper that the OP originally posted has a winning % of ~60-65% based on my own backtests.

FWIW here's my own backtest of what the white paper did. They did not say what their lookback period was (3 months? 6 months? 12 months?) nor did they say if they also screened for volatility or correlation. I kept it simple and used a 6 month lookback for the momentum screen. https://drive.google.com/file/d/0BzyyTlvGE-T2cTFfTzNLSVVjS00/view?usp=sharing

It is rather crude but you can do your own backtest for free using https://www.portfoliovisualizer.com/test-market-timing-model

Here's a spreadsheet you can use to make your own backtest using data from Yahoo. It's a pretty manual spreadsheet but you'll get the idea http://systemtradersuccess.com/backtesting-etf-rotational-system/ and http://systemtradersuccess.com/improving-simple-etf-rotational-model/
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 15, 2015, 10:38:16 AM
The strategy has you check monthly to see if you should make any changes.  Not bad at all.  In the papers I think he says the backtesting averages less than 2 trades per year.

This is only from 2003 (as far back as ETFReplay will let you go) but this is Gary's implementation of Dual Momentum. Looks like an average of 2.5 trades a year https://drive.google.com/file/d/0BzyyTlvGE-T2Y19FdV9wWXlUaVU/view?usp=sharing
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 15, 2015, 10:46:16 AM
miles is there a spreadsheet formula you are following to get the asset allocation?
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on April 15, 2015, 10:58:45 AM
The strategy has you check monthly to see if you should make any changes.  Not bad at all.  In the papers I think he says the backtesting averages less than 2 trades per year.

This is only from 2003 (as far back as ETFReplay will let you go) but this is Gary's implementation of Dual Momentum. Looks like an average of 2.5 trades a year https://drive.google.com/file/d/0BzyyTlvGE-T2Y19FdV9wWXlUaVU/view?usp=sharing

More fantastic results.  +2% CAGR and half the max drawdown with a very simple strategy. 

I'd love to see what would happen if you implement this in cFIREsim as missing the big drawdowns could significantly mitigate sequence of returns risk.
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 15, 2015, 11:09:13 AM
wait so couple questions...

1. does this dump whole portfolios into one asset class.

sir doug's spreadsheet.  I dont look at ratio's i just dump all of my money one direction.  then enter the closing values at the beginning of each month for the 4 asset classes and see what it spits out?  then proceed to dump all monies that way?

Title: Re: Dual Momentum Investing
Post by: FIPurpose on April 15, 2015, 11:29:14 AM
MD,

I have been eating up all this information like crazy. And honestly, I am almost completely convinced. I'm currently looking for reasons not to implement it myself. And like many others I may split my portfolio to where part implements this method and the other part implements a typical buy & hold. I'll be seeing if my library has Gary's book.

Do you currently use the 4 Vanguard funds in your strategy, and does it matter what the 4 funds are? I'm gathering that you need to select between 2-3 equity classes and a bond class of some sort.

More reading is to be done!
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 15, 2015, 11:32:24 AM
so is all your money in Large cap international right now?
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on April 15, 2015, 11:49:03 AM
so is all your money in Large cap international right now?

When I compare my "universe" of 4 funds in a website such as Stockcharts with a look back period of 6 months (meaning adding up the returns of each fund over the previous 126 sessions), the S&P500 is still outperforming Developed Int'l, but just barely. And both are markedly outperforming short term bonds.

So per the strategy, that portion of my portfolio with which I am implementing a momentum strategy will stay concentrated in the S&P until I check again next month.
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 15, 2015, 11:50:06 AM
also with 2 trades a year i guess this isnt a good play for taxable accounts?  realizing those short term gains each year?
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 15, 2015, 11:52:04 AM
In a straight comparison of VFINX to DFALX i see .28% return for the S&P and .56% return for the Large cap international
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 15, 2015, 12:01:38 PM

miles is there a spreadsheet formula you are following to get the asset allocation?

No spreadsheet necessary. every month I do a 6 month backtest of total returns on VIIIX, Vea, and shy and allocate 100% to the winner in my 403 B.

I use PERFCHaRTS on stockcharts.com for the backtest.
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on April 15, 2015, 12:09:34 PM
In a straight comparison of VFINX to DFALX i see .28% return for the S&P and .56% return for the Large cap international

This is what I'm using:

http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx (http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx)

I slide the date range to approx 126 (6 months, 21 sessions per month on average). Results vary with the funds/etfs chosen, as their compositions differ.
Title: Dual Momentum Investing
Post by: milesdividendmd on April 15, 2015, 12:16:47 PM
Relative momentum is simply an empirical observation that stocks which have recently done will continue to do well in the short term and vice versa.

It's not a risk story, It's not a valuation story. It's probably a behavioral story.

It's Strength is simply the empirical observation that it exists virtually everywhere, in every asset class, and in every market.

Used alone it absolutely improves returns, but offers no protection against drawdowns.

Absolute momentum on the other hand provides a rational signal when to exit the market alltogether, similar to the 200 day moving average with slightly less trading. So it derisks your portfolio with what I term "temporal diversification."  Ie instead of having some bonds all of the time,  you have all bonds part of the time. It is market timing pure and simple, there's no denying this.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 15, 2015, 12:17:45 PM

In a straight comparison of VFINX to DFALX i see .28% return for the S&P and .56% return for the Large cap international

This is what I'm using:

http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx (http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx)

I slide the date range to approx 126 (6 months, 21 sessions per month on average). Results vary with the funds/etfs chosen, as their compositions differ.

Slide your end date to the end of last month.
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 15, 2015, 12:19:18 PM
gotcha thats a great link turtle  thank you... i can do the same with my 401k account options.  How do fees play a role in all this.  my emerging markets in my 401k blows to the tune of 1.2% fees and the developed foreign  isnt much better at .64% and finally i dont have a SHY eqivalent option include : US Debt index T fund(blackrock .07%) Dodge and cox income fund(.43%)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 15, 2015, 12:20:07 PM
Tfund should be fine, skip EM.
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 15, 2015, 12:21:44 PM

In a straight comparison of VFINX to DFALX i see .28% return for the S&P and .56% return for the Large cap international

This is what I'm using:

http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx (http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx)

I slide the date range to approx 126 (6 months, 21 sessions per month on average). Results vary with the funds/etfs chosen, as their compositions differ.

Slide your end date to the end of last month.

i still get that VFIAX the S&P is the best place to be ... so is this chart all one really needs to implement this startegy?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 15, 2015, 12:22:57 PM
Correct. I am now 100% s and p.

Next month may be my first trade. We'll see.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 15, 2015, 12:28:34 PM

MD,

I have been eating up all this information like crazy. And honestly, I am almost completely convinced. I'm currently looking for reasons not to implement it myself. And like many others I may split my portfolio to where part implements this method and the other part implements a typical buy & hold. I'll be seeing if my library has Gary's book.

Do you currently use the 4 Vanguard funds in your strategy, and does it matter what the 4 funds are? I'm gathering that you need to select between 2-3 equity classes and a bond class of some sort.

More reading is to be done!

I just use VIIIX (S&P), FSPNX (EAFE), and vanguard short term treasuries. I have no suitable EM option in my 403b.

This is what Antonacci terms "global equities momentum," though he uses a total bond fund in place of short term treasuries.
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 15, 2015, 12:47:21 PM
alright i plan to start this next month.  at what expense ratio does this become dumb? my lowest developed is .64% and my bond fund looks like it will be .43 i'll have to look into the other to see if its workable. 
Title: Re: Dual Momentum Investing
Post by: ChaseJuggler on April 15, 2015, 01:36:56 PM
Here is a useful spreadsheet I found for comparing (https://docs.google.com/spreadsheets/d/1S5YVvjIXexBOjonrpgSM0ngr3O-82NGalGnfbj5hOxU/edit#gid=1298415711).
Title: Re: Dual Momentum Investing
Post by: FIPurpose on April 15, 2015, 02:42:30 PM
So I've been considering what sort of markets are good and bad for buy&hold vs. momentum

So as discussed in your article momentum investing is a poor investment in extremely volatile markets. where every 6 months you are picking the wrong trend.

Though in buy&hold you are betting that no matter what happens, the general trend will be up in the end. Now I have heard several people on this forum bring up the Japanese or even Australian markets as examples of countries that don't move anywhere for several years at a time. Perhaps this is the risk you take on in a buy&hold strategy.

I would be curious in how people analyze and compare those risks.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 15, 2015, 03:31:13 PM
I would expect returns of momentum strategies to be similar in the future as they have been in the past. In the past it went through good periods followed by bad periods. The bad periods shake out the people who aren't true believers, and allow the good periods to come back. As long as human nature stays the same, then momentum should be persistent over the long term just as it has in the past.

As you say, buy and hold has it's own risk so in the end, it's what kind of risk are you willing to take.
Title: Dual Momentum Investing
Post by: milesdividendmd on April 15, 2015, 04:16:43 PM
I would expect returns of momentum strategies to be similar in the future as they have been in the past. In the past it went through good periods followed by bad periods. The bad periods shake out the people who aren't true believers, and allow the good periods to come back. As long as human nature stays the same, then momentum should be persistent over the long term just as it has in the past.

As you say, buy and hold has it's own risk so in the end, it's what kind of risk are you willing to take.

While this observation of the popularity of an approach crowding out the future performance is true of other investment approaches like the value approachs or the dividend approach,    I am not sure that it is true of the momentum approach. After all if more people crowd into momentum, what are you left with?

You are left with more upwards price movement, a.k.a. more momentum. 

There is certainly the risk of a bubble forming, but as long as there is sufficient liquidity in short-term treasuries to trade out of equities, absolute momentum should protect against the downside risk of the bubble bursting better than for buy and holders.
Title: Re: Dual Momentum Investing
Post by: FIPurpose on April 15, 2015, 04:47:43 PM
I'll be going through a number of steps this weekend and have a convo with the spouse, but I think I've read enough to know the risks and trade offs. My portfolio is still decades from draw down, so I believe this strategy to be a winner long term over buy & hold. If people are interested I'll start a journal exploring how this method compares to how a buy & hold strategy would compare.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 15, 2015, 05:02:48 PM

I'll be going through a number of steps this weekend and have a convo with the spouse, but I think I've read enough to know the risks and trade offs. My portfolio is still decades from draw down, so I believe this strategy to be a winner long term over buy & hold. If people are interested I'll start a journal exploring how this method compares to how a buy & hold strategy would compare.

There is little to be lost (and much to be gained) by transitioning over in stages.

Maybe splitting your tax sheltered portfolio into 2 buckets?  Buy and hold Vs DM.

When all of your wealth is in a single index, the volatility can take some getting used to. ( I invested my HSA account only in this way for a year before switching over which, in retrospect, was helpful. )
Title: Re: Dual Momentum Investing
Post by: 691175002 on April 15, 2015, 05:04:29 PM
As with many investing strategies, knowledge generally leads to further uncertainty.

The dual momentum blog and book provide a fairly one-sided analysis of momentum and many of the back-tests are misrepresented as they incorporate varying amounts of future information.

Momentum is one of the original factors and has been extensively studied.  It is well understood to be the strongest market anomaly.
(http://i.imgur.com/QjCzQ1q.png)
http://www.msci.com/resources/pdfs/Foundations_of_Factor_Investing.pdf

Significant analysis has also been done on momentum crashes.  Momentum is one of the few investment strategies that creates positive feedback (where investors piling on acts as a signal for more investors to enter the trade).  This ends up creating infrequent but brutal drawdowns, which is one of the reasons momentum investing is considered a risk premium and not free money.

There are people who claim you can avoid momentum crashes by overlaying a second signal or diversifying in other ways but those systems are almost always fit to historical data in-sample and there is no expectation they should be robust in the future.  Standard deviation is not an effective way of quantifying a skewed return profile.

I am a believer in momentum investing, but am aware that excess returns are compensation for risk, not a free lunch.  There are reasons to believe momentum will generate superior returns if you can stay disciplined.

Strategies that appear to have abnormally consistent returns (writing options, momentum, statistical arbitrage) generally conceal infrequent but large losses.
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 15, 2015, 05:39:54 PM
so is DMSR the rotation of the 4 asset classes that includes emerging markets where as GEMs is just the 3 not including emerging markets.  Does anyone have a DMSR model?
Title: Re: Dual Momentum Investing
Post by: Financial.Velociraptor on April 15, 2015, 06:59:10 PM

Strategies that appear to have abnormally consistent returns (writing options, momentum, statistical arbitrage) generally conceal infrequent but large losses.

This.  I do very well writing options.  But I got burned heavily a few times while I was learning.  Now, I write puts only on companies I already want to own at a price I'd be willing pay for buy/hold.  My "downside" is thus tolerable when something tanks and I end up holding something with short term capital losses.  The result is a blue-chip intensive strategy that focuses on companies that have leading P/E, P/B, or P/S within their industry.  I get burned far less often now, and the skid marks are much shorter than when I chased yield by writing puts on Chinese solar companies with negative earnings but fat premiums.

I'd do back-testing with a mechanical trailing stop loss applied to see if there is a sweet spot that gets you out before market collapses before putting real money on DM.
Title: Re: Dual Momentum Investing
Post by: The Beacon on April 15, 2015, 07:17:42 PM
As with many investing strategies, knowledge generally leads to further uncertainty.

The dual momentum blog and book provide a fairly one-sided analysis of momentum and many of the back-tests are misrepresented as they incorporate varying amounts of future information.

Momentum is one of the original factors and has been extensively studied.  It is well understood to be the strongest market anomaly.
(http://i.imgur.com/QjCzQ1q.png)
http://www.msci.com/resources/pdfs/Foundations_of_Factor_Investing.pdf

Significant analysis has also been done on momentum crashes.  Momentum is one of the few investment strategies that creates positive feedback (where investors piling on acts as a signal for more investors to enter the trade).  This ends up creating infrequent but brutal drawdowns, which is one of the reasons momentum investing is considered a risk premium and not free money.

There are people who claim you can avoid momentum crashes by overlaying a second signal or diversifying in other ways but those systems are almost always fit to historical data in-sample and there is no expectation they should be robust in the future.  Standard deviation is not an effective way of quantifying a skewed return profile.

I am a believer in momentum investing, but am aware that excess returns are compensation for risk, not a free lunch.  There are reasons to believe momentum will generate superior returns if you can stay disciplined.

Strategies that appear to have abnormally consistent returns (writing options, momentum, statistical arbitrage) generally conceal infrequent but large losses.
Very good analysis.  if you chase returns, then be prepared for the bigger than normal draw-downs. I would not risk my whole portfolio on anything that has abnormal high returns on paper.  To be honest,  my main strategy has an average worst annual draw-down of 4.5% on paper after thousands of trades. I still do not have the balls to put all my money in, 30% at most. I wish I could scale up because the results on paper make me drool........ But I have no problem with 100% in an index fund...
Title: Re: Dual Momentum Investing
Post by: FIPurpose on April 15, 2015, 08:37:11 PM

I'll be going through a number of steps this weekend and have a convo with the spouse, but I think I've read enough to know the risks and trade offs. My portfolio is still decades from draw down, so I believe this strategy to be a winner long term over buy & hold. If people are interested I'll start a journal exploring how this method compares to how a buy & hold strategy would compare.

There is little to be lost (and much to be gained) by transitioning over in stages.

Maybe splitting your tax sheltered portfolio into 2 buckets?  Buy and hold Vs DM.

When all of your wealth is in a single index, the volatility can take some getting used to. ( I invested my HSA account only in this way for a year before switching over which, in retrospect, was helpful. )

Oh no doubt,

I'll be using about 1/3 of my portfolio to see how I feel about this strategy, and also see how I handle the swings. Thanks for your articles. They were an immense help.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 15, 2015, 08:45:24 PM

so is DMSR the rotation of the 4 asset classes that includes emerging markets where as GEMs is just the 3 not including emerging markets.  Does anyone have a DMSR model?

DMSR is dual momentum sector rotation.instead of rotating between asset classes it rotates between sectors within the US market based on dual momentum.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 15, 2015, 09:00:46 PM

As with many investing strategies, knowledge generally leads to further uncertainty.

The dual momentum blog and book provide a fairly one-sided analysis of momentum and many of the back-tests are misrepresented as they incorporate varying amounts of future information.

Momentum is one of the original factors and has been extensively studied.  It is well understood to be the strongest market anomaly.
(http://i.imgur.com/QjCzQ1q.png)
http://www.msci.com/resources/pdfs/Foundations_of_Factor_Investing.pdf

Significant analysis has also been done on momentum crashes.  Momentum is one of the few investment strategies that creates positive feedback (where investors piling on acts as a signal for more investors to enter the trade).  This ends up creating infrequent but brutal drawdowns, which is one of the reasons momentum investing is considered a risk premium and not free money.

There are people who claim you can avoid momentum crashes by overlaying a second signal or diversifying in other ways but those systems are almost always fit to historical data in-sample and there is no expectation they should be robust in the future.  Standard deviation is not an effective way of quantifying a skewed return profile.

I am a believer in momentum investing, but am aware that excess returns are compensation for risk, not a free lunch.  There are reasons to believe momentum will generate superior returns if you can stay disciplined.

Strategies that appear to have abnormally consistent returns (writing options, momentum, statistical arbitrage) generally conceal infrequent but large losses.

I don't mean to sound harsh, but I actually don't find this criticism to be very enlightening.

I am very open to specific criticisms of this (or any) strategy.  But this one seems so general as to be useless.

If you talk about momentum as above then what you are talking about is relative momentum or price momentum.

Dual momentum is a very different animal by virtue of absolute momentum.

And absolute momentum is just a very specific type of trend following. It is not so different from the 200 day moving average, and really the only difference is that it trades a little bit less frequently.

For this reason if you combine the 200 day moving average approach  with relative momentum you get very similar results to a dual momentum strategy.

This is because trend following almost universally limits drawdowns. There are really no exceptions to this rule over a long time horizons.

Over short time horizons trend following certainly is susceptible to whipsaws and flash crashes. (Which I write about in my  last article, but The downside of such an approach is limited to the actual drawdown of the flash crash, and  underperformance relative to the market. My fundamental understanding of such an approach is that it is axiomatic that if you can limit your maximum draw down to 20 to 30% without giving up most of the upside of equities you will do incredibly well long-term.

To dismiss this strategy as performance chasing just strikes me as somewhat lazy and generic. I.e. you can make this criticism about any strategy without really thinking about the specific problems of the strategy being discussed.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 15, 2015, 10:18:35 PM

As with many investing strategies, knowledge generally leads to further uncertainty.

The dual momentum blog and book provide a fairly one-sided analysis of momentum and many of the back-tests are misrepresented as they incorporate varying amounts of future information.

Momentum is one of the original factors and has been extensively studied.  It is well understood to be the strongest market anomaly.
(http://i.imgur.com/QjCzQ1q.png)
http://www.msci.com/resources/pdfs/Foundations_of_Factor_Investing.pdf

Significant analysis has also been done on momentum crashes.  Momentum is one of the few investment strategies that creates positive feedback (where investors piling on acts as a signal for more investors to enter the trade).  This ends up creating infrequent but brutal drawdowns, which is one of the reasons momentum investing is considered a risk premium and not free money.

There are people who claim you can avoid momentum crashes by overlaying a second signal or diversifying in other ways but those systems are almost always fit to historical data in-sample and there is no expectation they should be robust in the future.  Standard deviation is not an effective way of quantifying a skewed return profile.

I am a believer in momentum investing, but am aware that excess returns are compensation for risk, not a free lunch.  There are reasons to believe momentum will generate superior returns if you can stay disciplined.

Strategies that appear to have abnormally consistent returns (writing options, momentum, statistical arbitrage) generally conceal infrequent but large losses.

I understand what you are saying but the data you show here is a long/short individual stock momentum system with no trend filter vs a cross-asset momentum system w/ filter. Not exactly apples to apples. Long/short momentum applied to only individual stocks is pretty scary in simple form. The crashes don't come from momentum stocks crashing, it actually comes from the shorted stocks spiking upwards after a market crash. Men Faber showed that by simply lowering the shorted stocks by 20% for every 10% decline in the market, it effectively wiped out the previous momentum crashes from the backtest. Of course, you could also just apply momentum in a long-only basis and skip the crashes as well.

Trend Following with Managed Futures: The Search for Crisis Alpha (Wiley Trading) https://www.amazon.com/dp/1118890973/ref=cm_sw_r_awd_RsZlvb04E7KX8
https://www.amazon.com/dp/1118890973/ref=cm_sw_r_awd_RsZlvb04E7KX8

On top of Gary's book, I highly recommend this one. Dual momentum is really just a variation of diversified trend following which has been used successfully (with the fund track records to prove it) since at least the 1970s. Before that guys were using it but typically at the individual stock or commodity level. Alex does a very simple trend following strategy of using only 'absolute momentum' of 12 months applied to every market they could get data for back to 1200 a.d. If 12 month momentum was positive, they went long, when it was negative, they went short. Each market was equal weighted according to its volatility and long term returns were 13% with a max drawdown of less than 30% over 800 years. Even more interesting is the fact that it had equity like returns but with zero correlation. This allows you to combine it with long only equities and create a portfolio with the same or better returns, and with lower volatility and drawdowns. Returns are also much more consistent.
Title: Re: Dual Momentum Investing
Post by: The Beacon on April 15, 2015, 10:48:51 PM
To dismiss this strategy as performance chasing just strikes me as somewhat lazy and generic. I.e. you can make this criticism about any strategy without really thinking about the specific problems of the strategy being discussed.
Actually, there is nothing wrong with chasing risk adjusted performance. Different people have different appetite for draw downs/risk. It is safe to say that risk/reward is proportional in most cases. For me, if a system has abnormal returns with limited draw downs on paper, the first thought I have is if it is curve fitting.

No matter how pretty a strategy looks on paper, the only way to tell is  to put it to test in real trading. Paper trading is totally different than real trading. Once the psychological force kicks in, things will suddenly look so different than what they used to look on paper even if they are actually the same.  I rode hard this emotional roller coaster in Jan. 2015 after I scaled up my position size 4 times as big as last year. Originally I was going to try 10 times because it looked so beautiful on paper from all different angles. I am glad I did not..

I hope your strategy works for you in real trading. If it does, we can take a page from you. Good Luck.
 

Title: Dual Momentum Investing
Post by: milesdividendmd on April 15, 2015, 11:33:01 PM
To dismiss this strategy as performance chasing just strikes me as somewhat lazy and generic. I.e. you can make this criticism about any strategy without really thinking about the specific problems of the strategy being discussed.
Actually, there is nothing wrong with chasing risk adjusted performance. Different people have different appetite for draw downs/risk. It is safe to say that risk/reward is proportional in most cases. For me, if a system has abnormal returns with limited draw downs on paper, the first thought I have is if it is curve fitting.

No matter how pretty a strategy looks on paper, the only way to tell is  to put it to test in real trading. Paper trading is totally different than real trading. Once the psychological force kicks in, things will suddenly look so different than what they used to look on paper even if they are actually the same.  I rode hard this emotional roller coaster in Jan. 2015 after I scaled up my position size 4 times as big as last year. Originally I was going to try 10 times because it looked so beautiful on paper from all different angles. I am glad I did not..

I hope your strategy works for you in real trading. If it does, we can take a page from you. Good Luck.

Thanks Sharpy. I truly wish you well in your investing too.

I have only converted my retirement accounts to this strategy for six months, so it's impossible to draw any conclusions.  But so far so good.

I have increased my exposure to stocks, made no trades, and both of these have been beneficial to my portfolio thus far.

The thing that initially appealed to me about dual momentum, was the exact same thing that has always made me very leery of  using leverage. I am a coward.  I am risk-averse.I am anti-drawdown.

My basic feeling is that a long-term investing strategy has to first and foremost avoid blowups to be sustainable and successful.

What was most attractive to me about dual momentum is not that it returns more than the market during bull markets (usually), it is that it (almost always) loses much less during bear markets.

I believe that this is what Warren Buffett was getting at when he said that the first rule of investing was: don't lose money and that the second rule of investing was: see rule number one.
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 16, 2015, 05:47:07 AM
You can also read Antonacci's research papers here for free: http://www.optimalmomentum.com/papers1.html

I've read through them and have been messing around with backtest spreadsheets I developed independently using historical data from yahoo! finance and am becoming more and more convinced.   I copied my spreadsheet where I implement the strategy described in milesdividendmd's two faced investing post with VFINX, DFALX, DFEMX, and VFISX.  I was stunned that such a simple strategy could avoid the big market downturns in the early 2000s and 2008/2009.

Looking at the spreadsheet (with a 6 month lookback), it puts you in bonds on 1/2008 and puts you back in a stock fund on 1/2009.  You avoid a 33% drawdown during that period in the S&P500.  It has similar success in the dot com bust.

This strategy is really about absolute momentum (read that paper above) and getting completely out of stocks when they aren't doing well.  That of course is market timing which I am generally very wary of.  Usually people are burned badly by buying and selling at exactly the wrong times.  This rule based strategy seems to be an exception to the rule against market timing.  It just plain works.

I think it works on behavioral effects which is why it's so hard to understand logically.  So far I haven't found any fatal flaws and am starting to consider implementing this myself, but more digging needs to be done.

Just an FYI your spreadsheet is a 5 month lookback thats why i was getting different answers than when using the site that MilesDividend recommended
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 16, 2015, 05:53:40 AM
also sirdoug some of your numbers dont line up.  on 10/1 2014 VFINX was at 177 not 184.  so i'm not sure where you data came from but its not 100% lining up
Title: Re: Dual Momentum Investing
Post by: Revelry on April 16, 2015, 06:02:51 AM
In a straight comparison of VFINX to DFALX i see .28% return for the S&P and .56% return for the Large cap international

This is what I'm using:

http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx (http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx)

I slide the date range to approx 126 (6 months, 21 sessions per month on average). Results vary with the funds/etfs chosen, as their compositions differ.

Great website but I have a question.  When comparing your funds you use the 6- or 12- or X-month average, but the perfcharts show moving daily values.  To get that info, do I just change to the histogram view?

Also, if someone knows how to put the TSP funds in to compare that would be helpful to me.
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on April 16, 2015, 08:25:07 AM
In a straight comparison of VFINX to DFALX i see .28% return for the S&P and .56% return for the Large cap international

This is what I'm using:

http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx (http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx)

I slide the date range to approx 126 (6 months, 21 sessions per month on average). Results vary with the funds/etfs chosen, as their compositions differ.

Great website but I have a question.  When comparing your funds you use the 6- or 12- or X-month average, but the perfcharts show moving daily values.  To get that info, do I just change to the histogram view?

Also, if someone knows how to put the TSP funds in to compare that would be helpful to me.

Yes, histogram gives cumulative total return over the selected date range.

For TSP funds, I use tspcenter.com --> charts and returns
Title: Re: Dual Momentum Investing
Post by: 691175002 on April 16, 2015, 08:51:51 AM
A long-only momentum portfolio is roughly equivalent to 50% long/short momentum and 50% benchmark, so the arguments still apply.  A long-only strategy will reduce drawdown through diversification and potentially achieve higher risk adjusted returns, but you are still adding exposure to a skewed risk premium.

The most accurate way to backtest momentum would be to find a set of rules that were published many years ago and apply them exactly as written on market data following their discovery.  Unfortunately, this will introduce survivorship bias since it is likely that unsuccessful rules have been forgotten.  Similarly, looking at historical performance of funds which claim to have used this strategy is not robust.  It is impossible to avoid survivorship and selection bias that far back because funds are so transient and information on the strategies they used is very sparse.

Any rule that has been tested on data gathered before its creation will be biased to some degree.  Even if you avoid explicit in-sample curve fitting it is impossible for a person to ignore their own knowledge.  Just the idea of testing momentum was not obvious 15 years ago. 

Choosing to test dual momentum is a decision based on future knowledge (the fact that layered momentum strategies have worked) which implicitly biases returns upwards even if all testing is done on out-of-sample historical data.  This doesn't mean that dual momentum does not work, just that the backtested returns must be biased to some degree.  If the backtest was performed carefully the difference could be very small, but if parameters were fit in sample or rules were chosen using the investors knowledge of what has recently worked then the bias could be very large.

Quote
Men Faber showed that by simply lowering the shorted stocks by 20% for every 10% decline in the market, it effectively wiped out the previous momentum crashes from the backtest. Of course, you could also just apply momentum in a long-only basis and skip the crashes as well.
This is an example of trading rules that have been chosen to fit historical data .  There may be compelling theoretical reasons as to why it works, but it is still difficult to put confidence in such a strategy going forward.

Quote
I believe that this is what Warren Buffett was getting at when he said that the first rule of investing was: don't lose money and that the second rule of investing was: see rule number one.
This skips the most important part of his philosophy, which is that risk is the permanent loss of capital.  Both his words and actions show that he is not afraid of unrealized losses, and thinks that selling depressed assets is far riskier than buy and hold. ( http://www.mutualfundobserver.com/2013/10/permanent-loss-capital/ )

I'm not arguing against momentum as a strategy, I am even exposed to momentum in my personal accounts.  I just find that most of the information available is not fairly represented - in particular the idea that backtests can represent unbiased future returns is dangerous.
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 16, 2015, 08:56:19 AM
In a straight comparison of VFINX to DFALX i see .28% return for the S&P and .56% return for the Large cap international

This is what I'm using:

http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx (http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx)





I slide the date range to approx 126 (6 months, 21 sessions per month on average). Results vary with the funds/etfs chosen, as their compositions differ.

Great website but I have a question.  When comparing your funds you use the 6- or 12- or X-month average, but the perfcharts show moving daily values.  To get that info, do I just change to the histogram view?

Also, if someone knows how to put the TSP funds in to compare that would be helpful to me.

Yes, histogram gives cumulative total return over the selected date range.

For TSP funds, I use tspcenter.com --> charts and returns

how do i turn on histogram?
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on April 16, 2015, 09:13:05 AM
Should be the bar graph button (contains red and green squares) just to the left of the date slider.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 16, 2015, 09:55:55 AM
This strategy seems to be the opposite of all the books and advice i've read about investing, and sounds like market timing, guaranteeing you are buying in on the way up.

If the strategy works so well why isn't there a vanguard fund that takes advantage of it?  I mean if milesdividendmd can own a small set of funds and rebalance them to take advantage of this, then why can't vanguard build a similar fund that out performs the market as a whole?  I guess my next question is not only why isn't there a fund for it already, but why isn't everyone and their mother already in that fund?  Or is this because the strategy has only been recently realized and not exploited by everyone and their mother yet, but as soon as everyone catches on it will?
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on April 16, 2015, 10:55:25 AM
^^^
In Miles' posts linked earlier, he addresses some of your points. Momentum goes against the way that the market works according to both active traders and passive investors. That's why it is not intuitively pursued by either.

And short term performance is at least as good as long term performance (buy and hold) when deciding where to invest. Search for "Adaptive Asset Allocation: A Primer."

(http://www.advisor.ca/wp-content/uploads/2014/10/Chart-2-return-factor-estimates-over-various-horizons-e1413951428416.jpg)
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 16, 2015, 11:12:49 AM
Momentum goes against the way that the market works according to both active traders and passive investors. That's why it is not intuitively pursued by either.

That doesn't answer the question.  Not being intuitive is a reason to not think of it.  It's not a reason not to implement (after research).  Even if it's not intuitive, the idea is out there, and if it works, why wouldn't there be a fund utilizing it?
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 16, 2015, 11:39:47 AM
^^^
In Miles' posts linked earlier, he addresses some of your points. Momentum goes against the way that the market works according to both active traders and passive investors. That's why it is not intuitively pursued by either.

And short term performance is at least as good as long term performance (buy and hold) when deciding where to invest. Search for "Adaptive Asset Allocation: A Primer."

I haven't had time to read through his links (or nearly anything about momentum investing) yet, this is just my initial reaction to the concept.  It looks like it's classic market timing; get in on the way up, and get out on the way down, rinse and repeat.  Everything i've read so far, and all the evidence i've seen seem to suggest that can't be successfully done though.  I will reserve judgement until after i've done some reading up, but i'm a bit skeptical right now the reasons I previously mentioned.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 16, 2015, 12:30:16 PM
That doesn't answer the question.  Not being intuitive is a reason to not think of it.  It's not a reason not to implement (after research).  Even if it's not intuitive, the idea is out there, and if it works, why wouldn't there be a fund utilizing it?

Exactly.  Miles attempted to answer a variant of the same question in this post on his blog (http://www.milesdividendmd.com/dual-doubts/), but his answers similarly fail to explain why, if this method works and can be executed via a simple algorithm, an investment fund does not exist to put the strategy into practice.  I haven't read enough about this strategy yet to form a view one way or the other, but it seems that if it really works then the only possible explanation is what frugalnacho said:  that the strategy hasn't been "discovered" yet by the mutual fund industry and it's only a matter of time before it is (the same reason that explains the punchline to the joke about the economist arguing that a $20 bill on the floor can't possibly exist, because if it did someone would have already picked it up).
Title: Re: Dual Momentum Investing
Post by: RobertMa on April 16, 2015, 03:22:53 PM
In the literature I read, it seems that a 12 month lookback period supposedly give better results than a six month period. Miles, how did you settle on 6 months?
Title: Dual Momentum Investing
Post by: milesdividendmd on April 16, 2015, 06:04:24 PM
That doesn't answer the question.  Not being intuitive is a reason to not think of it.  It's not a reason not to implement (after research).  Even if it's not intuitive, the idea is out there, and if it works, why wouldn't there be a fund utilizing it?

Exactly.  Miles attempted to answer a variant of the same question in this post on his blog (http://www.milesdividendmd.com/dual-doubts/), but his answers similarly fail to explain why, if this method works and can be executed via a simple algorithm, an investment fund does not exist to put the strategy into practice.  I haven't read enough about this strategy yet to form a view one way or the other, but it seems that if it really works then the only possible explanation is what frugalnacho said:  that the strategy hasn't been "discovered" yet by the mutual fund industry and it's only a matter of time before it is (the same reason that explains the punchline to the joke about the economist arguing that a $20 bill on the floor can't possibly exist, because if it did someone would have already picked it up).

I think that one question you could ask yourself is:

"If I knew that everyone in the world was going to implement a dual momentum strategy, how could I use that information to front run the market?" 

I alluded to this above, but if everyone decided to use momentum, the result would be… More momentum.  This is in stark contrast to value, were the crowding of value causes a loss of value.

The other problems with starting a dual momentum ETF are of course impact factors (I.e. it is much cheaper for me to buy 50 shares of SPY, then it is for a  fund to buy 50,000), and marketing. Who would pay for such a simple strategy, when they look at the assets under management and all they see is a single vanguard S&P 500 fund?
Title: Dual Momentum Investing
Post by: milesdividendmd on April 16, 2015, 06:10:03 PM
In the literature I read, it seems that a 12 month lookback period supposedly give better results than a six month period. Miles, how did you settle on 6 months?

The optimal time period for a Lookback  is an unresolved  question.

What is clear is that the longer The Lookback period, the less trades you will make (Which is a very good thing.)

What is also clear is that with dual momentum you will exit risky assets when they have underperformed T-bills for your Lookback period.  this means that A longer Lookback period will mean that you will stay in the bear market a little bit longer, and get back into the recovery in little bit later.

From a behavioral standpoint, I felt that limiting drawdowns was attractive for me personally.

The look back should be between three and 12 months,  or a combination of multiple time periods in that range.
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on April 17, 2015, 04:45:24 AM
Late to the party...following.
Title: Re: Dual Momentum Investing
Post by: bluecheeze on April 17, 2015, 06:37:08 AM
Read this book and it got me interested.  Next month I am going to try a variation of it out with my play money.  Plan on using the top 50 stocks from the Vanguard Total Market as well as a total international ex US (VEU) and US Bond fund (BND) and then investing in the 5 with the highest 12 month returns.  It was a pita but I made a little spreadsheet with all 52 stocks that will back calc the 12 month returns and pick the top 5 for me and I will just buy/sell/hold depending on the results. A little back testing shows about a trade every month or so.  Will result in a few more then 2 trades a year, but I thought it would be fun to do with my play money instead of just my random picking.  It will be in taxable so all short term gains/losses, but it will be a small enough amount to not really make a difference.

Looks like May 1 will be Apple, Amgen, UnitedHealth, Biogen, and Celgene unless things drastically change in the next 13 days.  I plan on evenly splitting a $ value to each at the start and then just letting the gains ride until I need to sell the stock based on the charts.

Always have been a simple 5 fund portfolio guy so this is my first time dabbling in this kind of stuff.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 17, 2015, 07:50:54 AM
I think that one question you could ask yourself is:

"If I knew that everyone in the world was going to implement a dual momentum strategy, how could I use that information to front run the market?" 

I alluded to this above, but if everyone decided to use momentum, the result would be… More momentum.  This is in stark contrast to value, were the crowding of value causes a loss of value.

I'm having a difficult time understanding this logic.  If everyone did momentum investing the result would be more momentum, but i'm not exactly sure how that translates into a winning strategy.  It seems to me that if everyone did momentum investing, then no one would beat the market, because they collectively are the market, by definition.  You couldn't beat the market on the way up, or the way down, you would simply get market returns just like everyone else.  Unless you create a speculative bubble with run away momentum that just keeps increasing, but then whats the end game for that? Bubbles pop eventually, and not everyone can get out and minimize losses, if they could then by definition the bubble would not have popped, it would still be inflated indefinitely.

It's similar to the economist joke mentioned above, except instead of "just noticing" the $20 bill on the ground, the bill was noticed decades ago, and has had numerous papers and books written about it, and had thousands of people point it out.  It makes the joke significantly less funny, but also makes me wonder if the $20 bill is in fact real and has been sitting there for decades then why has no one picked it up?
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 17, 2015, 08:07:05 AM
^^^
In Miles' posts linked earlier, he addresses some of your points. Momentum goes against the way that the market works according to both active traders and passive investors. That's why it is not intuitively pursued by either.

And short term performance is at least as good as long term performance (buy and hold) when deciding where to invest. Search for "Adaptive Asset Allocation: A Primer."

I haven't had time to read through his links (or nearly anything about momentum investing) yet, this is just my initial reaction to the concept.  It looks like it's classic market timing; get in on the way up, and get out on the way down, rinse and repeat.  Everything i've read so far, and all the evidence i've seen seem to suggest that can't be successfully done though.  I will reserve judgement until after i've done some reading up, but i'm a bit skeptical right now the reasons I previously mentioned.

That's because you've been reading the wrong research. If you instead read stuff from Jesse Livermore, William O'Neil, Michael Covel, Alex Greyserman, Andreas Clenow, Meb Faber, Gary Antonnacci, Jack Schwager and others, you'd know that market timing (when done correctly) does work. It's only because Ben Graham first said it (that market timing is impossible), and Buffett reiterated it, that so many believe it.

Momentum strategies can be considered 'market timing' and they were first 'discovered' by academics in 1993, but were used by traders for hundreds of years beforehand. Even Fama acknowledges it to be the premier market anomaly, so anyone thinking that market timing is impossible has just had their head in the sand for the past 20+ years.

Once again, funds have been successfully timing the market and using momentum/trend following for decades. They are called Managed Futures Hedge Funds. See actual performance, after ridiculously high (2% management + 20% performance) fees:

http://www.iasg.com/Groups/group/EMC-Capital-Advisors-LLC/Program/classic
http://www.iasg.com/Groups/group/mark-j-walsh-co/Program/standard-program
http://www.iasg.com/Groups/group/abraham-trading-company/Program/Diversified-Program
http://www.iasg.com/Groups/group/chesapeake-capital/Program/diversified
http://www.iasg.com/Groups/group/hawksbill-capital-management/Program/global-diversified
http://www.iasg.com/Groups/group/dunn-capital-management/Program/World-Monetary-and-Agriculture-Program-WMA-#prog_snapshot
http://www.iasg.com/Groups/group/mulvaney-capital-management/Program/The-Mulvaney-Global-Markets-Program
http://www.iasg.com/Groups/group/ISAM/Program/ISAM-Systematic-Fund-Class-A-USD- (This is the fund that Alex Greyserman is the chief scientist of, and who's book I linked to earlier in this post)

Why you don't see these strategies in mutual funds for the past 30 years is for a few reasons. 1) It took a long time for people to figure out how to legally run a managed futures hedge fund under a mutual fund wrapper. 2) Once they did figure it out, the fees are so high that they generally suck. See here:

http://managed-futures-blog.attaincapital.com/2013/10/21/no-bloomberg-the-managed-futures-industry-is-not-a-scam/

To run a diversified managed futures program yourself, you generally need about $1 million to start with. Anything less and you'll be insanely leveraged. Once ETFs came about, it became much easier (and cheaper) for non-rich people to access these types of strategies. They can either do it themselves or purchase GMOM. GTAA was a previous implementation of diversified trend following but the fees were way too high and it was too complex IMO. GMOM uses dual momentum and purchases the top 10 ETFs based on momentum from a list of like 100 funds covering stocks, bonds, real estate and commodities. I don't know what the lookback period is, nor do I know how often it is rebalanced. It is long-only.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on April 17, 2015, 08:15:00 AM
also sirdoug some of your numbers dont line up.  on 10/1 2014 VFINX was at 177 not 184.  so i'm not sure where you data came from but its not 100% lining up

Thanks for noting I was only looking back 5 months.  I'll fix that but I can't imagine it changes the conclusions much.

I got the price data from Yahoo! finance.  I used monthly prices with adjusted close data.  On 10/1/2014 VFINX opened at 179.59 and closed at 186.40.  The adjusted close was $184.50.  The adjusted close accounts for a $0.826 dividend paid on 9/19/2014.  Here is a link.  I'm pretty sure their info is accurate: http://finance.yahoo.com/q/hp?s=VFINX&a=00&b=2&c=1980&d=03&e=17&f=2015&g=m

Here is how Yahoo! does adjusted closing prices: https://help.yahoo.com/kb/finance/historical-prices-sln2311.html
Title: Dual Momentum Investing
Post by: milesdividendmd on April 17, 2015, 09:06:49 AM
I think that one question you could ask yourself is:

"If I knew that everyone in the world was going to implement a dual momentum strategy, how could I use that information to front run the market?" 

I alluded to this above, but if everyone decided to use momentum, the result would be… More momentum.  This is in stark contrast to value, were the crowding of value causes a loss of value.

I'm having a difficult time understanding this logic.  If everyone did momentum investing the result would be more momentum, but i'm not exactly sure how that translates into a winning strategy.  It seems to me that if everyone did momentum investing, then no one would beat the market, because they collectively are the market, by definition.  You couldn't beat the market on the way up, or the way down, you would simply get market returns just like everyone else.  Unless you create a speculative bubble with run away momentum that just keeps increasing, but then whats the end game for that? Bubbles pop eventually, and not everyone can get out and minimize losses, if they could then by definition the bubble would not have popped, it would still be inflated indefinitely.

It's similar to the economist joke mentioned above, except instead of "just noticing" the $20 bill on the ground, the bill was noticed decades ago, and has had numerous papers and books written about it, and had thousands of people point it out.  It makes the joke significantly less funny, but also makes me wonder if the $20 bill is in fact real and has been sitting there for decades then why has no one picked it up?

I don't necessarily disagree with this analysis.The problem is that it ignores the context of the question being answered.

In the referenced quote I was not arguing that if everyone adopted a dual momentum strategy, Then everyone would "beat the market."

I was responding to a specific question: if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

As to the $20 allegory. The entire point of the joke is to poke fun at economists views of a perfectly efficient market and of human beings as perfectly rational players.

Momentum is a bet on the counternarrative: human irrationality.

So the punchline of the joke might be for a trend follower to come and pick up the $20 as the economists continue to discuss the quandary.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 17, 2015, 09:21:38 AM
I think that one question you could ask yourself is:

"If I knew that everyone in the world was going to implement a dual momentum strategy, how could I use that information to front run the market?" 

I alluded to this above, but if everyone decided to use momentum, the result would be… More momentum.  This is in stark contrast to value, were the crowding of value causes a loss of value.

I'm having a difficult time understanding this logic.  If everyone did momentum investing the result would be more momentum, but i'm not exactly sure how that translates into a winning strategy.  It seems to me that if everyone did momentum investing, then no one would beat the market, because they collectively are the market, by definition.  You couldn't beat the market on the way up, or the way down, you would simply get market returns just like everyone else.  Unless you create a speculative bubble with run away momentum that just keeps increasing, but then whats the end game for that? Bubbles pop eventually, and not everyone can get out and minimize losses, if they could then by definition the bubble would not have popped, it would still be inflated indefinitely.

It's similar to the economist joke mentioned above, except instead of "just noticing" the $20 bill on the ground, the bill was noticed decades ago, and has had numerous papers and books written about it, and had thousands of people point it out.  It makes the joke significantly less funny, but also makes me wonder if the $20 bill is in fact real and has been sitting there for decades then why has no one picked it up?

I don't necessarily disagree with this analysis.The problem is that it ignores the context of the question being answered.

In the referenced quote I was not arguing that if everyone adopted a dual momentum strategy, Then everyone would "beat the market."

I was responding to a specific question: if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

As to the $20 allegory. The entire point of the joke is to poke fun at economists views of a perfectly efficient market and of human beings as perfectly rational players.

Momentum is a bet on the counternarrative: human irrationality.

So the punchline of the joke might be for a trend follower to come and pick up the $20 as the economists continue to discuss the quandary.

I guess my overall point is that if this strategy really does improve returns over the market, then either position (everyone doing it, or no one doing it) is sub optimal.  It should reach an equilibrium.  That punchline is just a variation which i've heard before, but doesn't really make sense for the time frame.   It's funny in that the economist is quibbling about the EMH, while the trend follower is busy snatching up the $20, but you stretch that quibbling time frame out to several decades long and suddenly the joke no longer makes any sense.  Why would the economist still be quibbling 20 or 30 years later while he was watching trend followers continually snatch up those $20 bills during that whole time frame?  Either there is no $20 to snatch up, it's cost prohibitive to snatch it up, or the collective economist has been standing at the front of a free buffet line all this time and never bothered to take a bite.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 17, 2015, 09:59:31 AM
I was responding to a specific question: if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

I don't see how this answers the question.

The question wasn't "What if everyone did it?" (which is what you answered), it's "if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?"
Title: Re: Dual Momentum Investing
Post by: The Beacon on April 17, 2015, 10:16:21 AM
I was responding to a specific question: if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

I don't see how this answers the question.

The question wasn't "What if everyone did it?" (which is what you answered), it's "if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?"

Here are a few whys I can think of even though I am not very familiar with this approach.

1: it might have some hidden holes that MD has not discovered yet
2: It is a sound strategy that it is not easy to implement or follow

You can give 1 working indicator and show 2 investors how to use it.  After a year, you would see totally different results. The more money involved, the more divergence between the results of these 2 investors is.


One way to know after you have left no stones un-turned trying to break it is to test it with a small portfolio and scale up as your confidence swells.....



Title: Re: Dual Momentum Investing
Post by: arebelspy on April 17, 2015, 10:27:33 AM
I was responding to a specific question: if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

I don't see how this answers the question.

The question wasn't "What if everyone did it?" (which is what you answered), it's "if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?"

Here are a few whys I can think of even though I am not very familiar with this approach.

1: it might have some hidden holes that MD has not discovered yet
2: It is a sound strategy that it is not easy to implement or follow

1 is what we're worried about.  2 is not the case, they claim it is easy to implement/follow.  And the easiness isn't relevant to a fund doing it, they should be able to manage even if it's difficult.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 17, 2015, 10:47:23 AM
1 is what we're worried about.  2 is not the case, they claim it is easy to implement/follow.  And the easiness isn't relevant to a fund doing it, they should be able to manage even if it's difficult.

Ditto.

And to respond to hodedofome's explanation of the funds expenses "ridiculously high (2% management + 20% performance)"...

Why doesn't someone else create a fund and only charge 15% of performance?
Title: Dual Momentum Investing
Post by: milesdividendmd on April 17, 2015, 11:21:32 AM
I was responding to a specific question: if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

I don't see how this answers the question.

The question wasn't "What if everyone did it?" (which is what you answered), it's "if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?"

Right.

This is getting very derivative.

The question that you are asking about ETFs is what I originally answered in post # 71 .  Ie impact costs and the difficulty in marketing a fund that has one s & p fund in it for years at a time.

The quote above is a response to an out of context response to that response!
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 17, 2015, 11:26:14 AM
the difficulty in marketing a fund that has one s & p fund in it for years at a time.

They do it with target date funds, that has a few basic funds, just rebalances, and slowly shifts the allocation over the years.

Why wouldn't a dual momentum fund be similar?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 17, 2015, 11:26:21 AM
One final point. If vanguard gave up on the whole cap weighted index thing and decided to launch a dual momentum fund and it had significant capital invested in it, it would not take long for observers to figure out their Lookback period and front run the fund (ie buy the asset class a day early and sell it a day early, driving up the funds costs and diminishing their gains...
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 17, 2015, 11:30:27 AM

the difficulty in marketing a fund that has one s & p fund in it for years at a time.

They do it with target date funds, that has a few basic funds, just rebalances, and slowly shifts the allocation over the years.

Why wouldn't a dual momentum fund be similar?

Target date funds are funds of funds, and are simply passive allocations periodically rebalanced and risk adjusted. Totally different from an active fund that holds one index fund at a time and trades as often as monthly with wild swings in risk profiles from 100% long equities to 100% cash.

And target dates never hold only one index fundas their sole holding.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 17, 2015, 11:31:45 AM
One final point. If vanguard gave up on the whole cap weighted index thing and decided to launch a dual momentum fund and it had significant capital invested in it, it would not take long for observers to figure out their Lookback period and front run the fund (ie buy the asset class a day early and sell it a day early, driving up the funds costs and diminishing their gains...

So this would analogous to vanguard seeing a bunch of $20 bills on the ground, and then deciding not to pick them up because other people will notice them picking it, and will pick it up for themselves, and eventually there will be no more bills on the ground, so why bother in the first place?
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 17, 2015, 11:39:10 AM

the difficulty in marketing a fund that has one s & p fund in it for years at a time.

They do it with target date funds, that has a few basic funds, just rebalances, and slowly shifts the allocation over the years.

Why wouldn't a dual momentum fund be similar?

Target date funds are funds of funds, and are simply passive allocations periodically rebalanced and risk adjusted. Totally different from an active fund that holds one index fund at a time and trades as often as monthly with wild swings in risk profiles from 100% long equities to 100% cash.

And target dates never hold only one index fundas their sole holding.

I don't understand how that negates his points.  If it's a simple algorithm to buy a set asset allocation at a set point in time (for a target date fund), I don't understand why they couldn't just change the algorithm to buy a set asset allocation based on a rolling 6 month average.  I understand you will incur more trading costs, and have more market impact costs, but it seems that if the excess return is as great as you've stated then surely there is enough wiggle room to absorb some amount of market impact costs before it's no longer profitable. 
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 17, 2015, 11:45:00 AM

the difficulty in marketing a fund that has one s & p fund in it for years at a time.

They do it with target date funds, that has a few basic funds, just rebalances, and slowly shifts the allocation over the years.

Why wouldn't a dual momentum fund be similar?

Target date funds are funds of funds, and are simply passive allocations periodically rebalanced and risk adjusted. Totally different from an active fund that holds one index fund at a time and trades as often as monthly with wild swings in risk profiles from 100% long equities to 100% cash.

And target dates never hold only one index fundas their sole holding.

You're missing my point--it's not to nitpick on the differences between DM and TD funds, but to point out that target date funds are relatively simple.  It picks a certain AA, has just a few index funds, and then rebalances and shifts the AA gradually.

Pretty much anyone can do them.  Yet they are marketed and exist anyways, and people buy them anyways.

If your main argument for why there is no DM fund is "it'd be hard to sell something so simple," I don't buy it, because of the target date fund analogy.  They're both simple, yet the one exists and the other doesn't.  Why not?

People will pay for others to do their work, including looking at the past and investing based on that.  So why doesn't it exist?
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 17, 2015, 12:04:09 PM
Did anyone read my post? GMOM is a new fund that does dual momentum. For the past 40 years they were known as Managed Futures. There are managed futures mutual funds but they generally suck.
Title: Re: Dual Momentum Investing
Post by: Mississippi Mudstache on April 17, 2015, 12:05:20 PM
I read it, and was wondering how everyone else seemed to be overlooking it.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 17, 2015, 12:07:46 PM
Did anyone read my post? GMOM is a new fund that does dual momentum. For the past 40 years they were known as Managed Futures. There are managed futures mutual funds but they generally suck.

I did.  I can't view any of those pages without registering for an account, so I can't navigate through them, but I did have a follow up question:

And to respond to hodedofome's explanation of the funds expenses "ridiculously high (2% management + 20% performance)"...

Why doesn't someone else create a fund and only charge 15% of performance?
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 17, 2015, 12:13:36 PM
So the past 20 or so posts were because everyone is too lazy to register for a free account?

In response to the fees question, there are some funds that charge lower fees. But these are businesses we're talking about here. Some websites charge more for computer parts than Newegg but that hasn't put them out of business. Some funds perform better than others so they charge more. Some funds just like to help out their investors so they charge less. There's a floor to the fees however, because hedge funds are very expensive to run. Very high regulatory costs.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 17, 2015, 12:25:40 PM
So the past 20 or so posts were because everyone is too lazy to register for a free account?

In response to the fees question, there are some funds that charge lower fees. But these are businesses we're talking about here. Some websites charge more for computer parts than Newegg but that hasn't put them out of business. Some funds perform better than others so they charge more. Some funds just like to help out their investors so they charge less. There's a floor to the fees however, because hedge funds are very expensive to run. Very high regulatory costs.

That and it requires an email address and phone number.  I don't trust them.
Title: Re: Dual Momentum Investing
Post by: GregO on April 17, 2015, 12:34:06 PM
I've used a momentum investing strategy for the last 15 years and have had great results.  I just recently switched to a form of dual momentum strategy with half of my portfolio about a year ago and agree with milesdividend that it appears likely that it will increase returns and decrease risk by limiting the downside during bear markets.

As for the questions about why everyone isn't using it...there are thousands of investing strategies out there that people are touting.  Some of them work, some don't.  It takes work and research to investigate the strategies and see if they work that most people aren't willing to do.  And just because it hasn't become popular sure doesn't mean it can't be a successful strategy.

Just because you haven't heard of a strategy or aren't aware of mutual funds that use the strategy, that doesn't mean they don't exist or it isn't a potential winning strategy.  As with most investing strategies, if you can stay the course during the bad times then I think it is very likely this will be a profitable strategy.

Just wanted to provide a viewpoint from someone who has some more extensive experience with this, at least the momentum portion of it.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 17, 2015, 12:37:08 PM


the difficulty in marketing a fund that has one s & p fund in it for years at a time.

They do it with target date funds, that has a few basic funds, just rebalances, and slowly shifts the allocation over the years.

Why wouldn't a dual momentum fund be similar?

Target date funds are funds of funds, and are simply passive allocations periodically rebalanced and risk adjusted. Totally different from an active fund that holds one index fund at a time and trades as often as monthly with wild swings in risk profiles from 100% long equities to 100% cash.

And target dates never hold only one index fundas their sole holding.

I don't understand how that negates his points.  If it's a simple algorithm to buy a set asset allocation at a set point in time (for a target date fund), I don't understand why they couldn't just change the algorithm to buy a set asset allocation based on a rolling 6 month average.  I understand you will incur more trading costs, and have more market impact costs, but it seems that if the excess return is as great as you've stated then surely there is enough wiggle room to absorb some amount of market impact costs before it's no longer profitable.

No matter their lookback period, with a large enough fund it would be easily figured out with SEC filings alone. Their outperformance would be arbitraged away.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 17, 2015, 12:37:59 PM

I've used a momentum investing strategy for the last 15 years and have had great results.  I just recently switched to a form of dual momentum strategy with half of my portfolio about a year ago and agree with milesdividend that it appears likely that it will increase returns and decrease risk by limiting the downside during bear markets.

As for the questions about why everyone isn't using it...there are thousands of investing strategies out there that people are touting.  Some of them work, some don't.  It takes work and research to investigate the strategies and see if they work that most people aren't willing to do.  And just because it hasn't become popular sure doesn't mean it can't be a successful strategy.

Just because you haven't heard of a strategy or aren't aware of mutual funds that use the strategy, that doesn't mean they don't exist or it isn't a potential winning strategy.  As with most investing strategies, if you can stay the course during the bad times then I think it is very likely this will be a profitable strategy.

Just wanted to provide a viewpoint from someone who has some more extensive experience with this, at least the momentum portion of it.

Well stated.
Title: Dual Momentum Investing
Post by: milesdividendmd on April 17, 2015, 06:17:20 PM

the difficulty in marketing a fund that has one s & p fund in it for years at a time.

They do it with target date funds, that has a few basic funds, just rebalances, and slowly shifts the allocation over the years.

Why wouldn't a dual momentum fund be similar?

Target date funds are funds of funds, and are simply passive allocations periodically rebalanced and risk adjusted. Totally different from an active fund that holds one index fund at a time and trades as often as monthly with wild swings in risk profiles from 100% long equities to 100% cash.

And target dates never hold only one index fundas their sole holding.

You're missing my point--it's not to nitpick on the differences between DM and TD funds, but to point out that target date funds are relatively simple.  It picks a certain AA, has just a few index funds, and then rebalances and shifts the AA gradually.

Pretty much anyone can do them.  Yet they are marketed and exist anyways, and people buy them anyways.

If your main argument for why there is no DM fund is "it'd be hard to sell something so simple," I don't buy it, because of the target date fund analogy.  They're both simple, yet the one exists and the other doesn't.  Why not?

People will pay for others to do their work, including looking at the past and investing based on that.  So why doesn't it exist?

As hodedofome points out above there are (new) funds that utilize dual momentum methodology and managed futures funds have been around for a long time. But these are not really close to the simple global equities momentum that I use.

This marketing question was far from my main point, it was a small point.  But I just find it very hard to imagine trying to sell people on an active fund that at any one time will contain nothing more then a single S&P 500 fund, or an EAFE fund or a total bond fund.

Vanguard is selling convenience (in addition to their underlying funds) with TD funds. But selling an active fund is selling something else entirely which is the perception of outperformance. Equating one to the other is a conceptual error in my view.

The bigger hurdles however, are the fact that if you ran such a fund Then changing your position for 100% of your multi-hundred million dollar portfolio 1 to 2 times per year would have major impact costs and inflate the expense ratio far more than rebalancing a cap weighted 3fund portfolio  , and the problem of frontrunning as described above.
Title: Re: Dual Momentum Investing
Post by: Zamboni on April 17, 2015, 07:34:03 PM
Reading Antonacci's book from library now.

Following thread to go back and look at some of the links.  Thanks, everyone.
Title: Re: Dual Momentum Investing
Post by: mtnrider on April 17, 2015, 08:33:35 PM

I just read up a little about it now.  Color me suspicious, especially since it's partially sold by the backtesting.  Of course it backtests well!  It grew out of the backtests themselves, if it didn't fit them, he would have changed the algorithm.  This seems like survivorship bias to me.  (That doesn't mean it won't continue to work for a while longer, of course.)

I also can't find anything about a monte carlo simulation, which would be much better than backtesting.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 17, 2015, 08:38:11 PM


I just read up a little about it now.  Color me suspicious, especially since it's partially sold by the backtesting.  Of course it backtests well!  It grew out of the backtests themselves, if it didn't fit them, he would have changed the algorithm.  This seems like survivorship bias to me.  (That doesn't mean it won't continue to work for a while longer, of course.)

I also can't find anything about a monte carlo simulation, which would be much better than backtesting.

Please justify your use of the term survivorship bias.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 17, 2015, 08:40:05 PM

I just read up a little about it now.  Color me suspicious, especially since it's partially sold by the backtesting.  Of course it backtests well!  It grew out of the backtests themselves, if it didn't fit them, he would have changed the algorithm.  This seems like survivorship bias to me.  (That doesn't mean it won't continue to work for a while longer, of course.)

I also can't find anything about a monte carlo simulation, which would be much better than backtesting.

How could you perform a monte carlo? Don't you lose the whole momentum thing (which is critical to the strategy) by randomizing it like that?
Title: Re: Dual Momentum Investing
Post by: waltworks on April 17, 2015, 10:29:07 PM
The problem, really, is that there are an infinite number of possible algorithms that could be used to try to implement any sort of strategy you want. You could take the stock market results, or you could take just a big batch of random numbers, and a BUNCH of those "strategies" would look great in backtesting.

It really comes down to whether or not you believe the stock market to be a random (though upwards in general) walk or not. Whether there are irrational people and panics or not, or whether the market is efficient isn't relevant, since you can't predict when these events will happen or how long they will last - unless of course you think that in fact they are in some way predictable (either their timing, duration, whatever).

There is really no middle ground here, so there's probably no reason to bother arguing about it. Psychology tells us that we have an inherent bias toward seeing patterns where there are none, and extra trading = extra costs and taxes. So you need to believe *really* strongly in what you're doing to do what Miles is doing. If so, more power to you. I hope you do great.

-W

Title: Dual Momentum Investing
Post by: milesdividendmd on April 17, 2015, 11:40:17 PM
The problem, really, is that there are an infinite number of possible algorithms that could be used to try to implement any sort of strategy you want. You could take the stock market results, or you could take just a big batch of random numbers, and a BUNCH of those "strategies" would look great in backtesting.

It really comes down to whether or not you believe the stock market to be a random (though upwards in general) walk or not. Whether there are irrational people and panics or not, or whether the market is efficient isn't relevant, since you can't predict when these events will happen or how long they will last - unless of course you think that in fact they are in some way predictable (either their timing, duration, whatever).

There is really no middle ground here, so there's probably no reason to bother arguing about it. Psychology tells us that we have an inherent bias toward seeing patterns where there are none, and extra trading = extra costs and taxes. So you need to believe *really* strongly in what you're doing to do what Miles is doing. If so, more power to you. I hope you do great.

-W

There is a lot of truth in this.

Every approach (even indexing) is merely a bet on the future based on past results.

That being said all theories are not created equal. And there are ways of testing hypotheses that help to screen out curve fitting (out of sample testing, etc).

At the end of the day one chooses the approach that he believes gives him the best chance of sticking to the plan through thick and thin.

Here then are my core beliefs which may or may not be true, that have informed my personal decision to adopt this strategy.

1.  Costs matter a lot.
2.  It is possible to decrease drawdowns with trend following (ie. Moving averages, or absolute momentum,) with rare exceptions (ie flash crashes).
3.  Trading should be infrequent because it is expensive.
4.  Price Momentum exists and will continue to exist as long as humans are involved in markets.
5.  Investment Theories should always be simple.
6.  Avoiding the loss of capital is much more powerful than increasing returns on capital.
( http://www.milesdividendmd.com/on-the-wisdom-of-cowardice/)

There is a lot to argue with in there, and the arguments may even be interesting!
Title: Re: Dual Momentum Investing
Post by: waltworks on April 18, 2015, 12:26:42 AM
Yep, either you believe there's an underlying pattern, or you don't. You do. I don't, other than a general belief that the past general positive trend will continue in the long term.

I also will echo Arebelspy here - if this strategy were usable, it would be widely used. Very widely used, presumably particularly by hedge funds, whose originally raison d'etre was to mitigate losses during downturns (a task, I might note, that all the literature says they have abjectly failed at). Anything implementable by an individual investor now has arguably been implementable for 100+ years, and these days legions of *brilliant* people with more processing power than I can imagine work on these things. There's no one weird trick out there.

Except acai berries. Those things are amazing.

-W
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 18, 2015, 12:57:09 AM
There are thousands of things that we as individuals don't believe in and a only a few that we do.

What is more interesting than saying what you don't believe in generally,  I believe, is saying what you do or don't believe in specifically.

From your comment I can only surmise that you don't believe in the possibility of a simple active strategy working, despite the fact that some demonstrably have in the past and in a non random manner.

It is curious that momentum, described in its modern form in 1993 has persisted unabated in in and out of sample markets since.
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on April 18, 2015, 07:44:52 AM
In the literature I read, it seems that a 12 month lookback period supposedly give better results than a six month period. Miles, how did you settle on 6 months?

The optimal time period for a Lookback  is an unresolved  question.

What is clear is that the longer The Lookback period, the less trades you will make (Which is a very good thing.)

What is also clear is that with dual momentum you will exit risky assets when they have underperformed T-bills for your Lookback period.  this means that A longer Lookback period will mean that you will stay in the bear market a little bit longer, and get back into the recovery in little bit later.

From a behavioral standpoint, I felt that limiting drawdowns was attractive for me personally.

The look back should be between three and 12 months,  or a combination of multiple time periods in that range.

The lookback period is the heart of the model; it is the main variable that is used to optimize performance.  Too long, you get creamed; too short, you get whipsawed.  It is also the variable that is most vulnerable to over-fitting (i.e., constructing a model that predicts the past instead of the future).  Many posts have already alluded to the number one rule of modeling anything: construct your model using one set of data and validate it using another set of data.  So, the logical thing to do would be to divide the historical market data into two sets.  Use, say, 1900 - 1960 to optimize the lookback period, then use 1961 - present to test the model's performance.  Surely Antonacci (or someone) has already done this?  I'm too lazy to read all the background material - I'm hoping one of you already has and can enlighten me.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 18, 2015, 08:34:07 AM
This has been looked at extensively by Antonacci, CXO advisory, gestaltU, to name a few.  Read up!
Title: Re: Dual Momentum Investing
Post by: FIPurpose on April 18, 2015, 09:50:10 AM
Here is a paper that I found extremely enlightening.

http://dorseywrightmm.com/downloads/hrs_research/SSRN-id1585517.pdf (http://dorseywrightmm.com/downloads/hrs_research/SSRN-id1585517.pdf)

Runs a number of comparisons back to 1928 comparing different lookback periods and number of assets held at any one time.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 18, 2015, 12:28:58 PM

The lookback period is the heart of the model; it is the main variable that is used to optimize performance.  Too long, you get creamed; too short, you get whipsawed.  It is also the variable that is most vulnerable to over-fitting (i.e., constructing a model that predicts the past instead of the future).  Many posts have already alluded to the number one rule of modeling anything: construct your model using one set of data and validate it using another set of data.  So, the logical thing to do would be to divide the historical market data into two sets.  Use, say, 1900 - 1960 to optimize the lookback period, then use 1961 - present to test the model's performance.  Surely Antonacci (or someone) has already done this?  I'm too lazy to read all the background material - I'm hoping one of you already has and can enlighten me.
The look back period is much less important than the choice of asset classes. Asset choice is by far the most important.
Title: Re: Dual Momentum Investing
Post by: mtnrider on April 19, 2015, 11:30:46 AM

I just read up a little about it now.  Color me suspicious, especially since it's partially sold by the backtesting.  Of course it backtests well!  It grew out of the backtests themselves, if it didn't fit them, he would have changed the algorithm.  This seems like survivorship bias to me.  (That doesn't mean it won't continue to work for a while longer, of course.)

I also can't find anything about a monte carlo simulation, which would be much better than backtesting.

How could you perform a monte carlo? Don't you lose the whole momentum thing (which is critical to the strategy) by randomizing it like that?

That's the point.  It's really impossible to predict the future, but these backtests rely on something the authors saw by looking at the data in hindsight.  It's actually not hard to find patterns in the past.  You can mine PI for patterns.  You can read "The Bible Code" for people who've found patterns in the bible.  Etc...

To be clear though, momentum itself is a real thing.  It's small and unpredictable, but real.  The question is - can you really play it to your advantage.  There's tons of other strategies you can follow (eg Dogs of the Dow).  They all look good in backtesting, then they fail.  Then someone tweaks the backtests, they look good again, repeat.  I suspect this falls in that bucket.

Now... I will be impressed if they can keep their algorithm set in stone and report in 10 years that they made a better return than VTI.

That said - it's not a horrible strategy - you're not trading naked options or something where you can blow up.  Worst case, you backtested to a fund that drops in half in a month, or are invested in treasuries during a bull run.  (This is essentially a market timing strategy - and Bogle has laid out the pitfalls of that.)


As a big proviso: I haven't read the book.  I've only read blog posts like this (http://www.milesdividendmd.com/two-faced-investing/).  Maybe if I read it, I'd be a convert.  :)
Title: Re: Dual Momentum Investing
Post by: mtnrider on April 19, 2015, 11:53:05 AM


I just read up a little about it now.  Color me suspicious, especially since it's partially sold by the backtesting.  Of course it backtests well!  It grew out of the backtests themselves, if it didn't fit them, he would have changed the algorithm.  This seems like survivorship bias to me.  (That doesn't mean it won't continue to work for a while longer, of course.)

I also can't find anything about a monte carlo simulation, which would be much better than backtesting.

Please justify your use of the term survivorship bias.



More specifically, see the entry on data mining bias here:

http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/sampling-bias.asp

Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on April 19, 2015, 12:20:45 PM


I just read up a little about it now.  Color me suspicious, especially since it's partially sold by the backtesting.  Of course it backtests well!  It grew out of the backtests themselves, if it didn't fit them, he would have changed the algorithm.  This seems like survivorship bias to me.  (That doesn't mean it won't continue to work for a while longer, of course.)

I also can't find anything about a monte carlo simulation, which would be much better than backtesting.

Please justify your use of the term survivorship bias.



More specifically, see the entry on data mining bias here:

http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/sampling-bias.asp

Is there an appreciable difference between the historical data used to support momentum and that used to support long term buy and hold?

With momentum, I don't see any overly complex "algorithm" being fitted to cherry picked backtests. The strategy consists entirely of concentrating into recently outperforming global asset classes. There's no guarantee such a ploy will generate results in the future, but betting on buy and hold ("stocks will generally do better than bonds in the long term") seems no less uncertain.
Title: Dual Momentum Investing
Post by: milesdividendmd on April 19, 2015, 12:28:06 PM


I just read up a little about it now.  Color me suspicious, especially since it's partially sold by the backtesting.  Of course it backtests well!  It grew out of the backtests themselves, if it didn't fit them, he would have changed the algorithm.  This seems like survivorship bias to me.  (That doesn't mean it won't continue to work for a while longer, of course.)

I also can't find anything about a monte carlo simulation, which would be much better than backtesting.

Please justify your use of the term survivorship bias.



More specifically, see the entry on data mining bias here:

http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/sampling-bias.asp

Oh so you were confusing survivorship bias with data mining.

One is relevant to the discussion and one is not, hence the confusion.
Title: Re: Dual Momentum Investing
Post by: GGNoob on April 19, 2015, 06:07:54 PM
First time reading this thread and looking into Dual Momentum Investing. It's very intriguing. I have a few questions that pertain mainly to milesdividendmd and anyone else who is currently doing this. I would do a lot more reading before implementing something like this. But it could be fun to test out with my 457 and 401k since they both have the same funds available through the same company. One could be a 3-Fund account (100% stock), the other DMI.

1. How did you choose your loopback period?

From what I've read, 6 months sounds about right. I'd hate to be in a bear market too long and not get back into the bull soon enough if I chose 12 months, and 3 months seems like too little data to go with.

2. How did you choose your asset classes?

With my 457 and 401k, it would be easy as I'd probably just go with 4 funds...Capital Preservation/Fixed Income, US Large-Cap, US Mid/Small-Cap, International.

But in my IRA, I also invest in US REITs, Emerging Markets, and International Small-Cap. I'd be tempted to include those in the mix.

 

Title: Dual Momentum Investing
Post by: milesdividendmd on April 19, 2015, 07:11:56 PM
Due to the limitations of my 403B I toggle between an S&p fund VIIIX, an foreign developed fund, FSPNX, and a short term treasury fund.

This is almost identical to Antonacci's GEM, with short term treasuries in place of total bond.

If I had a low cost EM  fund I would include that too.

I chose 6 months for behavioral reasons, Ie not wanting to get out of a bear too slowly. The downside is more trades.

In my last blog posts I posit that it might be optimal to diversify Lookback periods. I.e. 1/3 of the portfolio to three months Lookback, 1/3 on 6 month, 1/3 12 month to mimimize the risk of period specific whipsaws.

The downside would be more trading and more complexity.
Title: Re: Dual Momentum Investing
Post by: mtnrider on April 19, 2015, 08:46:57 PM


I just read up a little about it now.  Color me suspicious, especially since it's partially sold by the backtesting.  Of course it backtests well!  It grew out of the backtests themselves, if it didn't fit them, he would have changed the algorithm.  This seems like survivorship bias to me.  (That doesn't mean it won't continue to work for a while longer, of course.)

I also can't find anything about a monte carlo simulation, which would be much better than backtesting.

Please justify your use of the term survivorship bias.



More specifically, see the entry on data mining bias here:

http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/sampling-bias.asp

Oh so you were confusing survivorship bias with data mining.

One is relevant to the discussion and one is not, hence the confusion.

Yeah.  My bad.  I tend to lump data mining bias in as a subset of survivorship bias (because one throws away all the strategies that fail), but I can see how not everyone would see it that way.

Title: Re: Dual Momentum Investing
Post by: GGNoob on April 19, 2015, 08:57:56 PM
Due to the limitations of my 403B I toggle between an S&p fund VIIIX, an foreign developed fund, FSPNX, and a short term treasury fund.

This is almost identical to Antonacci's GEM, with short term treasuries in place of total bond.

If I had a low cost EM  fund I would include that too.

I chose 6 months for behavioral reasons, Ie not wanting to get out of a bear too slowly. The downside is more trades.

In my last blog posts I posit that it might be optimal to diversify Lookback periods. I.e. 1/3 of the portfolio to three months Lookback, 1/3 on 6 month, 1/3 12 month to mimimize the risk of period specific whipsaws.

The downside would be more trading and more complexity.

Interesting blog post. Using my Roth IRA and my 401k as an example...my 401k would be split between 2 funds (2/3 US Small/Mid Cap and 1/3 US Large Cap). My Roth IRA on the other hand would be split between 3 funds (1/3 International Small-Cap, 1/3 Extended Market, and 1/3 US REIT). Using an approach like that would make me feel safer since I'd be invested in more than 1 fund and I would think it could reduce volatility a bit.
Title: Re: Dual Momentum Investing
Post by: Leisured on April 20, 2015, 05:38:03 AM
Dual Momentum Investing is an extraordinary method, but a Dual Momentum ETF is impractical. As has been pointed out, a DM ETF will hold just one or two ETFs, and when the time comes to sell the ETF, the entire holding has to be sold. This might be, say, $100 million over the space of a few days, thus flooding the market and forcing down the price. When the DM ETF buys one or two bond funds, it floods the market with buy orders, so forcing up the price.

I commend milesdividendmd and sirdoug for their links.
Title: Dual Momentum Investing
Post by: milesdividendmd on April 20, 2015, 08:30:15 AM
Due to the limitations of my 403B I toggle between an S&p fund VIIIX, an foreign developed fund, FSPNX, and a short term treasury fund.

This is almost identical to Antonacci's GEM, with short term treasuries in place of total bond.

If I had a low cost EM  fund I would include that too.

I chose 6 months for behavioral reasons, Ie not wanting to get out of a bear too slowly. The downside is more trades.

In my last blog posts I posit that it might be optimal to diversify Lookback periods. I.e. 1/3 of the portfolio to three months Lookback, 1/3 on 6 month, 1/3 12 month to mimimize the risk of period specific whipsaws.

The downside would be more trading and more complexity.

Interesting blog post. Using my Roth IRA and my 401k as an example...my 401k would be split between 2 funds (2/3 US Small/Mid Cap and 1/3 US Large Cap). My Roth IRA on the other hand would be split between 3 funds (1/3 International Small-Cap, 1/3 Extended Market, and 1/3 US REIT). Using an approach like that would make me feel safer since I'd be invested in more than 1 fund and I would think it could reduce volatility a bit.

You seem to be describing more of an absolute momentum strategy. Also an excellent strategy. For it to be dual momentum you must toggle between two imperfectly correlated assets with cash as your backstop.

Here is an excellent paper on absolute momentum to help you with your implementation.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2244633
Title: Re: Dual Momentum Investing
Post by: GGNoob on April 20, 2015, 08:54:31 AM

Due to the limitations of my 403B I toggle between an S&p fund VIIIX, an foreign developed fund, FSPNX, and a short term treasury fund.

This is almost identical to Antonacci's GEM, with short term treasuries in place of total bond.

If I had a low cost EM  fund I would include that too.

I chose 6 months for behavioral reasons, Ie not wanting to get out of a bear too slowly. The downside is more trades.

In my last blog posts I posit that it might be optimal to diversify Lookback periods. I.e. 1/3 of the portfolio to three months Lookback, 1/3 on 6 month, 1/3 12 month to mimimize the risk of period specific whipsaws.

The downside would be more trading and more complexity.

Interesting blog post. Using my Roth IRA and my 401k as an example...my 401k would be split between 2 funds (2/3 US Small/Mid Cap and 1/3 US Large Cap). My Roth IRA on the other hand would be split between 3 funds (1/3 International Small-Cap, 1/3 Extended Market, and 1/3 US REIT). Using an approach like that would make me feel safer since I'd be invested in more than 1 fund and I would think it could reduce volatility a bit.

You seem to be describing more of an absolute momentum strategy. Also an excellent strategy. For it to be dual momentum you must toggle between two uncorrelated assets with cash as your backstop.

Here is an excellent paper on absolute momentum to help you with your implementation.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2244633

Still too new to this idea so I didn't know exactly how it worked! I actually bought the book and will begin reading it tonight. Been playing around with backtesting on PortfolioVisualizer.com and there's some pretty impressive results. Since I wasn't sure how it worked, I did some tests with lots of funds and some with just US stock, International Stock, and Total Bond. The simple ones seemed to give better results.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 20, 2015, 01:21:53 PM
Dual Momentum Investing is an extraordinary method, but a Dual Momentum ETF is impractical. As has been pointed out, a DM ETF will hold just one or two ETFs, and when the time comes to sell the ETF, the entire holding has to be sold. This might be, say, $100 million over the space of a few days, thus flooding the market and forcing down the price. When the DM ETF buys one or two bond funds, it floods the market with buy orders, so forcing up the price.

I commend milesdividendmd and sirdoug for their links.

This is why the very large managed futures funds (like Winton Capital and others with billions under management) are pretty much stuck with trading interest rates and currencies. They are literally the only markets that are liquid enough for them to get in and out of their positions within a few days.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 20, 2015, 02:16:26 PM
Just throwing up some momentum research here:

http://www.dualmomentum.net/2013/09/momentum-back-testing.html
http://www.aqrindex.com/AQR_Momentum_Indices/Momentum_Research/Content/default.fs
http://www.dualmomentum.net/2011/03/history-of-momentum-research.html
http://www.dualmomentum.net/2011/05/efficient-marketsnot.html
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435323
https://www.aqr.com/~/media/files/papers/aqr-a-century-of-trend-following-investing.pdf
https://drive.google.com/file/d/0BzyyTlvGE-T2TFdZSG1rVmZYLVE/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2R2pjMWhSbjVSSGc/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2RWNINEpzc25Ma1U/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2MURxZGtqNnYxMDA/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2RG5zYkstZURrdDA/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2c1ZFQllrMl92eFU/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2eVFVZEF2ZHdkNlE/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2QW1jM2M1ejdLSkU/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2MHlLbS1tbzNVVDA/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2S19LSVF5UlUtS0k/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2eEswVmdGcjE2Q28/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2UXV6Q3ZrYlkzYjg/view?usp=sharing


As for the comments about the lookback periods, the previous momentum research going back 80 years has consistently looked at previous returns for the past 6-12 months. Those lookback periods still work today so that's a pretty decent amount of out of sample evidence. Find me another strategy with that much out of sample evidence.
Title: Re: Dual Momentum Investing
Post by: smilla on April 20, 2015, 03:33:22 PM
This is very interesting and I plan to try it in one very small (<5% of portfolio) account of mine.  I do have a question though.  It seems to me that choosing the top performer over a specified period shows which asset had relative momentum to that point, not which asset is currently enjoying momentum

Wouldn't a more accurate but still simple assessment be achieved by looking at the 12 mo, 6 mo & 3 month performance and choosing the investment that is increasing momentum at the greatest rate across the periods (or at least losing momentum the slowest)?   

I.e.     (periods ending Mar 31/15)
Stock symbol    12 mo    6 mo    3 mo
VUN  (US)         28.27    20.92    10.9
XEF  (dev)         16.31    18.24    14.53
XEC  (em)         14.85    10.56    11.79

At a glance this suggests that the US market is actually slowing down and that foreign markets have the momentum.  Even if you delete the 3 month column to lower risk and reduce trading, it seems reasonable to think that the comparison between 12 month and 6 month rates of growth would be a better way to capitalize on relative momentum than simply choosing the top 6 month performer.

Since it isn't done that way I expect I am missing something.  What makes this wrong or dangerous? 

(These are Canadian stock symbols but they are basically broad index ETFs for each market.)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 20, 2015, 04:59:35 PM
The question you're asking  is what's more predictive, the absolute return over the look back period or the acceleration of the price (dp/dt)? 

Your basis for this question seems to be gestalt feeling that  price acceleration jibes with your idea of "momentum" linguistically.

I don't know the answer to that question specifically, but I do know that simple price momentum (ie total returns over the Lookback period) is very predictive of future short term returns and it is simple to implement.

A literature search or your own backtest may answer your question better.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on April 21, 2015, 10:03:38 AM
I've been doing more and more reading and some more backtesting, including with the funds I have access to in my 401(k).

I was actually relieved to discover some Dual Momentum under-performance.  Otherwise this thing would be a free lunch and my econ professor drilled into me there ain't no such thing!

DM is really a medium to long term investing approach.  The key is that absolute momentum will occasionally pull you out of equities on loss of momentum just at the time equities push to new highs.  However, where DM really shines is over time periods that include a major drawdown which we really haven't had since 2009, summer 2011 wasn't bad and quickly bounced back.

This spreadsheet uses the mutual funds available to me in my T. Rowe Price 401(k) but you can pull your own data from the historical data on yahoo finance.

I compared the performance of DM starting in January of each year with the performance of a 100% S&P500 fund (close to what I am invested in now).  The results show significant outperformance for periods starting in 2005-2008.  However, after the great recession DM has underperformed the S&P500 (like pretty much everything else out there).  Note the outperformance of the longer periods in in the +70% to +140% range while underperformance is in the -0 to -32% range (i.e., a bit lopsided with advantage to long term outperformance).  You'll see the same thing in my earlier spreadsheet in the 1995-1999 period.

My conclusion is that DM can under-perform in bull markets as it moves between funds and occasionally jumps into bonds on small hiccups.  However, over long periods that include a bear market, DM does very, very well.

This makes some sense intuitively if you think of equities markets as cyclical with significant up and significant down periods.  I think the cyclical nature of equities markets has been pretty well established.  If you are in a bull/up market, the relative momentum may help a small amount but you can also underperform, especially when the S&P500 is the best performing equity asset sector.  It's when the bears come out of the woods that the absolute momentum part of DM saves your ass.  This is why you see great performance over 10+ years but so-so performance over 0-5 year periods.

Title: Re: Dual Momentum Investing
Post by: sirdoug007 on April 21, 2015, 10:38:13 AM
Here is the same analysis with the other spreadsheet that goes back to 1995.

The results since 2009 are barely perceptible while years that have endured the 2000s bust and 2008 recession have done incredibly well compared to the S&P500.  I had to double check but yes that is 26x the performance of the S&P500 since 1995.  However, since 2009 it's been less than 50% and only 2% over the last year.

This may be why Wall Street has not embraced this.  It doesn't really work on the time-frames they live in.  Monthy, quarterly and yearly it's not impressive.  Over 20 years with some big equity draw-downs it can really do some awesome stuff.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 21, 2015, 02:01:15 PM

I've been doing more and more reading and some more backtesting, including with the funds I have access to in my 401(k).

I was actually relieved to discover some Dual Momentum under-performance.  Otherwise this thing would be a free lunch and my econ professor drilled into me there ain't no such thing!

DM is really a medium to long term investing approach.  The key is that absolute momentum will occasionally pull you out of equities on loss of momentum just at the time equities push to new highs.  However, where DM really shines is over time periods that include a major drawdown which we really haven't had since 2009, summer 2011 wasn't bad and quickly bounced back.

This spreadsheet uses the mutual funds available to me in my T. Rowe Price 401(k) but you can pull your own data from the historical data on yahoo finance.

I compared the performance of DM starting in January of each year with the performance of a 100% S&P500 fund (close to what I am invested in now).  The results show significant outperformance for periods starting in 2005-2008.  However, after the great recession DM has underperformed the S&P500 (like pretty much everything else out there).  Note the outperformance of the longer periods in in the +70% to +140% range while underperformance is in the -0 to -32% range (i.e., a bit lopsided with advantage to long term outperformance).  You'll see the same thing in my earlier spreadsheet in the 1995-1999 period.

My conclusion is that DM can under-perform in bull markets as it moves between funds and occasionally jumps into bonds on small hiccups.  However, over long periods that include a bear market, DM does very, very well.

This makes some sense intuitively if you think of equities markets as cyclical with significant up and significant down periods.  I think the cyclical nature of equities markets has been pretty well established.  If you are in a bull/up market, the relative momentum may help a small amount but you can also underperform, especially when the S&P500 is the best performing equity asset sector.  It's when the bears come out of the woods that the absolute momentum part of DM saves your ass.  This is why you see great performance over 10+ years but so-so performance over 0-5 year periods.

I completely agree with your analysis.

The power of Dual momentum lies mostly in absolute momentum which allows you to limit drawdowns in all market conditions except for flash crashes. 

One point to make about dual momentum however, is that its ability to limit drawdowns allows you to take on more risk.

So comparing to a 100% S&P 500 fund might not be the best comparison on a personal level.

The ability to limit drawdowns allows you to up the risk of your holdings during bull markets.

As an example, prior to switching over my retirement accounts I was in a 75/25, stock bond passive global portfolio. I am nowholding 100% S&P 500.

Under most (almost all) market scenarios my drawdowns should be far less in bull markets then with my prior 75/25 portfolio, and there are no 10 year periods were dual momentum has not outperformed such a portfolio.

This ability to take on more risk significantly increases upside, without increasing downside. The one exception to this observation would be a flash crash such as what occurred on Black Monday 1987.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 21, 2015, 02:32:09 PM
I am still trying to wrap my head around this.  I understand how and why indexing works.  It's not a free lunch, you just cut out all the useless middlemen that add no value, and get average market returns.  Sprinkle in a dash of compounding interest, and bake for 10-15 years, and retire.

Maybe my perception of the market is wrong, but I see it as a positive sum game, where the positive sum is the total market capitalization.  For example is the total market is $1M, and then in the future it is $2M, then $1M in real (at least on paper) wealth has been created, but no more.  So buy and hold index investors would have realized average growth during that period, dual momentum investors would have realized above average growth, and because of the math some other group of rubes has achieved below average market returns for that period. 

So who is consistently making below average market returns? My first thought is that it is the unsophisticated investor that doesn't know anything.  They just toss money at whatever is hot, and panic and sell when it's not hot, they end up buying high and selling low.  They help amplify the momentum that dual momentum investors hope to capitalize on, but because they are unsophisticated they don't know when to get out and end up bearing the brunt of the losses when the tides change.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 21, 2015, 02:53:12 PM
Not hard to find losers in the stock market.  The answer to your question is: almost everyone including indexers.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 21, 2015, 03:01:14 PM
Not hard to find losers in the stock market.  The answer to your question is: almost everyone including indexers.

But to answer your question in a more genuine manner,  the power of trend following approaches is really limiting drawdowns.  Trendfollowing approaches generally provide reliable signals as to when to get the hell out of dodge, and when to get back in.

Dual momentum is just one such trendfollowing approach (thanks to absolute momentum) , with a little juice added to the upside courtesy of relative momentum.

And in my way of seeing the market, not losing is the name of the game and is far more powerful than outperforming to the upside.  I wrote a whole "cowards" investing series based on that premise, and dual momentum was merely the last chapter.

The first installment was here:

http://www.milesdividendmd.com/on-the-wisdom-of-cowardice/

Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 21, 2015, 03:03:42 PM
Not hard to find losers in the stock market.  The answer to your question is: almost everyone including indexers.

I'm not really satisfied with that answer.  Of course there are losers/winners depending on which sector you went into.  Also i'm sure part of that can be explained by fees (which I already addressed).  Pay someone 2% to invest in index funds for you, and it should be no surprise that you consistently under perform the market by 2% each year. 
Title: Re: Dual Momentum Investing
Post by: Chuck on April 21, 2015, 03:24:41 PM
I have been reading furiously about this for hours now. It appears to work. It appears to work in multiple time frames.

I just can't shake this question: Why isn't everyone doing this? Why is such a simple method not in widespread application? Indexing has an entire religion devoted to it for fucks sake, why doesn't this? I can't shake the feeling that all I'm looking at is the best, most delicious bait... on a nasty hook.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on April 21, 2015, 03:56:48 PM
Maybe my perception of the market is wrong, but I see it as a positive sum game, where the positive sum is the total market capitalization.  For example is the total market is $1M, and then in the future it is $2M, then $1M in real (at least on paper) wealth has been created, but no more.  So buy and hold index investors would have realized average growth during that period, dual momentum investors would have realized above average growth, and because of the math some other group of rubes has achieved below average market returns for that period. 

For each transaction there is a buyer and a seller.  So if you are correctly timing the market, you are selling high to someone who may get crushed in the near future and then buying low from someone who may have just been crushed and is missing out on the subsequent gains.  Because of the emotions involved with money and investing people do this all the time.  Implementing DM may be stomach churning in real life because it doesn't feel good to go against the good times and then buy back in when it seems like the world is falling apart.

DM is a rule based approach that takes the emotions of buying and selling out of it and gives a clear signal when the ride to the top of the roller coaster is over and it's time to get off.

I'm just as amazed by everyone else at how well this backtests.  I even did a backtest with Robert Shiller's S&P500 dataset back to 1871 with getting out to cash to test absolute momentum and it does amazingly well.

This only works because of human's herding tendencies which result in the cyclical nature of markets.  It seems to only be useful over 10+ year timeframes which may be why traders haven't adopted it and it isn't more well known.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 21, 2015, 04:45:27 PM
Maybe my perception of the market is wrong, but I see it as a positive sum game, where the positive sum is the total market capitalization.  For example is the total market is $1M, and then in the future it is $2M, then $1M in real (at least on paper) wealth has been created, but no more.  So buy and hold index investors would have realized average growth during that period, dual momentum investors would have realized above average growth, and because of the math some other group of rubes has achieved below average market returns for that period. 

For each transaction there is a buyer and a seller.  So if you are correctly timing the market, you are selling high to someone who may get crushed in the near future and then buying low from someone who may have just been crushed and is missing out on the subsequent gains.  Because of the emotions involved with money and investing people do this all the time.  Implementing DM may be stomach churning in real life because it doesn't feel good to go against the good times and then buy back in when it seems like the world is falling apart.

DM is a rule based approach that takes the emotions of buying and selling out of it and gives a clear signal when the ride to the top of the roller coaster is over and it's time to get off.

I'm just as amazed by everyone else at how well this backtests.  I even did a backtest with Robert Shiller's S&P500 dataset back to 1871 with getting out to cash to test absolute momentum and it does amazingly well.

This only works because of human's herding tendencies which result in the cyclical nature of markets.  It seems to only be useful over 10+ year timeframes which may be why traders haven't adopted it and it isn't more well known.

Actually, In practice I think that Dual momentum is behaviorally much easier than buy and hold since it merely asks me to follow my own base instincts and chase performance.  No need to buy recent losers or sell recent winners as in rebalancing a buy and hold.

I buy assets that are doing well, and sell ones that are doing less well.  I will re-enter the market after the recovery has started and exit when the sh*t is hitting the fan.  (But I haven't employed this technique through a bear market yet, of course.)

The main discomfort is in tracking error and the increased volatility that comes with holding only one asset at a time as opposed to holding a diversified portfolio (which smoothes the ride considerably.)
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 21, 2015, 06:36:54 PM
I have been reading furiously about this for hours now. It appears to work. It appears to work in multiple time frames.

I just can't shake this question: Why isn't everyone doing this? Why is such a simple method not in widespread application? Indexing has an entire religion devoted to it for fucks sake, why doesn't this? I can't shake the feeling that all I'm looking at is the best, most delicious bait... on a nasty hook.

Yeah pretty much what i've been thinking. But to add to that, if it's such a simple method and it's so easy to tell when the roller coaster ride is over...why does every book i've read state emphatically that market timing is impossible?  It seems it's ridiculously easy using this method.  Why has every author dismissed this approach that has been known about since before I was even born?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 21, 2015, 06:42:33 PM
Dual Momentum was only recently described.  You may be confusing it with relative price momentum which was first described in academia in the 80s.

You could make a similar argument about using the 200 day moving average approach, which has also outperformed since first described.

Trend following works at decreasing drawdowns.  It empirically does.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 21, 2015, 07:04:02 PM
Dual Momentum was only recently described.

How do we know it will continue to work?

Trend following works at decreasing drawdowns.  It empirically does.

A posteriori, apparently.  But a priori?

My question is: it has worked.  Apparently it's new though.  Logically, what is the reason it works, and will continue to work?  All market timing back tested works empirically.  Until it doesn't.  So I want something that rationally works (like index funds).  Does this?
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 21, 2015, 07:35:20 PM

I have been reading furiously about this for hours now. It appears to work. It appears to work in multiple time frames.

I just can't shake this question: Why isn't everyone doing this? Why is such a simple method not in widespread application? Indexing has an entire religion devoted to it for fucks sake, why doesn't this? I can't shake the feeling that all I'm looking at is the best, most delicious bait... on a nasty hook.

Yeah pretty much what i've been thinking. But to add to that, if it's such a simple method and it's so easy to tell when the roller coaster ride is over...why does every book i've read state emphatically that market timing is impossible?  It seems it's ridiculously easy using this method.  Why has every author dismissed this approach that has been known about since before I was even born?

Because you've only been reading the authors that don't believe in market timing, and missing the ones that do.


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Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 21, 2015, 07:38:45 PM

I have been reading furiously about this for hours now. It appears to work. It appears to work in multiple time frames.

I just can't shake this question: Why isn't everyone doing this? Why is such a simple method not in widespread application? Indexing has an entire religion devoted to it for fucks sake, why doesn't this? I can't shake the feeling that all I'm looking at is the best, most delicious bait... on a nasty hook.

Yeah pretty much what i've been thinking. But to add to that, if it's such a simple method and it's so easy to tell when the roller coaster ride is over...why does every book i've read state emphatically that market timing is impossible?  It seems it's ridiculously easy using this method.  Why has every author dismissed this approach that has been known about since before I was even born?

Because you've only been reading the authors that don't believe in market timing, and missing the ones that do.


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My follow up is: Why do those authors not believe in market timing if it apparently works so well?  How did they all miss the memo and not discover it during their own research?  And why does everyone recommend them if they are all so wrong?  It just doesn't add up to me.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 21, 2015, 07:50:14 PM
Dual Momentum was only recently described.  You may be confusing it with relative price momentum which was first described in academia in the 80s.

You could make a similar argument about using the 200 day moving average approach, which has also outperformed since first described.

Trend following works at decreasing drawdowns.  It empirically does.

This paper seems to describe momentum and was published in 1937:

http://www.e-m-h.org/CoJo37.pdf

So it was pointed out and published in a paper nearly 100 years ago and has been completely ignored since?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 21, 2015, 08:39:16 PM

Dual Momentum was only recently described.  You may be confusing it with relative price momentum which was first described in academia in the 80s.

You could make a similar argument about using the 200 day moving average approach, which has also outperformed since first described.

Trend following works at decreasing drawdowns.  It empirically does.

This paper seems to describe momentum and was published in 1937:

http://www.e-m-h.org/CoJo37.pdf

So it was pointed out and published in a paper nearly 100 years ago and has been completely ignored since?

It hasn't been. Momentum is used by almost every trader out there, consciously or subconsciously.

The better question is: if it has persisted for 85 years, why do you expect it to disappear? 
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 21, 2015, 08:41:39 PM
It hasn't been. Momentum is used by almost every trader out there, consciously or subconsciously.

The better question is: if it has persisted for 85 years, why do you expect it to disappear?

(http://i.kinja-img.com/gawker-media/image/upload/s--PA14owjN--/yhgl3xelhowly2rphv6c.gif)
Title: Dual Momentum Investing
Post by: milesdividendmd on April 21, 2015, 08:45:00 PM
Dual Momentum was only recently described.

How do we know it will continue to work?

Trend following works at decreasing drawdowns.  It empirically does.

A posteriori, apparently.  But a priori?

My question is: it has worked.  Apparently it's new though.  Logically, what is the reason it works, and will continue to work?  All market timing back tested works empirically.  Until it doesn't.  So I want something that rationally works (like index funds).  Does this?

A priori.

Trendfollowing was described in the 1930s at the latest, and it still has the same effect 80 years later:  decreased drawdowns.

Momentum was described as the 4th factor in the efficient market model (after beta, size, and value) in the 1980s, and its effect persists undiluted.

Dual momentum simply combines the 2 ; trend following (absolute momentum) and price momentum (relative momentum). It's future success rests solely on the persistence of those 2 observations.

Which do you doubt?
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 21, 2015, 08:47:25 PM
Something being described and observed doesn't provide logical reasoning for why it works, or if it will continue to.

I don't understand why you're citing dates for an argument of reason.

https://en.wikipedia.org/wiki/A_priori_and_a_posteriori
Quote
A priori knowledge or justification is independent of experience

Title: Re: Dual Momentum Investing
Post by: Chuck on April 21, 2015, 08:51:22 PM
Why do we have faith that the market will go up (the underlying assumption underpinning buy and hold index investing)?

Because it has in the past? I think your questions are fair arebelspy, but I also think they could be asked of bogglehead investing as well. Ultimately, all we have to presume future returns is prior performance.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 21, 2015, 08:53:46 PM
Why do we have faith that the market will go up (the underlying assumption underpinning buy and hold index investing)?

Because it has in the past? I think your questions are fair arebelspy, but I also think they could be asked of bogglehead investing as well. Ultimately, all we have to presume future returns is prior performance.

No, I think there are other valid, logical reasons as to why it will go up long term that have nothing to do with "because it has in the past."  If that's your only reason for thinking it will, I'd suggest reading a lot more before investing.  :)
Title: Re: Dual Momentum Investing
Post by: Chuck on April 21, 2015, 08:59:01 PM
Why do we have faith that the market will go up (the underlying assumption underpinning buy and hold index investing)?

Because it has in the past? I think your questions are fair arebelspy, but I also think they could be asked of bogglehead investing as well. Ultimately, all we have to presume future returns is prior performance.

No, I think there are other valid, logical reasons as to why it will go up long term that have nothing to do with "because it has in the past."  If that's your only reason for thinking it will, I'd suggest reading a lot more before investing.  :)
I think the primary reason you are referring to is the ever expanding US economy. What guarantee do we have this trend of perpetual expansion will continue? It didn't work that way for Japan, and others.

The logic behind momentum, from what I have read over the past six or so hours, is that humans are fearful and irrational. They buy high and sell low. So long as this remains true, I think momentum investing as described by MDMD has a solid chance of outperforming the market, and it certainly has up until this point.

Like I said, I understand your questions, but if you aren't satisified with the answers I don't understand why you are satisified with the leap of faith involved in index investing either...
Title: Dual Momentum Investing
Post by: hodedofome on April 21, 2015, 09:20:28 PM

My follow up is: Why do those authors not believe in market timing if it apparently works so well?  How did they all miss the memo and not discover it during their own research?  And why does everyone recommend them if they are all so wrong?  It just doesn't add up to me.

Ben Graham didn't believe in it And he's pretty much responsible for most modern investors' beliefs. So everyone totes the party line without realizing its original origins and whether or not it's even true.

Rice traders were using Ichimoku trend following several hundred years ago. Maybe even 1000 years ago I can't remember how long. Successful speculators in the 1700 and 1800s mentioned 'hang onto your winners and cut your losers short.' This is trend following and momentum at its core.

A few here have wondered whether momentum will continue in the future. I personally believe that it will continue as long as irrational humans run the markets. Momentum and value are both strategies that prey on human cognitive biases and so I don't see any reason why that would go away. However, here's a market structure explanation of the source of trend following returns (at least in the futures markets):

http://www.michaelcovel.com/2013/01/18/eric-crittenden-on-the-podcast-now/

Start listening at 23:00 into the podcast. According to Eric, as long as we have commercial hedgers we'll have sustained trends. It may or may not be true but it's something to think about.


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Title: Re: Dual Momentum Investing
Post by: dragoncar on April 21, 2015, 09:23:56 PM
Double momentum is fine for consumer suckAs but triple moment investing is streets ahead.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 21, 2015, 09:35:49 PM

Something being described and observed doesn't provide logical reasoning for why it works, or if it will continue to.

I don't understand why you're citing dates for an argument of reason.

https://en.wikipedia.org/wiki/A_priori_and_a_posteriori
Quote
A priori knowledge or justification is independent of experience

I must've misunderstood your point ARS.

My point was that if the effect described was based on data mining (what I thought you meant by a posteriori knowledge), then why has it persisted long after its initial description?

If a posteriori knowledge is merely that which based on experience, (ie it is empirical) then that is the best sort of knowledge on which to make decisions about the future IMO.



Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 21, 2015, 10:17:58 PM
If a posteriori knowledge is merely that which based on experience, (ie it is empirical) then that is the best sort of knowledge on which to make decisions about the future IMO.

No, a priori knowledge is the best sort of knowledge on which to make decisions about the future.  But since there are no purely a priori truths about the market (in the sense that it is impossible for them to be wrong, because they are inherently true), the best sort of knowledge on which to make decisions about the future is knowledge that both has an underlying logical explanation and can be demonstrated empirically, which I think is what arebelspy is getting at.  As he pointed out earlier, if an investing strategy based on making trades every other Tuesday in months starting with the letter J or M, except in years ending in double-digit primary numbers, happened to backtest perfectly, would you trust it to continue to work into the future?

The logic behind momentum, from what I have read over the past six or so hours, is that humans are fearful and irrational. They buy high and sell low.

Miles, do you agree with this?  Is there any other logic behind this strategy?  If not, it's interesting to note that the logic behind this strategy is in some sense fundamentally pessimistic (it relies on an assumption of human irrationality/stupidity) while the logic behind buy and hold indexing is fundamentally optimistic (it relies on an assumption of human productivity/ingenuity).
Title: Dual Momentum Investing
Post by: milesdividendmd on April 21, 2015, 11:41:18 PM
If a posteriori knowledge is merely that which based on experience, (ie it is empirical) then that is the best sort of knowledge on which to make decisions about the future IMO.

No, a priori knowledge is the best sort of knowledge on which to make decisions about the future.  But since there are no purely a priori truths about the market (in the sense that it is impossible for them to be wrong, because they are inherently true), the best sort of knowledge on which to make decisions about the future is knowledge that both has an underlying logical explanation and can be demonstrated empirically, which I think is what arebelspy is getting at.  As he pointed out earlier, if an investing strategy based on making trades every other Tuesday in months starting with the letter J or M, except in years ending in double-digit primary numbers, happened to backtest perfectly, would you trust it to continue to work into the future?

The logic behind momentum, from what I have read over the past six or so hours, is that humans are fearful and irrational. They buy high and sell low.

Miles, do you agree with this?  Is there any other logic behind this strategy?  If not, it's interesting to note that the logic behind this strategy is in some sense fundamentally pessimistic (it relies on an assumption of human irrationality/stupidity) while the logic behind buy and hold indexing is fundamentally optimistic (it relies on an assumption of human productivity/ingenuity).

There are multiple explanations for momentum. Some efficient market types even try to explain it as a risk story which has never made a bit of sense to me and just ends up seeming Panglossian.

I don't think that momentum has to do with human irrationality or stupidity, in a pejorative way. I think it has to do with the heuristics that govern human decision-making.  i'm talking recency, loss aversion, representativeness, etc. i.e. everything in Daniel Kahneman's thinking fast and slow.  These are useful techniques that we all use to process information quickly, but they are nonstatistical ways of thinking.

There is also some good data that momentum is perpetuated by the flow of capital in and out of funds. So as one strategy becomes successful based on regime change, money flows toward it in the short-term from other funds creating price momentum (and negative momentum from the donor funds!). And because money cannot flow instantaneously because of liquidity issues, this momentum lasts for a significant amount of time (anywhere from 3 to 12 months).

To me momentum is an expression of humanity as it exists, not as we think it exists.

We all believe ourselves to be rational, but we have irrational reactions to loss, and to prospective gain. We all chase performance (which is probably why there is such a strong predilection here for passive low cost investment. It is the SmartMoney bet!)

But to me passive investment has always been about one thing and one thing only. Low costs.

Passive investment wins because it is cheaper. Period. Full stop.

That's it. All of the arguments about winners and losers, zero sum games, and market efficiency strike me as post Facto rationalization. What matters to me is getting exposure to the market at the lowest price possible.

And one of the best things about the dual momentum strategy is that it trades so incredibly infrequently and can be implemented with only low-cost Cap weighted index funds.

To be sure there is some friction in the form
of bid ask spreads, so it is a little bit more expensive than buy-and-hold. But you trade about as often as you rebalance in a yearly rebalance.

But if you believe that the momentum anomaly is real, and is likely to persist, then it is easy to get exposure to it for cheaper than it is to get exposure to other factors like size, value, quality etc.

So to me the momentum story could not be more persuasive. But admittedly that's probably because its The fastest horse out there as far as I can see right now.
Title: Dual Momentum Investing
Post by: milesdividendmd on April 21, 2015, 11:57:25 PM
All of which relates to relative momentum. By far the less important half of dual momentum.

The real bang for the buck comes from sitting out of bear markets based on absolute momentum which is just another form of trend following not to dissimilar from moving average rules.

Trend following does not always beat buy-and-hold, but it almost always limits draw downs. (the only exception I can think of being flash crashes.)

So if you are considering the strategy or are interested in it then that is really the most important question to answer for yourself. Does it make sense to you that absolute momentum (or 200 day moving average rules) in other words trend following, will reproducibly truncate drawdowns in the future?

That is the single most important a priori question that you must answer.

My answer is (obviously) "almost always yes."
Title: Re: Dual Momentum Investing
Post by: michaelrecycles on April 22, 2015, 12:40:24 AM
Very interesting discussion. Following.

I understand you can backtest, but before going whole hog, I'd probably conduct a real test with a two-horse race between DM and buy-and-hold over a number of years. Then I'd trade a winning horse for a whole hog. I still wouldn't have enough animals for a farm, though.
Title: Re: Dual Momentum Investing
Post by: halfshellmeijin on April 22, 2015, 07:21:38 AM
So here is another way of thinking about this. If you use the Dual Momentum strategy but instead of back testing 6-12 months, you back test as far as you can go. You reach the result that the US stock market has produced the best returns over the period of time and should be invested in 100% in US stocks. This is the argument that MMM puts forth in his blog. So the question is do you think back testing for the whole historical period is a better choice then back testing 6-12 months? Back testing the whole historical period gives more data to work with, but could also be argued that much of the data is outdated. Back testing such a short period of time reduces the sample size but makes the data more relevant.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 22, 2015, 07:46:49 AM
Very interesting discussion. Following.

I understand you can backtest, but before going whole hog, I'd probably conduct a real test with a two-horse race between DM and buy-and-hold over a number of years. Then I'd trade a winning horse for a whole hog. I still wouldn't have enough animals for a farm, though.

The issue with that is that it might take a long time before you are able to confidently reach a conclusion on which is the better strategy.  As in it might take my entire working career before one strategy shows clear superiority.  What I need is a strategy I can implement right now, that not only back tests well, but has sufficient evidence to lead me to believe it will continue to perform.  Passive investing has that evidence.  Not only that, it makes perfectly logical sense to me - cut out middlemen and any unnecessary costs that don't add value, and minimize the costs that are absolutely necessary - that means more money goes into my account and I can calculate the effect of compounding that excess money.  It's not an anomaly, it's just costs reduction and math, so I have every reason to believe that advantage will persist.

Dual momentum however, doesn't make logical sense to me.  I don't understand how it works.  It seems to decouple risk from reward.  You bear essentially no risk when the market is on the way up yet you reap all the rewards, and when the market is going to go down you get out of the market so you essentially bear no risk.  All the reward (more than your fair share), and none of the risk.  A giant free lunch.  The phenomena has apparently existed for hundreds of years and pre dates the USA according to some, and yet still persists as an easily exploitable anomaly. 

Why don't you just take the bullet proof dual momentum strategy, and implement it one day earlier?  Just get onto that roller coaster one day earlier, and get off one day earlier.  Wouldn't that give you slightly more gains, and slightly less losses?

I also don't believe that ben graham just decided timing the market is impossible, presented no data, and then everyone just parroted him ad infinitum.  I've heard the argument from more than just ben, and i've seen it supported with evidence and data, over and over.  Whenever I have heard claims of being able to time the market and been presented with evidence of how it can be done, when I dig into the data I find it's either false or can be explained by some other logical fallacy, 100% of the time.  I've yet to see any strategy (excluding dual momentum - still undecided as of yet) that cuts the mustard.  Furthermore I fully expect any strategy that actually does work will be exploited to the point it is no longer possible.  The idea that an easily exploitable anomaly exists, is widely known, and yet remains unimplemented is troubling to me.
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 22, 2015, 07:48:23 AM
So here is another way of thinking about this. If you use the Dual Momentum strategy but instead of back testing 6-12 months, you back test as far as you can go. You reach the result that the US stock market has produced the best returns over the period of time and should be invested in 100% in US stocks. This is the argument that MMM puts forth in his blog. So the question is do you think back testing for the whole historical period is a better choice then back testing 6-12 months? Back testing the whole historical period gives more data to work with, but could also be argued that much of the data is outdated. Back testing such a short period of time reduces the sample size but makes the data more relevant.

ok so most models show a 6 month lookback (not backtest) used with dual momentum, when backtested significantly out performed the market over time.  if you're saying change your look back to 100+ years and see what was the best then yeah you will probably always be 100% invested in one asset class but thats not the point of this you're confusing back testing and lookback windows. 
Title: Re: Dual Momentum Investing
Post by: thepokercab on April 22, 2015, 08:36:00 AM
Interesting discussion. I'm also you're typical index investor, and I've been looking through a bunch of the dual momentum research, but what I can't seem to wrap my head around is how does this strategy work when you're in the accumulation phase, making, for instance, monthly contributions to your investment accounts?

For instance, if I'm understanding Dual Momentum correctly, you'll find yourself at a point where equities start underperforming a 'safe asset' such as cash, so you get out of equities entirely and move into cash.  But what do I do with the savings i'm continuing to generate and would normally invest in the market?  Wouldn't this be the perfect time to keep buying up equities, when they're 'on sale' so to speak? 

I'm not nearly smart enough to digest all of the research i've seen on this so far, but do these back tested studies account for the buy and holder, who is not only holding on to her equities, but is continuing to buy up equities at the bottom of a market?  Surely, she is realizing significant gain down the road vs the dual momentum investor who doesn't get back into equities months or years later? 
Title: Re: Dual Momentum Investing
Post by: ChaseJuggler on April 22, 2015, 08:46:47 AM
I would like to point out that even small flash crashes will not always cause harm to dual momentum. As long as the down and up takes less than a month to happen, it is possible to dodge them. For example, October 2014 would have only fooled you if your rebalancing date (or whatever you call it) was on the 15th of the month. Any other day was safe. (note the difference in date selection below)

(http://i.imgur.com/IdHZnC1.png)
(http://i.imgur.com/LhXRBZ8.png)

Of course, this would have stung like a b#!ch if it had happened on the first of the month. But the odds are strong that DM will dodge the next October 2014 as well.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 22, 2015, 08:46:53 AM
Interesting discussion. I'm also you're typical index investor, and I've been looking through a bunch of the dual momentum research, but what I can't seem to wrap my head around is how does this strategy work when you're in the accumulation phase, making, for instance, monthly contributions to your investment accounts?

For instance, if I'm understanding Dual Momentum correctly, you'll find yourself at a point where equities start underperforming a 'safe asset' such as cash, so you get out of equities entirely and move into cash.  But what do I do with the savings i'm continuing to generate and would normally invest in the market?  Wouldn't this be the perfect time to keep buying up equities, when they're 'on sale' so to speak? 

I'm not nearly smart enough to digest all of the research i've seen on this so far, but do these back tested studies account for the buy and holder, who is not only holding on to her equities, but is continuing to buy up equities at the bottom of a market?  Surely, she is realizing significant gain down the road vs the dual momentum investor who doesn't get back into equities months or years later?

I assume you would just put your contributions into whatever fund you are currently holding.  Milesdividenmd said he was holding 100% s&p right now, so I assume he would just keep adding to that.

If you saw the market drop 10%, and thought it was going to drop another 10%, would you buy the stocks at 10% off, or save your cash until it's on sale for 20% off?  I think the dual momentum strategy claims to have superior returns because you don't buy any assets when they're inflated in price (ok maybe you do, but you do so with the assurance they will be even more inflated in the near term future), and you don't buy assets that are only partially on sale (you wait and buy them fully on sale).  That is the theory anyway.  Feel free to correct me if I am misunderstanding the strategy. 
Title: Re: Dual Momentum Investing
Post by: ChaseJuggler on April 22, 2015, 08:59:47 AM
I'm not nearly smart enough to digest all of the research i've seen on this so far, but do these back tested studies account for the buy and holder, who is not only holding on to her equities, but is continuing to buy up equities at the bottom of a market?  Surely, she is realizing significant gain down the road vs the dual momentum investor who doesn't get back into equities months or years later?

Crackers at the store are 5% off this week. What a deal!! You buy a 2 year supply of crackers. Only to find out that next week, crackers are now buy 1 get 1 free! But you already bought your crackers at last week's 'great prices' and can't take advantage.

Dual Momentum, as I understand it, ignores the 5-10% sale and waits for the 40%. (Which will only outperform if we have another crash in the next 10 years.)
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 22, 2015, 09:01:20 AM
its just gaging the momentum of the market ... its a simple look back.. what has it done over the last 6 months.  then you put 100% of your money in the one that does the best.  you're not waiting or trying to time market selloffs.  you look at what happened in the last 6-12 months and you adjust 100% of your portfolio into whatever was the winner.  this isnt an over simplification its pretty much that easy.
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 22, 2015, 09:09:52 AM
I'm not nearly smart enough to digest all of the research i've seen on this so far, but do these back tested studies account for the buy and holder, who is not only holding on to her equities, but is continuing to buy up equities at the bottom of a market?  Surely, she is realizing significant gain down the road vs the dual momentum investor who doesn't get back into equities months or years later?

Crackers at the store are 5% off this week. What a deal!! You buy a 2 year supply of crackers. Only to find out that next week, crackers are now buy 1 get 1 free! But you already bought your crackers at last week's 'great prices' and can't take advantage.

Dual Momentum, as I understand it, ignores the 5-10% sale and waits for the 40%. (Which will only outperform if we have another crash in the next 10 years.)

not necessarily true.  if the emerging markets or international are outperforming the US significantly or vice versa.  it could still minorly outperform.  but the largest performance gains are seen by shifting to bonds during large down turns yes.
Title: Re: Dual Momentum Investing
Post by: dragoncar on April 22, 2015, 09:18:38 AM
I'm not nearly smart enough to digest all of the research i've seen on this so far, but do these back tested studies account for the buy and holder, who is not only holding on to her equities, but is continuing to buy up equities at the bottom of a market?  Surely, she is realizing significant gain down the road vs the dual momentum investor who doesn't get back into equities months or years later?

Crackers at the store are 5% off this week. What a deal!! You buy a 2 year supply of crackers. Only to find out that next week, crackers are now buy 1 get 1 free! But you already bought your crackers at last week's 'great prices' and can't take advantage.

Dual Momentum, as I understand it, ignores the 5-10% sale and waits for the 40%. (Which will only outperform if we have another crash in the next 10 years.)

You forgot the store return policy and/or price match "put"
Title: Re: Dual Momentum Investing
Post by: halfshellmeijin on April 22, 2015, 09:21:37 AM
Why don't you just take the bullet proof dual momentum strategy, and implement it one day earlier?  Just get onto that roller coaster one day earlier, and get off one day earlier.  Wouldn't that give you slightly more gains, and slightly less losses?

To me this does not seem like a logically valid strategy. There are only about 30 days in a month. That means that there are a finite amount of choices you could make to game the system. For instance, why not double bullet proof the strategy and go two days earlier? I mean you'll beat everyone that has thought like you! Also think if everyone did their DM balancing on the 1st. If you decided to do yours on the 15th, would you be half a month early, or half a month late? Well what if you did it on the 22nd? Would you be about 8 days early or would you be 7 days late from the 15th? It would be easy to game if everyone picked the same day, but more than likely people will distribute their choices across all the days of the month making it hard to be one day in front of everyone.
Title: Re: Dual Momentum Investing
Post by: thepokercab on April 22, 2015, 09:24:33 AM
I'm not nearly smart enough to digest all of the research i've seen on this so far, but do these back tested studies account for the buy and holder, who is not only holding on to her equities, but is continuing to buy up equities at the bottom of a market?  Surely, she is realizing significant gain down the road vs the dual momentum investor who doesn't get back into equities months or years later?

Crackers at the store are 5% off this week. What a deal!! You buy a 2 year supply of crackers. Only to find out that next week, crackers are now buy 1 get 1 free! But you already bought your crackers at last week's 'great prices' and can't take advantage.

Dual Momentum, as I understand it, ignores the 5-10% sale and waits for the 40%. (Which will only outperform if we have another crash in the next 10 years.)

not necessarily true.  if the emerging markets or international are outperforming the US significantly or vice versa.  it could still minorly outperform.  but the largest performance gains are seen by shifting to bonds during large down turns yes.

Ok- i guess that's what the answer I was looking for.  For instance, I've just been steadily investing in VFWAX the last couple of years as part of my asset allocation, and over the last 3 months or so, its up by like 8.5%. In the meantime a Dual Momentum investor has been 100% in the S&P.  If the 'momentum' in international equities continues he eventually goes 100% international, but misses out on some of those early gains.  But the argument is that he makes up for it later when he shifts to bonds or a safe asset during a down turn? 
Title: Re: Dual Momentum Investing
Post by: halfshellmeijin on April 22, 2015, 09:31:46 AM
So here is another way of thinking about this. If you use the Dual Momentum strategy but instead of back testing 6-12 months, you back test as far as you can go. You reach the result that the US stock market has produced the best returns over the period of time and should be invested in 100% in US stocks. This is the argument that MMM puts forth in his blog. So the question is do you think back testing for the whole historical period is a better choice then back testing 6-12 months? Back testing the whole historical period gives more data to work with, but could also be argued that much of the data is outdated. Back testing such a short period of time reduces the sample size but makes the data more relevant.

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

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

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

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

I would also be interested in a conversation about applying the portfolio theory regarding diversification and rebalancing if it was applied to DM. "The Intelligent Asset Allocator" (a book MMM recommends) states that a 90/10 portfolio out performs a 100/0 portfolio in both reward and risk when back tested. I am just thinking about if the same ideas could be applied to the DM plan, or if it is too inherently conflicting to the strategy.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 22, 2015, 09:35:57 AM

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

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

In this comment you're  conflating back testing with the lookback period.  These are two completely different things.

Based on the observation that momentum predicts short-term price movement based on past results of 3 to 12 months(an empirical observation), it makes no sense to use all of history as your Lookback period.

Simply put,All of history gives no predictive information about how the market will perform in the short-term, unlike a 3 to 12 month look back period.

As an example,In 1989 Japan was the most successful stock market using all of history as a Lookback period.  deciding to buy-and-hold a 100% Japanese equities portfolio in 1989 would not of been a very smart decision in retrospect.  But if you had been toggling between Japan and America or the rest of the world based on dual momentum, you would've exited it 100% Japanese portfolio before too much blood was shed.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 22, 2015, 09:41:40 AM

Why don't you just take the bullet proof dual momentum strategy, and implement it one day earlier?  Just get onto that roller coaster one day earlier, and get off one day earlier.  Wouldn't that give you slightly more gains, and slightly less losses?

To me this does not seem like a logically valid strategy. There are only about 30 days in a month. That means that there are a finite amount of choices you could make to game the system. For instance, why not double bullet proof the strategy and go two days earlier? I mean you'll beat everyone that has thought like you! Also think if everyone did their DM balancing on the 1st. If you decided to do yours on the 15th, would you be half a month early, or half a month late? Well what if you did it on the 22nd? Would you be about 8 days early or would you be 7 days late from the 15th? It would be easy to game if everyone picked the same day, but more than likely people will distribute their choices across all the days of the month making it hard to be one day in front of everyone.

Right. This is the issue I described earlier where I tried to imagine a world in which everyone used dual momentum. Even given this knowledge, It would be very difficult to arbitrage against dual momentum due to varying look back periods, days to make trades, etc.
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 22, 2015, 09:44:43 AM
I'm not nearly smart enough to digest all of the research i've seen on this so far, but do these back tested studies account for the buy and holder, who is not only holding on to her equities, but is continuing to buy up equities at the bottom of a market?  Surely, she is realizing significant gain down the road vs the dual momentum investor who doesn't get back into equities months or years later?

Crackers at the store are 5% off this week. What a deal!! You buy a 2 year supply of crackers. Only to find out that next week, crackers are now buy 1 get 1 free! But you already bought your crackers at last week's 'great prices' and can't take advantage.

Dual Momentum, as I understand it, ignores the 5-10% sale and waits for the 40%. (Which will only outperform if we have another crash in the next 10 years.)

not necessarily true.  if the emerging markets or international are outperforming the US significantly or vice versa.  it could still minorly outperform.  but the largest performance gains are seen by shifting to bonds during large down turns yes.

Ok- i guess that's what the answer I was looking for.  For instance, I've just been steadily investing in VFWAX the last couple of years as part of my asset allocation, and over the last 3 months or so, its up by like 8.5%. In the meantime a Dual Momentum investor has been 100% in the S&P.  If the 'momentum' in international equities continues he eventually goes 100% international, but misses out on some of those early gains.  But the argument is that he makes up for it later when he shifts to bonds or a safe asset during a down turn?

the arguement isnt this loss will be made up when the market turns down the arguement is that while your portfolio is diversified you're missing out on larger gains by being in evenly distributed asset classes.  so if one asset class is outperforming the others over the last 6 months you swap to that asset class and historically doing this has lead to much higher returns ... your diversification is basically shifted to an over time diversification vs a constant diversification.  allowing you to capture gains of the best performing asset class.  it may very well shake out that you own at a similar asset distribution that you have now over a 30 year period.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 22, 2015, 09:46:05 AM

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

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

In this comment you're  conflating back testing with the lookback period.  These are two completely different things.

Based on the observation that momentum predicts short-term price movement based on past results of 3 to 12 months(an empirical observation), it makes no sense to use all of history as your Lookback period.

Simply put,All of history gives no predictive information about how the market will perform in the short-term, unlike a 3 to 12 month look back period.

As an example,In 1989 Japan was the most successful stock market using all of history as a Lookback period.  deciding to buy-and-hold a 100% Japanese equities portfolio in 1989 would not of been a very smart decision in retrospect.  But if you had been toggling between Japan and America or the rest of the world based on dual momentum, you would've exited it 100% Japanese portfolio before too much blood was shed.

Which begs the question: How does anyone ever lose money in the market if it's so easy to see the trend and get out of dodge before the shit hits the fan?
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 22, 2015, 09:46:11 AM

Why don't you just take the bullet proof dual momentum strategy, and implement it one day earlier?  Just get onto that roller coaster one day earlier, and get off one day earlier.  Wouldn't that give you slightly more gains, and slightly less losses?

To me this does not seem like a logically valid strategy. There are only about 30 days in a month. That means that there are a finite amount of choices you could make to game the system. For instance, why not double bullet proof the strategy and go two days earlier? I mean you'll beat everyone that has thought like you! Also think if everyone did their DM balancing on the 1st. If you decided to do yours on the 15th, would you be half a month early, or half a month late? Well what if you did it on the 22nd? Would you be about 8 days early or would you be 7 days late from the 15th? It would be easy to game if everyone picked the same day, but more than likely people will distribute their choices across all the days of the month making it hard to be one day in front of everyone.

Right. This is the issue I described earlier where I tried to imagine a world in which everyone used dual momentum. Even given this knowledge, It would be very difficult to arbitrage against dual momentum due to varying look back periods, days to make trades, etc.

the way to arbitrage away the system would be to vary the look back to 5 months vs 6 and get in one month earlier IMO if this became the norm .
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 22, 2015, 09:48:26 AM

Very interesting discussion. Following.

I understand you can backtest, but before going whole hog, I'd probably conduct a real test with a two-horse race between DM and buy-and-hold over a number of years. Then I'd trade a winning horse for a whole hog. I still wouldn't have enough animals for a farm, though.

The issue with that is that it might take a long time before you are able to confidently reach a conclusion on which is the better strategy.  As in it might take my entire working career before one strategy shows clear superiority.  What I need is a strategy I can implement right now, that not only back tests well, but has sufficient evidence to lead me to believe it will continue to perform.  Passive investing has that evidence.  Not only that, it makes perfectly logical sense to me - cut out middlemen and any unnecessary costs that don't add value, and minimize the costs that are absolutely necessary - that means more money goes into my account and I can calculate the effect of compounding that excess money.  It's not an anomaly, it's just costs reduction and math, so I have every reason to believe that advantage will persist.

Dual momentum however, doesn't make logical sense to me.  I don't understand how it works.  It seems to decouple risk from reward.  You bear essentially no risk when the market is on the way up yet you reap all the rewards, and when the market is going to go down you get out of the market so you essentially bear no risk.  All the reward (more than your fair share), and none of the risk.  A giant free lunch.  The phenomena has apparently existed for hundreds of years and pre dates the USA according to some, and yet still persists as an easily exploitable anomaly. 

Why don't you just take the bullet proof dual momentum strategy, and implement it one day earlier?  Just get onto that roller coaster one day earlier, and get off one day earlier.  Wouldn't that give you slightly more gains, and slightly less losses?

I also don't believe that ben graham just decided timing the market is impossible, presented no data, and then everyone just parroted him ad infinitum.  I've heard the argument from more than just ben, and i've seen it supported with evidence and data, over and over.  Whenever I have heard claims of being able to time the market and been presented with evidence of how it can be done, when I dig into the data I find it's either false or can be explained by some other logical fallacy, 100% of the time.  I've yet to see any strategy (excluding dual momentum - still undecided as of yet) that cuts the mustard.  Furthermore I fully expect any strategy that actually does work will be exploited to the point it is no longer possible.  The idea that an easily exploitable anomaly exists, is widely known, and yet remains unimplemented is troubling to me.

I get it. I completely agree, frugal, Dual momentum seems too good to be true.

You are wise to be suspicious of any approach which demonstrates superior return with less risk.

That being said, please use your suspicion to poke specific holes in the strategy. I've been trying to do this for a couple of years now, and aside from large flashcrashes like 1989, I can find no other major weaknesses in the strategy.

In other words your conceptual suspicion of dual momentum is a very good thing, but at some point it may be useful for you to move on to specific problems that you see with the strategy.

Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 22, 2015, 09:51:01 AM

Why don't you just take the bullet proof dual momentum strategy, and implement it one day earlier?  Just get onto that roller coaster one day earlier, and get off one day earlier.  Wouldn't that give you slightly more gains, and slightly less losses?

To me this does not seem like a logically valid strategy. There are only about 30 days in a month. That means that there are a finite amount of choices you could make to game the system. For instance, why not double bullet proof the strategy and go two days earlier? I mean you'll beat everyone that has thought like you! Also think if everyone did their DM balancing on the 1st. If you decided to do yours on the 15th, would you be half a month early, or half a month late? Well what if you did it on the 22nd? Would you be about 8 days early or would you be 7 days late from the 15th? It would be easy to game if everyone picked the same day, but more than likely people will distribute their choices across all the days of the month making it hard to be one day in front of everyone.

Right. This is the issue I described earlier where I tried to imagine a world in which everyone used dual momentum. Even given this knowledge, It would be very difficult to arbitrage against dual momentum due to varying look back periods, days to make trades, etc.

Which brings me back to what I posted earlier:


Maybe my perception of the market is wrong, but I see it as a positive sum game, where the positive sum is the total market capitalization.  For example is the total market is $1M, and then in the future it is $2M, then $1M in real (at least on paper) wealth has been created, but no more.  So buy and hold index investors would have realized average growth during that period, dual momentum investors would have realized above average growth, and because of the math some other group of rubes has achieved below average market returns for that period. 

So are you telling me if everyone employed a dual momentum strategy that everyone's portfolio would go gang busters, and no one would lose to a bear market?  Lake Wobegon, where every investor is above average?  How is that even mathematically possible?
Title: Re: Dual Momentum Investing
Post by: thepokercab on April 22, 2015, 09:52:50 AM
One other question I have is how do folks select their asset classes for this approach?  I'm at Vanguard currently, so if I was to move part of my portfolio to a dual momentum approach i'd probably focus on VTI, VEU, VWO (emerging markets), and then VFISX as the 'safe' asset.  Would this seem sound? 
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 22, 2015, 09:54:03 AM

I would like to point out that even small flash crashes will not always cause harm to dual momentum. As long as the down and up takes less than a month to happen, it is possible to dodge them. For example, October 2014 would have only fooled you if your rebalancing date (or whatever you call it) was on the 15th of the month. Any other day was safe. (note the difference in date selection below)

(http://i.imgur.com/IdHZnC1.png)
(http://i.imgur.com/LhXRBZ8.png)

Of course, this would have stung like a b#!ch if it had happened on the first of the month. But the odds are strong that DM will dodge the next October 2014 as well.

This is correct. I was 100% dual momentum in October 2014 in my retirement accounts. And I did absolutely nothing.

Unless the flash crash brings you down to a level below your Lookback period, it will have absolutely no effect on the strategy.

It was mildly painful to see my portfolio lose so much money so quickly, but behaviorally I was very reassured that if the market went down too far I would have a clear signal to exit stocks and get into short-term treasures.

All in all it was less stressful than holding a by and hold portfolio for me personally.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 22, 2015, 09:56:37 AM
That being said, please use your suspicion to poke specific holes in the strategy. I've been trying to do this for a couple of years now, and aside from large flashcrashes like 1989, I can find no other major weaknesses in the strategy.

In other words your conceptual suspicion of dual momentum is a very good thing, but at some point it may be useful for you to move on to specific problems that you see with the strategy.

I can find no obvious holes to poke yet.  I am hoping someone else will see the discussion and points raised and can perhaps point out a hole we are missing.  Or perhaps if I keep thinking about it I will have an epiphany and see the flaws with it.  Or maybe I (or someone) will go through the data and find holes.  I think I need to read more about it, and digest that information to have a better understanding of it.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 22, 2015, 09:57:40 AM


Why don't you just take the bullet proof dual momentum strategy, and implement it one day earlier?  Just get onto that roller coaster one day earlier, and get off one day earlier.  Wouldn't that give you slightly more gains, and slightly less losses?

To me this does not seem like a logically valid strategy. There are only about 30 days in a month. That means that there are a finite amount of choices you could make to game the system. For instance, why not double bullet proof the strategy and go two days earlier? I mean you'll beat everyone that has thought like you! Also think if everyone did their DM balancing on the 1st. If you decided to do yours on the 15th, would you be half a month early, or half a month late? Well what if you did it on the 22nd? Would you be about 8 days early or would you be 7 days late from the 15th? It would be easy to game if everyone picked the same day, but more than likely people will distribute their choices across all the days of the month making it hard to be one day in front of everyone.

Right. This is the issue I described earlier where I tried to imagine a world in which everyone used dual momentum. Even given this knowledge, It would be very difficult to arbitrage against dual momentum due to varying look back periods, days to make trades, etc.

Which brings me back to what I posted earlier:


Maybe my perception of the market is wrong, but I see it as a positive sum game, where the positive sum is the total market capitalization.  For example is the total market is $1M, and then in the future it is $2M, then $1M in real (at least on paper) wealth has been created, but no more.  So buy and hold index investors would have realized average growth during that period, dual momentum investors would have realized above average growth, and because of the math some other group of rubes has achieved below average market returns for that period. 

So are you telling me if everyone employed a dual momentum strategy that everyone's portfolio would go gang busters, and no one would lose to a bear market?  Lake Wobegon, where every investor is above average?  How is that even mathematically possible?

No, in this hypothetical there would be an asset bubble until all of the capital was used up. Then it would pop and destroy everyone.

The point is that it would be very hard to profit off of this information. In other words it is difficult to impossible to arbitrage away momentum.

Is a ridiculous hypothetical of course, but useful I think.
Title: Re: Dual Momentum Investing
Post by: GGNoob on April 22, 2015, 10:20:02 AM
One other question I have is how do folks select their asset classes for this approach?  I'm at Vanguard currently, so if I was to move part of my portfolio to a dual momentum approach i'd probably focus on VTI, VEU, VWO (emerging markets), and then VFISX as the 'safe' asset.  Would this seem sound?

Because VEU contains emerging markets, I would think VTI, VEA, VWO for your stock options. Then either short term bonds or could even do total bond market.
Title: Re: Dual Momentum Investing
Post by: sol on April 22, 2015, 12:06:22 PM
I've been reading along for fun, even though I'm a dyed in the wool indexer who generally derides chartist fantasies like this.

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

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

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

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

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

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

And who knows, maybe the crazy old gypsy lady is right for a while longer? If enough people fall for it, the strategy becomes a self fulfilling prophesy, temporarily.  The problem with a perfectly predictable stock market, as others have already pointed out upthread, is that it's too easy to exploit and all of those exploits make it unpredictable again.
Title: Re: Dual Momentum Investing
Post by: MDM on April 22, 2015, 12:23:28 PM
As I understand this strategy, the secret sauce is entirely in the timing of how you ride the waves of market cycles. You ride early losses down until your signal tells you to get out, and then you miss early appreciation until your signal tells you to buy back in. In between you hope to catch the long upswings and avoid the prolonged downturns. Sounds about right?

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

Just highlighting this because it seems a particularly apt summary, and having it appear twice makes it more likely that others will comment....
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 22, 2015, 12:28:46 PM
Me, I don't believe in vampires or ghosts or crystal balls.  I believe the successful backtesting of this strategy is entirely coincidental, classic theory survivorship bias akin to buying a "how to win the lottery" book from a lottery winner. I believe any strategy with a positive feedback loop like this is prone to being overhyped by people (not anyone here) looking to create and then cash in on a bubble by getting people to buy into it, like any other pump and dump scheme.

Or to sell a book.  If I figured out a way to exploit the market for massive profits I sure as fuck wouldn't be publishing a book to tell everyone about it, i'd be too busy rolling around on my pile of hundred dollar bills.

(http://i.imgur.com/lI33a7O.gif)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 22, 2015, 01:03:48 PM
I've been reading along for fun, even though I'm a dyed in the wool indexer who generally derides chartist fantasies like this.

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

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

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

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

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

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


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

What a self aggrandizing and narcissistic tirade.  That must have felt good to write.

You deride trendfollowing here, but you ignore the fact that a simple 200 day moving average strategy always, but always decreases max drawdown in periods greater than 10 years and almost always increases CAGR.  And this pattern has persisted long after it was first described in the 30s.

And by by your very definition of charlatan, I would point out that Bogle is a charlatan for profiting immensely off of his own strategy:  the marketing of low cost cap weighted funds. 

So you believe in the the superiority of a theory that has been demonstrably outperformed by the very strategy that you deride.

So who is it exactly that believes in fairy tales?
Title: Re: Dual Momentum Investing
Post by: waltworks on April 22, 2015, 01:36:06 PM
I thought Sol's post was actually pretty respectful.

As others (and Sol) have pointed out, the question is whether this pattern that exists in the data will persist in the future. That is a legitimate concern and spurious patternfinding is something that both human nature in general and investors in particular are notorious for. Anything involving large amounts of data will be chock full (and always will be in the future, as well) of apparently meaningful patterns that fail to persist going forward.

Like Sol, it's a little too "one weird old trick" for me. But best of luck.

-W
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 22, 2015, 01:43:56 PM
i'm gonna say you took SOL's post the wrong way.  But its the internet soooo.... he brings up the number one issue even i as a supporter see with this system  i'm still willing to take the risk.  but it is a very good point.  that for the system to work you need a long time of run up and run down at or better than 6 months in the 6 month system.  but traditional bear markets have lasted much longer than 6 months. 
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 22, 2015, 02:03:09 PM
I really wish people would first read all the links to previous research I have posted, as well as listen to the podcasts. Many of the questions have already been answered many times. To say momentum doesn't work is to say the work of Fama and many others doesn't work either. Remember Fama is the chief of the EMH and yet he acknowledges momentum is persistent across all asset classes all over the world.

Read all the previous academic work on momentum and then come back with your criticisms. It will make this conversation much more productive.

If you do your own research and decide it's still not for you, that's fine. It's not compatible with everyone's personality. That's the beauty of a marketplace, we all have differing beliefs.


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Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 22, 2015, 02:08:29 PM
i'm gonna say you took SOL's post the wrong way.  But its the internet soooo.... he brings up the number one issue even i as a supporter see with this system  i'm still willing to take the risk.  but it is a very good point.  that for the system to work you need a long time of run up and run down at or better than 6 months in the 6 month system.  but traditional bear markets have lasted much longer than 6 months.

Not sure I take your last point there, the longer the bear market, the better you will do with a trend following approach.

There are exactly 2 unique risks to dual momentum that I have explored previously.

1.  A whipsaw at the same frequency as your lookback period.
and
2. a large flash crash a la black monday.  (There has been but one of these in the history of the US stock market.)

I am open to the possiblility of other risks that I am not seeing, but haven't come across one of them yet.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 22, 2015, 02:16:15 PM
I really wish people would first read all the links to previous research I have posted, as well as listen to the podcasts.

Did anyone read my post? GMOM is a new fund that does dual momentum. For the past 40 years they were known as Managed Futures. There are managed futures mutual funds but they generally suck.

I did.  I can't view any of those pages without registering for an account, so I can't navigate through them


So the past 20 or so posts were because everyone is too lazy to register for a free account?

In response to the fees question, there are some funds that charge lower fees. But these are businesses we're talking about here. Some websites charge more for computer parts than Newegg but that hasn't put them out of business. Some funds perform better than others so they charge more. Some funds just like to help out their investors so they charge less. There's a floor to the fees however, because hedge funds are very expensive to run. Very high regulatory costs.

That and it requires an email address and phone number.  I don't trust them.

You posted a bunch of links to previous research that is all contained on a single website.  That website requires registration to read the pages, and requires you to disclose your email address and phone number to register.  I am not giving them that information.  It looks like no one else is either.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 22, 2015, 02:23:41 PM
There was another post that I threw up a bunch of other links a few pages back. No logins, just academic research.

If you are going to let a free signup keep you from getting to the truth, then I need to stop wasting my time with this argument.


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Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 22, 2015, 02:34:34 PM
There was another post that I threw up a bunch of other links a few pages back. No logins, just academic research.

If you are going to let a free signup keep you from getting to the truth, then I need to stop wasting my time with this argument.


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Yes I see it now.  I completely missed that post.  Although i'm not sure why you think I should disclose my email address and phone number to a website I don't know/trust based on the recommendation of a forum poster that I don't know/trust. I will check out the other sources you posted however.

Just throwing up some momentum research here:

http://www.dualmomentum.net/2013/09/momentum-back-testing.html
http://www.aqrindex.com/AQR_Momentum_Indices/Momentum_Research/Content/default.fs
http://www.dualmomentum.net/2011/03/history-of-momentum-research.html
http://www.dualmomentum.net/2011/05/efficient-marketsnot.html
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435323
https://www.aqr.com/~/media/files/papers/aqr-a-century-of-trend-following-investing.pdf
https://drive.google.com/file/d/0BzyyTlvGE-T2TFdZSG1rVmZYLVE/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2R2pjMWhSbjVSSGc/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2RWNINEpzc25Ma1U/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2MURxZGtqNnYxMDA/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2RG5zYkstZURrdDA/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2c1ZFQllrMl92eFU/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2eVFVZEF2ZHdkNlE/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2QW1jM2M1ejdLSkU/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2MHlLbS1tbzNVVDA/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2S19LSVF5UlUtS0k/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2eEswVmdGcjE2Q28/view?usp=sharing
https://drive.google.com/file/d/0BzyyTlvGE-T2UXV6Q3ZrYlkzYjg/view?usp=sharing


As for the comments about the lookback periods, the previous momentum research going back 80 years has consistently looked at previous returns for the past 6-12 months. Those lookback periods still work today so that's a pretty decent amount of out of sample evidence. Find me another strategy with that much out of sample evidence.

Title: Re: Dual Momentum Investing
Post by: hodedofome on April 22, 2015, 02:39:49 PM
No offense, but those who are intent on finding the truth will find a way to get it. Those who aren't, just make excuses for why they can't. You're obviously an intelligent person, you're telling me you can't make up an email address used for sign ups and put in a fake phone number?


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Title: Re: Dual Momentum Investing
Post by: sol on April 22, 2015, 02:40:32 PM
What a self aggrandizing and narcissistic tirade. 

I like you miles.  You have interesting things to say, and you're deliberately inflammatory.  I'll assume your personal insult was meant in the most benign way possible.

I was kind of hoping for a more thoughtful response to some of those issues though.

Quote
You deride trendfollowing here,

And you deride me personally here, but you still read what I have to say and maybe find value in it, just like I do with your momentum strategy.

For the record, I suspect that the US economy and thus the stock market, in broad strokes, has some particular traits that are predictable.  And I'm pretty sure that there are ways to exploit that predictability, for a while, particularly if you're ahead of the curve and can do so before others catch on.

I think you've done it with your work on travel hacking.  I'm guessing that in ten years time a short course on travel hacking will have no value, either because the loopholes have closed or because the knowledge is so widespread.  In the meantime, you're successfully profiting from leading the curve on that particular exploit.  Good on you.

I'm less convinced that an easy to implement technical trading strategy is the same kind of winner.  But I will not begrudge you the fortune you make of you turn out to be right.

Quote
by your very definition of charlatan, I would point out that Bogle is a charlatan for profiting immensely off of his own strategy: 

That seems like a fair point, but I might quibble over the details.  Bogle got rich facilitating the trades of people following his advice, not selling the advice itself.  It's probably an irrelevant distinction.

Quote
So you believe in the the superiority of a theory that has been demonstrably outperformed by the very strategy that you deride.

No, I believe that logic and reason are better predictors of future results than blindly following a strategy that might have succeeded by pure random chance.  I still don't understand WHY double momentum should work, so the fact that it appears to have worked in the past has not convinced me it will work in the future.

As an example, I really like Meb Faber's work on international equity exposure by using national market CAPE ratios.  It makes sense to me why it should work, so the fact that his strategy has been a dismal failure for the past few years doesn't discourage me and I think he might eventually be proven right.  Double momentum lacks that rational basis in my mind, so the fact that it has worked has not convinced me that it will continue to do so, when random chance is also a viable explanation.

You seem to really believe in the data mining approach to creating an investment strategy, and that's fine for you.   Lots of smart folks agree with you.  When I'm playing with my own money, though, I want more than that if I'm going to adopt any strategy that might do worse than my guaranteed average returns.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 22, 2015, 02:50:49 PM
No offense, but those who are intent on finding the truth will find a way to get it. Those who aren't, just make excuses for why they can't. You're obviously an intelligent person, you're telling me you can't make up an email address used for sign ups and put in a fake phone number?


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If I thought it actually contained the truth I might be so inclined to jump through those hoops.  In fact I would probably just divulge my email and phone number if I truly believe it contained the truth.   I also believe if it did contain the truth, that it's probably not the only source that did, and I could find it elsewhere that didn't require personal information or me faking personal information to gain access to it.  Pretty much any website that requires me to sign up and divulge my email address and phone number gets automatically dismissed unless I already trust them and have confidence they won't sell that information, and I have no confidence in that website whatsoever.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 22, 2015, 03:56:32 PM
What a self aggrandizing and narcissistic tirade. 

I like you miles.  You have interesting things to say, and you're deliberately inflammatory.  I'll assume your personal insult was meant in the most benign way possible.

I was kind of hoping for a more thoughtful response to some of those issues though.

Quote
You deride trendfollowing here,

And you deride me personally here, but you still read what I have to say and maybe find value in it, just like I do with your momentum strategy.

For the record, I suspect that the US economy and thus the stock market, in broad strokes, has some particular traits that are predictable.  And I'm pretty sure that there are ways to exploit that predictability, for a while, particularly if you're ahead of the curve and can do so before others catch on.

I think you've done it with your work on travel hacking.  I'm guessing that in ten years time a short course on travel hacking will have no value, either because the loopholes have closed or because the knowledge is so widespread.  In the meantime, you're successfully profiting from leading the curve on that particular exploit.  Good on you.

I'm less convinced that an easy to implement technical trading strategy is the same kind of winner.  But I will not begrudge you the fortune you make of you turn out to be right.

Quote
by your very definition of charlatan, I would point out that Bogle is a charlatan for profiting immensely off of his own strategy: 

That seems like a fair point, but I might quibble over the details.  Bogle got rich facilitating the trades of people following his advice, not selling the advice itself.  It's probably an irrelevant distinction.

Quote
So you believe in the the superiority of a theory that has been demonstrably outperformed by the very strategy that you deride.

Quote
Just don't be surprised if it turns out the fortune teller you just paid turns out to be a charlatan after all.
No, I believe that logic and reason are better predictors of future results than blindly following a strategy that might have succeeded by pure random chance.  I still don't understand WHY double momentum should work, so the fact that it appears to have worked in the past has not convinced me it will work in the future.

As an example, I really like Meb Faber's work on international equity exposure by using national market CAPE ratios.  It makes sense to me why it should work, so the fact that his strategy has been a dismal failure for the past few years doesn't discourage me and I think he might eventually be proven right.  Double momentum lacks that rational basis in my mind, so the fact that it has worked has not convinced me that it will continue to do so, when random chance is also a viable explanation.

You seem to really believe in the data mining approach to creating an investment strategy, and that's fine for you.   Lots of smart folks agree with you.  When I'm playing with my own money, though, I want more than that if I'm going to adopt any strategy that might do worse than my guaranteed average returns.


Fair enough Sol,

I like you too, and enjoy your commentary very much when it is not so breezily dismissive of others (my) perspective(s.)

For the record here are the parts of your post that I found to be self aggrandizing and narcissistic:

Quote
I'm a dyed in the wool indexer who generally derides chartist fantasies like this.

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

Quote
Me, I don't believe in vampires or ghosts or crystal balls.

From my perspective basing an investing strategy on a good story is utter nonsense.  Furthermore its probably not what you do.  I would guess that you've chosen my second favorite investing strategy, (passive indexing,) because it has traditionally performed very well, and post facto you've bought into a theory about efficient markets, despite ample evidence that markets are not truly efficient.

To me it seems far more rational to invest in a way that has actually worked well in the past, in in and out of sample data, and which has persisted long after it was described, and makes sense in my view.  We invest in real markets, not ones of our own conception.

Investing in bad companies is not immediately intuitive from a risk perspective (value investing), but the small value effect persists regardless.  If risk and reward are irretrievably linked then why do low beta stocks persistently outperform relative to high?

I love in indexing because it is cheap and it works.  I love dual momentum because it is cheap and it works and it limits left tail exposure.

I make no claims about knowing the future.  I just think its smart to practice what works.

Betting on human irrationality is a very comfortable bet for me because I am convinced of my own irrrationality.  Maybe you find yourself to be perfectly rational, though I seem to recall you writing about "buying the dips" with EM indices, which strikes me as both technical trading and not perfectly in keeping with your own "logic".
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 22, 2015, 03:59:26 PM
No offense, but those who are intent on finding the truth will find a way to get it. Those who aren't, just make excuses for why they can't. You're obviously an intelligent person, you're telling me you can't make up an email address used for sign ups and put in a fake phone number?


Sent from my iPhone using Tapatalk

If I thought it actually contained the truth I might be so inclined to jump through those hoops.  In fact I would probably just divulge my email and phone number if I truly believe it contained the truth.   I also believe if it did contain the truth, that it's probably not the only source that did, and I could find it elsewhere that didn't require personal information or me faking personal information to gain access to it.  Pretty much any website that requires me to sign up and divulge my email address and phone number gets automatically dismissed unless I already trust them and have confidence they won't sell that information, and I have no confidence in that website whatsoever.

Why would you have a belief one way or another about its truth when you haven't read what it contains?
Title: Re: Dual Momentum Investing
Post by: sol on April 22, 2015, 04:32:21 PM
For the record here are the parts of your post that I found to be self aggrandizing and narcissistic:

Yes, I am also deliberately inflammatory sometimes.  I think this is why our exchanges have always been so colorful.  Sometimes, late at night when my significant other has neglected my emotional needs, I'll lie in bed and fondly recall our long talks about effective vs marginal tax rates, and smile quietly to myself.  Smooches!

Quote
To me it seems far more rational to invest in a way that has actually worked well in the past, in in and out of sample data,
...
Investing in bad companies is not immediately intuitive from a risk perspective (value investing), but the small value effect persists regardless. 

Like I said above, lots of smart people get paid heaps of money to agree with you.  The whole high speed high frequency trading movement is comprised of people like you, looking for an edge tracking the specific details of what looks to me like a random walk.

As for the non intuitive nature of value investing, I think the same could be said of this momentum strategy.  You're deliberately reducing diversification and flaunting modern portfolio theory in order to buy high and sell low.  Yet it still seems to work despite that sounding like terrible advice to me. Maybe they both work precisely because they are contrarian schemes in an essentially random market dominated by herd mentality?

Quote
seem to recall you writing about "buying the dips" with EM indices, which strikes me as both technical trading and not perfectly in keeping with your own "logic".

Oh hell yes, I'm chock full of ugly contradictions. In this case though, I've been gradually increasing my EM exposure for reasons related to my long term projections of the global economy. I consider it my "play" money and I'm currently up to almost half a percent of my total liquid assets.

Buying on "down" days is purely for entertainment value, as my monthly contributions get a true-up at the end of every month anyway, if I haven't invested my target amount.  It's my own personal trick for meeting that internal desire for control through tinkering, while still helping myself stay the course through automatic larger investments aligned with my overall investment strategy.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 22, 2015, 04:47:13 PM
'According to the data,' the difference between momentum and value is a matter of timeframe. Momentum appears to work in timeframes of 1 month up to 12 months with a fairly steep drop off afterwards, while mean reversion (value) works in timeframes of 3 years to 5 years. So if something has been up for the past 12 months, it would not make sense to bet against it, rather in the short term it would make sense to go along with the trend. But if something has been down for 3-5 years, it would make sense to buy it in anticipation of it reverting to the mean. So both momentum and value can work even though they appear opposite. The difference is a matter of differing timeframes.


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Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 22, 2015, 06:18:40 PM
No offense, but those who are intent on finding the truth will find a way to get it. Those who aren't, just make excuses for why they can't. You're obviously an intelligent person, you're telling me you can't make up an email address used for sign ups and put in a fake phone number?


Sent from my iPhone using Tapatalk

If I thought it actually contained the truth I might be so inclined to jump through those hoops.  In fact I would probably just divulge my email and phone number if I truly believe it contained the truth.   I also believe if it did contain the truth, that it's probably not the only source that did, and I could find it elsewhere that didn't require personal information or me faking personal information to gain access to it.  Pretty much any website that requires me to sign up and divulge my email address and phone number gets automatically dismissed unless I already trust them and have confidence they won't sell that information, and I have no confidence in that website whatsoever.

Why would you have a belief one way or another about its truth when you haven't read what it contains?

As I already stated it's because I don't trust them.  They want my personal contact information.  That makes me think they are up to something. 
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 22, 2015, 06:32:26 PM
Right, but  if you "thought it contained the truth" you would trust them? 

The question is not why you don't give them your email, It's why you do not think it actually contains the truth, when there seemingly is no basis for that opinion.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 22, 2015, 07:08:27 PM
Quote
Like I said above, lots of smart people get paid heaps of money to agree with you.  The whole high speed high frequency trading movement is comprised of people like you, looking for an edge tracking the specific details of what looks to me like a random walk.

First of all, no one gets paid a cent to agree with me.  I guarantee it.  And high frequency trading is generally not about market timing, it is about millisecond price arbitrage.  It is technological insider trading.  For the most part HF traders are agnostic about predicting market movement.  They want to sell items that have already been ordered for a slightly higher price.  (their profit)

My guess is that you don't really believe in a random walk.  I would wager that you firmly believe in continued public company revenue growth going forward, an equity risk premium, decreased volatility in bonds, and mean reversion.

I would guess that relative to the true world economy your portfolio is overweight equities, domestic equities, domestic debt, and underweight commodities, and currency, and global debt.

Why? because you either believe in the underlying story of your chosen investments, or you have noted their outperformance historically, or both. 

The best argument for buy and hold bogle investing is that it is cheap.  But it is not as cheap as a cap weighted global market portfolio that represents the actual capitalization of the world economy (because you would never need to rebalance such a portfolio) . And it is not passive, because you are putting your penny down too.  You are betting that some assets will overperform, and some will under perform.

Quote
As for the non intuitive nature of value investing, I think the same could be said of this momentum strategy.  You're deliberately reducing diversification and flaunting modern portfolio theory in order to buy high and sell low. 

Absolutely, which is why these are called anomalies.  (except for the part about buying high and selling low.  The idea of momentum (and its actual record) is to buy at some price and sell higher.)

Quote
Oh hell yes, I'm chock full of ugly contradictions.

Me too.  Which is why momentum is a cohesive story to me.  I am perfectly irrational as is everyone I see around me and we all use the same heuristics to make decisions, and these heuristics create momentum.  A perfect reflection of our own human irrationality.  (To me this is the most logical story of all!  But these are merely my own biases.)

Quote
Buying on "down" days is purely for entertainment value, as my monthly contributions get a true-up at the end of every month anyway, if I haven't invested my target amount.  It's my own personal trick for meeting that internal desire for control through tinkering, while still helping myself stay the course through automatic larger investments aligned with my overall investment strategy.

It wouldn't be entertaining if you didn't think (feel?) it was useful. 
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 22, 2015, 08:14:49 PM
Right, but  if you "thought it contained the truth" you would trust them? 

The question is not why you don't give them your email, It's why you do not think it actually contains the truth, when there seemingly is no basis for that opinion.

My default position is that it most likely does not contain the truth (like 99% of websites).  I have no reason to believe it does contain the truth besides hodedofome saying it does.  I don't personally know hodedofome, and I can't recall any interaction with him on this forum.  I'm not saying it definitely doesn't contain the truth, or definitely is a scam, i'm just not willing to invest the time to circumvent their registration process or give them my personal contact information. 

In my experience any place that requests for my email address and phone number has ulterior motives.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 22, 2015, 08:33:26 PM
I'll vouch for hodedofome. He's solid!
And honestly a wealth of info.
Title: Re: Dual Momentum Investing
Post by: jcoz on April 22, 2015, 10:28:44 PM
http://www.optimalmomentum.com/faq.html

The optimal momentum website has a faq which addresses a few common questions posted on this thread such as:
   If momentum investing is so great, why are not more people doing it?
   It usually takes awhile for academic research to work its way into the investment marketplace. We saw that with indexing and value   investing. Public awareness should grow as momentum research information gets assimilated over time.

While the answer probably leaves us all a bit wanting, it is directly from the author/researcher's mouth.

I am still performing a bit of reading/research prior to committing even my madmoney to the approach.  I am, however, appreciative of milesdividendmd's writing on the subject as his coward's series is an enjoyable read.
Title: Re: Dual Momentum Investing
Post by: HipGnosis on April 23, 2015, 10:03:25 AM
I've been reading along as I like to learn what I can about investing strategies from where ever I can.
I did some internet searching on my own.  It's amazing how much vague info there is about Dual Momentum investing (a name that I abhore btw).
The term 'excessive negative gain' made  me gag...
I eventually found (somewhere) on optimalmomentum.com that they actually did a bit better (they don't say how much...) with industry sector indexes than with their 'Global Equities Momentum'.  They call it: Dual Momentum Sector Rotation.

I'm going to backtest applying absolute momentum (another abhorable term) to proven sector rotation.

I am new here, but I gotta say;  I wish the folks that get so disturbed when anyone doesn't take everything they say as the gospel truth, and those who lambaste what they don't understand or agree with would go back to their playschool computers.
Title: Re: Dual Momentum Investing
Post by: PathtoFIRE on April 23, 2015, 10:24:34 AM
So I understand the "dual" refers to two measures of momentum, the first looking at the various asset classes chosen (SP500, international, etc), and the second looking at everything versus cash/short-term treasuries. However, in practice, isn't this just a one step process, where you compare everything at one time, and pick the best performer over the past 3/6/12 months? And if everything is negative except treasuries, then you move into that? I'm just trying to see if there is something I don't understand about the absolute momentum part. Also, why are total bond funds usually not added to the mix, or real estate? Looking back at the funds in my 401k over the past 5 years on stockcharts.com, there are times when either of these show superior performance to the SP500 or international funds (although after fees, especially the the ER of 0.89 on the real estate fund, the superiority is less clear), but it wasn't clear from a cursory look that there was any momentum, meaning usually when there was a signal to buy either the total bond or the real estate fund, there was a signal to sell relatively shortly after, suggesting no real momentum.
Title: Re: Dual Momentum Investing
Post by: boarder42 on April 23, 2015, 10:48:13 AM
So I understand the "dual" refers to two measures of momentum, the first looking at the various asset classes chosen (SP500, international, etc), and the second looking at everything versus cash/short-term treasuries. However, in practice, isn't this just a one step process, where you compare everything at one time, and pick the best performer over the past 3/6/12 months? And if everything is negative except treasuries, then you move into that? I'm just trying to see if there is something I don't understand about the absolute momentum part. Also, why are total bond funds usually not added to the mix, or real estate? Looking back at the funds in my 401k over the past 5 years on stockcharts.com, there are times when either of these show superior performance to the SP500 or international funds (although after fees, especially the the ER of 0.89 on the real estate fund, the superiority is less clear), but it wasn't clear from a cursory look that there was any momentum, meaning usually when there was a signal to buy either the total bond or the real estate fund, there was a signal to sell relatively shortly after, suggesting no real momentum.

so all equities dont necessarily have to be negative over the look back window to move to bonds.  the short term note was as high as 6% in the real estate bubble of 2008.  so you just compare all 4 ... its really simple and you just check it once a month and realocate if needed.
Title: Re: Dual Momentum Investing
Post by: PathtoFIRE on April 23, 2015, 11:05:13 AM
so all equities dont necessarily have to be negative over the look back window to move to bonds.  the short term note was as high as 6% in the real estate bubble of 2008.  so you just compare all 4 ... its really simple and you just check it once a month and realocate if needed.

Good point, I was being careless with language. Short term notes were even returning around 3% return over a 6 month lookback as late as 2011 it looks like. On the PERFchart, you can toggle one of the up to 10 funds/stocks, and the returns on everything else is reported in relation to that, so I was toggling short term treasuries, and in that sense, there are points where everything else is negative _in relation to_ the treasuries.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 23, 2015, 03:39:44 PM
In the past 5 years there have been no sustained down periods in U.S. Stocks, which is why any time that the system told you to switch to another asset class, you were quickly given a signal to switch back. It's called getting 'whipsawed' and it's going to happen. You just have to accept it. It's incredibly frustrating for a lot of people which is why most give up on the system. Just as you give up or say 'screw it I'll just buy and hold US stocks,' that's when the real bear market happens and you wish you had stuck with the system.

Ed Seykota is a famous (and stupidly successful) trend follower who wrote a song to help cope with the psychological issues of following a systematic approach to trend following. https://youtu.be/LiE1VgWdcQM


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Title: Re: Dual Momentum Investing
Post by: dungoofed on April 23, 2015, 10:37:32 PM
Ed Seykota is a famous (and stupidly successful) trend follower who wrote a song to help cope with the psychological issues of following a systematic approach to trend following. https://youtu.be/LiE1VgWdcQM

Classic!

* * * * *

Any chance the dual momentum-ers give us a heads up in this thread when they next trade? Might be several years from now but I would like to see how it plays out.
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on April 24, 2015, 04:43:32 AM


Why don't you just take the bullet proof dual momentum strategy, and implement it one day earlier?  Just get onto that roller coaster one day earlier, and get off one day earlier.  Wouldn't that give you slightly more gains, and slightly less losses?

To me this does not seem like a logically valid strategy. There are only about 30 days in a month. That means that there are a finite amount of choices you could make to game the system. For instance, why not double bullet proof the strategy and go two days earlier? I mean you'll beat everyone that has thought like you! Also think if everyone did their DM balancing on the 1st. If you decided to do yours on the 15th, would you be half a month early, or half a month late? Well what if you did it on the 22nd? Would you be about 8 days early or would you be 7 days late from the 15th? It would be easy to game if everyone picked the same day, but more than likely people will distribute their choices across all the days of the month making it hard to be one day in front of everyone.

Right. This is the issue I described earlier where I tried to imagine a world in which everyone used dual momentum. Even given this knowledge, It would be very difficult to arbitrage against dual momentum due to varying look back periods, days to make trades, etc.

Which brings me back to what I posted earlier:


Maybe my perception of the market is wrong, but I see it as a positive sum game, where the positive sum is the total market capitalization.  For example is the total market is $1M, and then in the future it is $2M, then $1M in real (at least on paper) wealth has been created, but no more.  So buy and hold index investors would have realized average growth during that period, dual momentum investors would have realized above average growth, and because of the math some other group of rubes has achieved below average market returns for that period. 

So are you telling me if everyone employed a dual momentum strategy that everyone's portfolio would go gang busters, and no one would lose to a bear market?  Lake Wobegon, where every investor is above average?  How is that even mathematically possible?

No, in this hypothetical there would be an asset bubble until all of the capital was used up. Then it would pop and destroy everyone.

The point is that it would be very hard to profit off of this information. In other words it is difficult to impossible to arbitrage away momentum.

Is a ridiculous hypothetical of course, but useful I think.

Not a ridiculous hypothetical situation.  See: tech stocks in 1999, real estate in 2008, tulip bulbs in Holland in 17-something, etc.  Although these bubbles weren't caused by DM per se, they were caused by a large proportion of speculators blindly following momentum.  If anyone was following a DM strategy through these boom-and-bust cycles, they made out like bandits (i.e., they were the smart money).  But what if a large proportion of speculators had been doing DM?  My guess is the busts would have been much quicker and deeper due to everyone bailing out as soon as the trend started to change.  Your sell orders may not have been executed quickly enough to avoid taking a bath.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 24, 2015, 05:51:03 AM
http://blog.alphaarchitect.com/2015/04/21/are-value-investing-and-momentum-investing-robust-anomalies/

Legitimate anomalies can usually be described via a behavioral finance lens:

Can we identify poor psychology in the market? (Why do prices get dislocated along the way)
Can we identify the limits to arbitrage? (Why don’t large pools of capital arbitrage the anomaly away)
There are 2 anomalies that stand out among all other anomalies: Value investing and momentum investing.


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Title: Re: Dual Momentum Investing
Post by: Financial.Velociraptor on April 24, 2015, 08:53:48 AM
There are 2 anomalies that stand out among all other anomalies: Value investing and momentum investing.

Third "big" anomaly has existed since Black/Scholes defined the options pricing model: the "options smile".  You can find about 30,000 reams of academia on that one, especially the 'negative skew' that favors put premiums over call premiums.  Impossible cry the EFM peeps, yet it has persisted for decades across an entire class of assets despite a clear path to arbitrage.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 24, 2015, 09:01:40 AM
Yeah not my words, it came from the article I posted. I unfortunately don't know enough about options but I do know some very smart people who have said roughly the same as you.


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Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 24, 2015, 09:20:05 AM

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

The optimal momentum website has a faq which addresses a few common questions posted on this thread such as:
   If momentum investing is so great, why are not more people doing it?
   It usually takes awhile for academic research to work its way into the investment marketplace. We saw that with indexing and value   investing. Public awareness should grow as momentum research information gets assimilated over time.

While the answer probably leaves us all a bit wanting, it is directly from the author/researcher's mouth.

I am still performing a bit of reading/research prior to committing even my madmoney to the approach.  I am, however, appreciative of milesdividendmd's writing on the subject as his coward's series is an enjoyable read.

Thanks jcoz.

The cowards posts were not meant as a persuasive series really.  My blog has always been just a stage for personal musings.

The cowards philosophy is just kind of how I see the world of investing. It's just one slubs perspective.

I am risk averse first and foremost and I truly believe that avoiding left tail risk is the name of the game.

I agree with others that you don't have to hit home runs. But what's more important (from my perspective) is just not hitting into triple plays.

Compounding takes time, most of all, so avoiding Big negative moves that erase long periods of time is a worthwhile goal.

Whether or not it is possible is open to debate.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 24, 2015, 09:21:32 AM



Why don't you just take the bullet proof dual momentum strategy, and implement it one day earlier?  Just get onto that roller coaster one day earlier, and get off one day earlier.  Wouldn't that give you slightly more gains, and slightly less losses?

To me this does not seem like a logically valid strategy. There are only about 30 days in a month. That means that there are a finite amount of choices you could make to game the system. For instance, why not double bullet proof the strategy and go two days earlier? I mean you'll beat everyone that has thought like you! Also think if everyone did their DM balancing on the 1st. If you decided to do yours on the 15th, would you be half a month early, or half a month late? Well what if you did it on the 22nd? Would you be about 8 days early or would you be 7 days late from the 15th? It would be easy to game if everyone picked the same day, but more than likely people will distribute their choices across all the days of the month making it hard to be one day in front of everyone.

Right. This is the issue I described earlier where I tried to imagine a world in which everyone used dual momentum. Even given this knowledge, It would be very difficult to arbitrage against dual momentum due to varying look back periods, days to make trades, etc.

Which brings me back to what I posted earlier:


Maybe my perception of the market is wrong, but I see it as a positive sum game, where the positive sum is the total market capitalization.  For example is the total market is $1M, and then in the future it is $2M, then $1M in real (at least on paper) wealth has been created, but no more.  So buy and hold index investors would have realized average growth during that period, dual momentum investors would have realized above average growth, and because of the math some other group of rubes has achieved below average market returns for that period. 

So are you telling me if everyone employed a dual momentum strategy that everyone's portfolio would go gang busters, and no one would lose to a bear market?  Lake Wobegon, where every investor is above average?  How is that even mathematically possible?

No, in this hypothetical there would be an asset bubble until all of the capital was used up. Then it would pop and destroy everyone.

The point is that it would be very hard to profit off of this information. In other words it is difficult to impossible to arbitrage away momentum.

Is a ridiculous hypothetical of course, but useful I think.

Not a ridiculous hypothetical situation.  See: tech stocks in 1999, real estate in 2008, tulip bulbs in Holland in 17-something, etc.  Although these bubbles weren't caused by DM per se, they were caused by a large proportion of speculators blindly following momentum.  If anyone was following a DM strategy through these boom-and-bust cycles, they made out like bandits (i.e., they were the smart money).  But what if a large proportion of speculators had been doing DM?  My guess is the busts would have been much quicker and deeper due to everyone bailing out as soon as the trend started to change.  Your sell orders may not have been executed quickly enough to avoid taking a bath.

The "ridiculous hypothetical" was not the existence of future bubbles. It was 100% of investors adopting dual momentum.
Title: Re: Dual Momentum Investing
Post by: forummm on April 25, 2015, 01:24:14 PM
Ed Seykota is a famous (and stupidly successful) trend follower who wrote a song to help cope with the psychological issues of following a systematic approach to trend following. https://youtu.be/LiE1VgWdcQM


Sent from my iPhone using Tapatalk

Thanks for posting. I only invest my life savings in ways that can be explained by song. ;)

(j/k --it's a fun addition to the topic)
Title: Re: Dual Momentum Investing
Post by: AlanStache on April 25, 2015, 01:53:56 PM
I think I have looked into momentum strategies in past, basic opinion at the time was yes sort of but not worth the effort/added risk of doing the unconventional.  Seeing wipsaws in back testing does not give confidence either.  Need to read up a bit more from the links above then write some code.

thanks for the great read.
Title: Re: Dual Momentum Investing
Post by: mtnrider on April 25, 2015, 03:09:40 PM
Is accurate daily data is available for the four funds?

It might be fun to write a little program to backtest the algorithms (trust but verify  :) ).  Oh, and see how thing would have gone with minor changes.
Title: Re: Dual Momentum Investing
Post by: AlanStache on April 25, 2015, 03:44:37 PM
Is accurate daily data is available for the four funds?

It might be fun to write a little program to backtest the algorithms (trust but verify  :) ).  Oh, and see how thing would have gone with minor changes.

yahoo finance is a good/ok source of free historical data.  can be pulled programmatically as csv files.  they dont seem to mind people pulling large amounts of data, also includes an adjusted close that accounts for splits/dividends.  google finance does not have an adjusted close (last time I checked).  back testing over 10 years dividends add up.
Title: Re: Dual Momentum Investing
Post by: GGNoob on April 25, 2015, 04:11:20 PM
Is accurate daily data is available for the four funds?

It might be fun to write a little program to backtest the algorithms (trust but verify  :) ).  Oh, and see how thing would have gone with minor changes.

You can back-test on https://www.portfoliovisualizer.com/ using the timing models section.
Title: Re: Dual Momentum Investing
Post by: forummm on April 25, 2015, 07:06:54 PM
I finally read this thread today. Still processing through some thoughts. But the big one I have now is market timing. People repeatedly said in posts that everyone says market timing is bad. And that Ben Graham is one big reason why, since he was so opposed to market timing. And his disciple Buffett took on that torch.

But Graham was explicitly for market timing.

He was for more narrow movements in portfolio allocation (never less than 25% in either stocks or bonds). But clearly advocated (and practiced) reallocating his portfolio between those two asset classes based on whether he determined one was sufficiently "too expensive" compared to the other.

Graham was also timing the market on the basis of individual stock selections. Again, based on when he thought the movements of the market made a particular stock "too cheap", he would buy into that stock. And sell it if it got "too expensive".

Buffett does something similar, except that he does almost all buying and very little selling. But the reason for that is (I think) mostly the taxes he's trying to avoid and the fact that his positions are so huge that he would depress the stock price as he sold it off. He might think Coke is overpriced, but his capital gains on it since ~1986 when he bought it, plus the fact that he holds 10% of the company, make it just too expensive to sell relative to other investments available.

I don't know that this give me any great insight into dual momentum investing (a dumb name BTW). But just thinking through the implications of the strategy.
Title: Re: Dual Momentum Investing
Post by: forummm on April 26, 2015, 11:17:19 AM
I noticed that all the backtesting shown on this site looks at the last 10 or 20 years. The market performance during this time is a little unusual in ways that would seem to bias results in favor of a DM strategy as articulated by MDMD (6-month lookback, relative strength, 1-fund holding, etc). For example, two huge crashes within 10 years of each other, both were preceeded by a bull market, and both crashes were slow enough and deep enough that the market timer could switch to another fund well before the bottom, and the bull markets following the crashes were slow enough at first such that the market timer could jump back in before the losing too much growth, etc. I thought I would see what the most data available was and simulate that.

I think I discovered where there isn't any free lunch. And that the flaws can be substantively deleterious to short- and long-term performance. I used the Vanguard funds with the longest-available data on https://www.portfoliovisualizer.com/test-market-timing-model (https://www.portfoliovisualizer.com/test-market-timing-model) to conduct MDMD's DM strategy as best as possible from 1986 (or 1987 or 1988 for some funds) through 2014. The 500 Index fund (VFINX), the Small Cap Index Fund (NAESX), and International Growth Fund (VWIGX) were available from 1985 onwards. I was unable to find another international fund available for as lengthy a time period. I also looked at results with that fund excluded. The bond funds most similar to "quality" that investors normally pile into during crashes and with data available were GNMA (VFIIX), Long-Term Treasury (VUSTX), Total Bond (VBMFX), LT Investment Grade (VWESX), ST Investment Grade (VFSTX). These were available starting between 1986 and 1988 depending on the fund. You can argue about which one you think is the "right" one that you would use in a DM strategy. But I looked at them all. I won't include links to all of the simulation results because they are absurdly long URLs. But I will include one and you can easily substitute the fund call letters to see the results for yourself. Note that all these examples are ignoring any transaction costs (through bid/ask spreads, trading fees, capital gains taxes, etc) and assume reinvestment of dividends.

Example 1 LT Treasury 1987+:
Timing portfolio $90,960
Stock market $159,503
Over ~30 years, you end up with about half as much as a buy-and-hold investor, and lag the bond portfolio for about 25 of the years. There's a +$20k positive difference by omitting international.

Example 2 GNMA 1986+:
Timing portfolio $191,625
Stock market $185,465
There's a -$35k difference by omitting international.

Example 3 Total Bond 1988+:
Timing portfolio $177,762
Stock market $156,984
Even with avoiding the 1987 flash crash, the timing portfolio only slightly outperforms. Omitting international has a -$12k difference.

Example 4 LT investment grade 1986+
Timing portfolio $127,063
Stock market $185,465
Omitting international has a -$23k difference.

Example 5 ST investment grade 1986+
Timing portfolio $171,083
Stock market $185,465
Omitting international has a -$40k difference.

So this tells me that the DM strategy, when tested on an out-of-sample set of data, fails miserably. The results posted earlier in the thread from the last 10 or 20 years showed ending portfolios of ~4X the buy-and-hold. So the fact that extending the sample backwards just 10 or 20 years results in similar or much worse performance shows how terrible the DM strategy performs during that extra period--even in the period that excludes the 1987 crash.

In this sequence of returns, for some of these examples, a retiree would go bust quickly. Since their portfolio dives in the first portion of the simulation period and only very slowly recovers 2 decades later, a retiree would be selling a very high percentage of their portfolio to live on. In example 1, the portfolio without any withdrawals would still be below the starting value after 6 years.

Example simulation URL (note you can't just click on the link here to have all the options load, you have to copy and past the URL Mod Edit: Fixed link. Click away. /end edit.):
https://www.portfoliovisualizer.com/test-market-timing-model?s=y&timingWeights[2]=0&endYear=2014&volatilityPeriodWeight=0&movingAverageType=1&windowSize=6&timingUnits[2]=2&timingModel=4&volatilityWindowSize=0&startYear=1985&assetsToHold=1&multipleTimingPeriods=false&timingUnits[1]=2&outOfMarketAssetType=1&timingPeriods[0]=5&timingWeights[0]=100&volatilityWindowSizeInDays=0&riskControl=false&symbols=VUSTX%2C+VFINX%2C+NAESX%2C+VWIGX&riskWindowSizeInDays=0&timingUnits[0]=2&timingWeights[1]=0&windowSizeInDays=105&volatilityPeriodUnit=1&riskWindowSize=10&rebalancePeriod=1 (http://bit.ly/1bIjnrX)
Title: Re: Dual Momentum Investing
Post by: GGNoob on April 26, 2015, 02:23:34 PM
Here's the results using just 3 funds...S&P 500, International Growth, and a GNMA fund (http://goo.gl/SI7LPw). The test goes back to 1986. The timing portfolio underperforms until 2002. Those first 16 years of underperformance would make it incredibly hard to stick to when a simple buy and hold approach would have done better.
Title: Re: Dual Momentum Investing
Post by: forummm on April 26, 2015, 02:41:32 PM
Here's the results using just 3 funds...S&P 500, International Growth, and a GNMA fund (http://goo.gl/SI7LPw). The test goes back to 1986. The timing portfolio underperforms until 2002. Those first 16 years of underperformance would make it incredibly hard to stick to when a simple buy and hold approach would have done better.

And that underperforms just buying and holding emerging markets:
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&annualOperation=0&initialAmount=10000&EmergingMarket1=100&endYear=2014&mode=2&inflationAdjusted=true&annualAdjustment=0&startYear=1986&rebalanceType=1&annualPercentage=0.0

Doing this kind of sensitivity analysis shows how vulnerable these kinds of systems are to overfitting by using backtesting. Just by using a slightly different bond fund (one that is still safe, and has returned about the same amount over time), your portfolio ends up being half as much. And whether you include international or not, depending on which bond fund you use, has a similar effect of changing the final value by 4x your starting portfolio amount. There's a lot of increased risk to this system that doesn't show up in the standard deviation.
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on April 26, 2015, 02:59:54 PM
Here's the results using just 3 funds...S&P 500, International Growth, and a GNMA fund (http://goo.gl/SI7LPw). The test goes back to 1986. The timing portfolio underperforms until 2002. Those first 16 years of underperformance would make it incredibly hard to stick to when a simple buy and hold approach would have done better.

Many of the back tests up-thread also showed that long period of underperformance in the 1990s.  If you stuck with it, ultimately you were vindicated and ended up with twice as much money.  But at what point does your wise patience start to feel like waiting for the Great Pumpkin?

I've run a number of back tests as well, and generally found that the reduction in maximum drawdown does seem to be consistent across most scenarios, even compared to a balanced portfolio.  So perhaps there is something to that aspect of it.
Title: Re: Dual Momentum Investing
Post by: forummm on April 26, 2015, 03:57:40 PM
Here's the results using just 3 funds...S&P 500, International Growth, and a GNMA fund (http://goo.gl/SI7LPw). The test goes back to 1986. The timing portfolio underperforms until 2002. Those first 16 years of underperformance would make it incredibly hard to stick to when a simple buy and hold approach would have done better.

Many of the back tests up-thread also showed that long period of underperformance in the 1990s.  If you stuck with it, ultimately you were vindicated and ended up with twice as much money.  But at what point does your wise patience start to feel like waiting for the Great Pumpkin?

I've run a number of back tests as well, and generally found that the reduction in maximum drawdown does seem to be consistent across most scenarios, even compared to a balanced portfolio.  So perhaps there is something to that aspect of it.

I suppose. But investing such that from the same starting portfolio value you get a 30% drawdown from $100k (and miss most of the rebound) is a worse scenario than a 50% drawdown from $250k (and you get all of the rebound).
Title: Re: Dual Momentum Investing
Post by: forummm on April 26, 2015, 04:33:44 PM
And if you are spending most years getting bond-like performance with stock-like volatility, that seems suboptimal. Especially for people who are attracted to the idea that you could have less risk of dramatic portfolio decline.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 12:56:38 AM
I noticed that all the backtesting shown on this site looks at the last 10 or 20 years. The market performance during this time is a little unusual in ways that would seem to bias results in favor of a DM strategy as articulated by MDMD (6-month lookback, relative strength, 1-fund holding, etc). For example, two huge crashes within 10 years of each other, both were preceeded by a bull market, and both crashes were slow enough and deep enough that the market timer could switch to another fund well before the bottom, and the bull markets following the crashes were slow enough at first such that the market timer could jump back in before the losing too much growth, etc. I thought I would see what the most data available was and simulate that.

I think I discovered where there isn't any free lunch. And that the flaws can be substantively deleterious to short- and long-term performance. I used the Vanguard funds with the longest-available data on https://www.portfoliovisualizer.com/test-market-timing-model (https://www.portfoliovisualizer.com/test-market-timing-model) to conduct MDMD's DM strategy as best as possible from 1986 (or 1987 or 1988 for some funds) through 2014. The 500 Index fund (VFINX), the Small Cap Index Fund (NAESX), and International Growth Fund (VWIGX) were available from 1985 onwards. I was unable to find another international fund available for as lengthy a time period. I also looked at results with that fund excluded. The bond funds most similar to "quality" that investors normally pile into during crashes and with data available were GNMA (VFIIX), Long-Term Treasury (VUSTX), Total Bond (VBMFX), LT Investment Grade (VWESX), ST Investment Grade (VFSTX). These were available starting between 1986 and 1988 depending on the fund. You can argue about which one you think is the "right" one that you would use in a DM strategy. But I looked at them all. I won't include links to all of the simulation results because they are absurdly long URLs. But I will include one and you can easily substitute the fund call letters to see the results for yourself. Note that all these examples are ignoring any transaction costs (through bid/ask spreads, trading fees, capital gains taxes, etc) and assume reinvestment of dividends.

Example 1 LT Treasury 1987+:
Timing portfolio $90,960
Stock market $159,503
Over ~30 years, you end up with about half as much as a buy-and-hold investor, and lag the bond portfolio for about 25 of the years. There's a +$20k positive difference by omitting international.

Example 2 GNMA 1986+:
Timing portfolio $191,625
Stock market $185,465
There's a -$35k difference by omitting international.

Example 3 Total Bond 1988+:
Timing portfolio $177,762
Stock market $156,984
Even with avoiding the 1987 flash crash, the timing portfolio only slightly outperforms. Omitting international has a -$12k difference.

Example 4 LT investment grade 1986+
Timing portfolio $127,063
Stock market $185,465
Omitting international has a -$23k difference.

Example 5 ST investment grade 1986+
Timing portfolio $171,083
Stock market $185,465
Omitting international has a -$40k difference.

So this tells me that the DM strategy, when tested on an out-of-sample set of data, fails miserably. The results posted earlier in the thread from the last 10 or 20 years showed ending portfolios of ~4X the buy-and-hold. So the fact that extending the sample backwards just 10 or 20 years results in similar or much worse performance shows how terrible the DM strategy performs during that extra period--even in the period that excludes the 1987 crash.

In this sequence of returns, for some of these examples, a retiree would go bust quickly. Since their portfolio dives in the first portion of the simulation period and only very slowly recovers 2 decades later, a retiree would be selling a very high percentage of their portfolio to live on. In example 1, the portfolio without any withdrawals would still be below the starting value after 6 years.

Example simulation URL (note you can't just click on the link here to have all the options load, you have to copy and past the URL Mod Edit: Fixed link. Click away. /end edit.):
https://www.portfoliovisualizer.com/test-market-timing-model?s=y&timingWeights[2]=0&endYear=2014&volatilityPeriodWeight=0&movingAverageType=1&windowSize=6&timingUnits[2]=2&timingModel=4&volatilityWindowSize=0&startYear=1985&assetsToHold=1&multipleTimingPeriods=false&timingUnits[1]=2&outOfMarketAssetType=1&timingPeriods[0]=5&timingWeights[0]=100&volatilityWindowSizeInDays=0&riskControl=false&symbols=VUSTX%2C+VFINX%2C+NAESX%2C+VWIGX&riskWindowSizeInDays=0&timingUnits[0]=2&timingWeights[1]=0&windowSizeInDays=105&volatilityPeriodUnit=1&riskWindowSize=10&rebalancePeriod=1 (http://bit.ly/1bIjnrX)

Before getting into the nitty-gritty here, let me just thank you for your specific criticism of the strategy.

I find this sort of discussion very useful and truly appreciate your effort.

Now for the specifics of the points that you bring up.

To credibly call something a dual momentum strategy it must fulfill a 2 simple criteria.

1: It must include 2 imperfectly correlated assets, Plus cash.

2: Cash can be simply cash, or short-term treasuries. You can make an argument for total bond market with an average duration of about five years, but this is about as aggressive as you can possibly go. In other words "cash" must be a risk-free asset. It cannot be long-term treasuries which have interest-rate risk. It cannot be high-yield bonds which have credit risk. And it certainly cannot be mortgage-backed securities (GNMA) which have both interest rate risk and credit risk.

The idea is to harness absolute momentum, which means exiting the market when the look back period signals a bear market.

Finally looking at your back tests, I have absolutely no idea what you are actually testing, but it certainly is not dual momentum.

For instance in your example 1 you cite long-term treasuries from 1987 on. But if you back test VUSTX versus VFINX, without short-term treasuries for this time period you will find out the timing portfolio has a return of 11.3% with a Max drawdown 23.51% versus a return of 10.4% with a max drawdown of 50.39% for the stock portfolio. So even using a flawed dual momentum strategy with no short-term treasuries or safe assets it still beats 100% stocks with one half of the max drawdown!  I'll take it!

That there will be long periods of underperformance with this active strategy is beyond obvious. this is true for every active strategy, even Warren Buffet's, in retrospect.

But it is worth noting that dual momentum is at its best when the market is at its worst and that you will still compound in years when you're "losing" to the market. So you're winning you're just not winning as much as the stock market for these time periods.

So it is certainly not reasonable to expect consistent outperformance of this or any strategy, but it is very reasonable to expect markedly decreased drawdowns and excellent long-term performance.

The final point to make is that Antonacci has backtest data going back to 1971 for all of his dual momentum strategies on his site, using index data.  I encourage you to read his papers and his book so that you can gain a better understanding of the strategy.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 01:02:45 AM
Here's the results using just 3 funds...S&P 500, International Growth, and a GNMA fund (http://goo.gl/SI7LPw). The test goes back to 1986. The timing portfolio underperforms until 2002. Those first 16 years of underperformance would make it incredibly hard to stick to when a simple buy and hold approach would have done better.

And that underperforms just buying and holding emerging markets:
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&annualOperation=0&initialAmount=10000&EmergingMarket1=100&endYear=2014&mode=2&inflationAdjusted=true&annualAdjustment=0&startYear=1986&rebalanceType=1&annualPercentage=0.0

Doing this kind of sensitivity analysis shows how vulnerable these kinds of systems are to overfitting by using backtesting. Just by using a slightly different bond fund (one that is still safe, and has returned about the same amount over time), your portfolio ends up being half as much. And whether you include international or not, depending on which bond fund you use, has a similar effect of changing the final value by 4x your starting portfolio amount. There's a lot of increased risk to this system that doesn't show up in the standard deviation.

This is not sensitivity analysis.  This is just bad modeling on your part.

It's easy to find a single asset class that outperforms any strategy in retrospect.  Unless your strategy has always been to hold 100% EM stocks, your point is meaningless.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 08:50:46 AM
Thanks MDMD, you saved me some keystrokes. I'll add to your post that we need to first decide what the benchmark is going to be before we make any conclusions whatsoever. Is the benchmark just US stocks? Who gets to cherry pick the benchmark like that? It is much more realistic to use the entire global market, rather that cherry pick 1 country out of all the other possibilities. Since the dual momentum strategy as mostly described on this post uses both worldwide stocks and bonds, we should probably compare it to a balanced portfolio, rather than a 100% stock portfolio. ESPECIALLY if the small timeperiod that we're cherry picking to compare (late '80s to 2000) is literally the best period of US stocks in all of history. That to me sounds incredibly biased. Rather let's compare much greater periods of time than just that one.

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

You are absolutely correct that there is a good bit of sensitivity to what asset classes you throw in the momentum portfolio. Especially if you are only choosing 1 asset class at a time. You have to really think through which asset classes you are going to pick. It is the most important choice in a system like this. The lookback window is of much less importance than the choice of asses classes.
Title: Re: Dual Momentum Investing
Post by: forummm on April 27, 2015, 10:07:45 AM
Regarding: http://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/msg641783/#msg641783
and http://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/msg641785/#msg641785

I'm not sure I understand the cricitism of my analysis. You say you're not sure what I did, but I provided a link so that it was perfectly replicable by anyone. You argue that LT Treasuries was not the same as cash, but then later say that it performed the way you wanted it to. However, my impression is that this still causes you to dismiss the overall result from that analysis--that DM significantly underperformed buy-and-hold the last 30 years. And you said I wasn't conducting sensitivity analysis, but maybe you were just confused as to which analysis I meant. Adding additional out-of-sample years and substituting different asset classes shows how robust or not the strategy is (or, to put it differently, how sensitive it is to the specific inputs). Or perhaps you misinterpreted my comment about the perils of using backtesting as being about sensitivity analysis. The point I was making there is that by using backtesting you can always look like your strategy is genius. I think emerging markets are going to outperform developed markets for the next 30 years, so it's a reasonable strategy to buy-and-hold them. It bears similar risks of dramatic underperformance for substantial periods as does DM.

Prospectively, LT Treasuries are not entirely risk free because of interest rate risk. But during the sample period, interest rate risk was not much of an issue. Rates were generally trending down. And during the key period that mattered (the 1987 crash), LT Treasuries increased in value as you would expect because it's a safe asset. In the short term, and when we know in hindsight that interest rates did not increase, it functions like tradeable cash. Thinking prospectively, there is interest rate risk. But in hindsight, there was no downward change in asset prices due to rising interest rates.

http://quote.morningstar.com/fund/chart.aspx?t=VUSTX&region=USA&culture=en-US&statePara=%7Bsecurities%3A%5B%7Bn%3A%22Vanguard%20Long-Term%20Treasury%20Inv%22%2Cids%3A%22FOUSA00FTW%7C0P00002T15%7CCU%24%24%24%24%24USD%7C1%7C1%7CFO%7C1986-5-19%7C%7C%7Cfalse%7CUSA%7C19%22%7D%2C%7Bn%3A%22Long%20Government%22%2Cids%3A%22%24FOCA%24GL%24%24%7C%24FOCA%24GL%24%24%7CCU%24%24%24%24%24USD%7C1%7C1%7CCA%7C%7C%7C%7Ctrue%7CUSA%7C0%22%7D%2C%7Bn%3A%22Barclays%20US%20Agg%20Bond%20TR%20USD%22%2Cids%3A%22XIUSA000MC%7C0P00001G5L%7CCU%24%24%24%24%24USD%7C1%7C1%7CXI%7C%7C%7C%7Ctrue%7CUSA%7C0%22%7D%5D%2CchartType%3A%22GrowthChart%22%2Crange%3A%221987-5-19%7C1988-1-1%22%2Cperiod%3A9%2Cregion%3A%22USA%22%2Ctc%3A%22USD%22%2CisD%3A%220%22%2CisR%3A%220%22%2CrM%3A3%2Cscale%3A%221%22%2CbMenu%3A%22%22%2Csma%3A%220%2C0%2C0%22%7D

I do not have ready access to the $50 book, so I can't see what data was used and cannot comment on it. I was going only on what had been posted in this forum. But I think an independent analysis of the strategy, showing that it is robust to different inputs and time periods, would be necessary to demonstrate that this strategy has merit for investing my life savings. So far I have not seen that.

I think the point about underperformance is really important. Underperforming--and dramatically so--may lead one to abandon the strategy. And the early dramatic underperformance may lead one to portfolio failure. One reason any of these or Logan's backtesting ended up with comparable results in some scenarios for DM is that there was no portfolio withdrawal. Unfortunately PortfolioVisualizer does not include the option to simluate withdrawals with market timing strategies.
Title: Re: Dual Momentum Investing
Post by: forummm on April 27, 2015, 10:11:53 AM
Thanks MDMD, you saved me some keystrokes. I'll add to your post that we need to first decide what the benchmark is going to be before we make any conclusions whatsoever. Is the benchmark just US stocks? Who gets to cherry pick the benchmark like that? It is much more realistic to use the entire global market, rather that cherry pick 1 country out of all the other possibilities. Since the dual momentum strategy as mostly described on this post uses both worldwide stocks and bonds, we should probably compare it to a balanced portfolio, rather than a 100% stock portfolio. ESPECIALLY if the small timeperiod that we're cherry picking to compare (late '80s to 2000) is literally the best period of US stocks in all of history. That to me sounds incredibly biased. Rather let's compare much greater periods of time than just that one.

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

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

In the examples posted in the thread, people used the S&P 500 and one or 2 international funds. And I think all or almost all examples used just 1 fund at a time or showed that using just 1 fund at a time had superior overall returns. Hence my using those same parameters for my analyses. I thought MDMD's point with this whole approach is that you don't need a balanced fund at any point in time because the magic of momentum will get you out of the market before your equities go all the way down and get you back in when they are ready to roar.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 11:48:40 AM
Regarding: http://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/msg641783/#msg641783
and http://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/msg641785/#msg641785

I'm not sure I understand the cricitism of my analysis. You say you're not sure what I did, but I provided a link so that it was perfectly replicable by anyone. You argue that LT Treasuries was not the same as cash, but then later say that it performed the way you wanted it to. However, my impression is that this still causes you to dismiss the overall result from that analysis--that DM significantly underperformed buy-and-hold the last 30 years. And you said I wasn't conducting sensitivity analysis, but maybe you were just confused as to which analysis I meant. Adding additional out-of-sample years and substituting different asset classes shows how robust or not the strategy is (or, to put it differently, how sensitive it is to the specific inputs). Or perhaps you misinterpreted my comment about the perils of using backtesting as being about sensitivity analysis. The point I was making there is that by using backtesting you can always look like your strategy is genius. I think emerging markets are going to outperform developed markets for the next 30 years, so it's a reasonable strategy to buy-and-hold them. It bears similar risks of dramatic underperformance for substantial periods as does DM.

Prospectively, LT Treasuries are not entirely risk free because of interest rate risk. But during the sample period, interest rate risk was not much of an issue. Rates were generally trending down. And during the key period that mattered (the 1987 crash), LT Treasuries increased in value as you would expect because it's a safe asset. In the short term, and when we know in hindsight that interest rates did not increase, it functions like tradeable cash. Thinking prospectively, there is interest rate risk. But in hindsight, there was no downward change in asset prices due to rising interest rates.

http://quote.morningstar.com/fund/chart.aspx?t=VUSTX&region=USA&culture=en-US&statePara=%7Bsecurities%3A%5B%7Bn%3A%22Vanguard%20Long-Term%20Treasury%20Inv%22%2Cids%3A%22FOUSA00FTW%7C0P00002T15%7CCU%24%24%24%24%24USD%7C1%7C1%7CFO%7C1986-5-19%7C%7C%7Cfalse%7CUSA%7C19%22%7D%2C%7Bn%3A%22Long%20Government%22%2Cids%3A%22%24FOCA%24GL%24%24%7C%24FOCA%24GL%24%24%7CCU%24%24%24%24%24USD%7C1%7C1%7CCA%7C%7C%7C%7Ctrue%7CUSA%7C0%22%7D%2C%7Bn%3A%22Barclays%20US%20Agg%20Bond%20TR%20USD%22%2Cids%3A%22XIUSA000MC%7C0P00001G5L%7CCU%24%24%24%24%24USD%7C1%7C1%7CXI%7C%7C%7C%7Ctrue%7CUSA%7C0%22%7D%5D%2CchartType%3A%22GrowthChart%22%2Crange%3A%221987-5-19%7C1988-1-1%22%2Cperiod%3A9%2Cregion%3A%22USA%22%2Ctc%3A%22USD%22%2CisD%3A%220%22%2CisR%3A%220%22%2CrM%3A3%2Cscale%3A%221%22%2CbMenu%3A%22%22%2Csma%3A%220%2C0%2C0%22%7D

I do not have ready access to the $50 book, so I can't see what data was used and cannot comment on it. I was going only on what had been posted in this forum. But I think an independent analysis of the strategy, showing that it is robust to different inputs and time periods, would be necessary to demonstrate that this strategy has merit for investing my life savings. So far I have not seen that.

I think the point about underperformance is really important. Underperforming--and dramatically so--may lead one to abandon the strategy. And the early dramatic underperformance may lead one to portfolio failure. One reason any of these or Logan's backtesting ended up with comparable results in some scenarios for DM is that there was no portfolio withdrawal. Unfortunately PortfolioVisualizer does not include the option to simluate withdrawals with market timing strategies.

Again what you are testing is not dual momentum, so using this test to criticize dual momentum is utterly meaningless.

If you want to use an international growth strategy then you could pair it with an imperfectly correlated asset such as international value, or domestic value and then include the cash equivalent.   That would be dual momentum.

What you do instead is throw a bunch of correlated assets in a bucket, with no cash equivalent and call it dual momentum.

It is not dual momentum.  It is utter nonsense.  So your conclusions have no relevance to the topic at hand.

You have proven nothing other than combining an illogical collection of asetts in a bucket and using relative strength does not always work.

This is a good criticism of a "throwing darts at a wall" strategy, which noone is advocating.

If you want to test or the robustness of dual momentum, then you must test dual momentum in an out of sample time period, or out of sample market.

You can not test a completely different theory in the same time period and claim that this is sensitivity analysis.  It is no such thing.

In order to intelligently critique a strategy, you must first understand the strategy.  Checking out Dual Momentum from the local library (or at least reading some of the articles on Antonacci's website) would be a very worthwhile investment of your time to this end.
Title: Re: Dual Momentum Investing
Post by: MDM on April 27, 2015, 12:46:15 PM
Generic question: is it possible to use the www.portfoliovisualizer.com site to back test DM? 

If "yes", how should the inputs be formulated?  What, if anything, is specifically incorrect about the analyses done above?

If "no", why not?  What other site(s) can one use, and how should the inputs be formulated?
Title: Re: Dual Momentum Investing
Post by: Chuck on April 27, 2015, 12:55:11 PM
Thanks MDMD, you saved me some keystrokes. I'll add to your post that we need to first decide what the benchmark is going to be before we make any conclusions whatsoever. Is the benchmark just US stocks? Who gets to cherry pick the benchmark like that? It is much more realistic to use the entire global market, rather that cherry pick 1 country out of all the other possibilities. Since the dual momentum strategy as mostly described on this post uses both worldwide stocks and bonds, we should probably compare it to a balanced portfolio, rather than a 100% stock portfolio. ESPECIALLY if the small timeperiod that we're cherry picking to compare (late '80s to 2000) is literally the best period of US stocks in all of history. That to me sounds incredibly biased. Rather let's compare much greater periods of time than just that one.

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

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

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

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

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

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

Title: Re: Dual Momentum Investing
Post by: sol on April 27, 2015, 01:07:00 PM
That said, the practice of timing the market between ONLY US Stocks and Treasuries does stand up to your test.

It only stands up to the test due to the particular timing of the last two recession/recovery cycles.  I still haven't seen anything to suggest that it will ever work again.  You can't just mine the data for some theory that worked in the past and say you've discovered the Holy Grail of investing without some justification as to WHY it worked, and should continue to work.  Otherwise you're just picking the winner of a random contest between groundless hypotheses.

There are tons of different theories about timing the market.  They all worked, for a while, which is why they became widely known theories.  If you're theory is "only buy stocks on Tuesdays and only sell on Thursdays" then in some years you will make a killing with that plan, just due to random chance.  That doesn't make the theory any good for this year or any year in the future.

Thus far, all discussion in this thread is the equivalent of that Tuesday/Thursday plan.  I've yet to see any evidence presented about why or how dual momentum investing is supposed to work in the future.

Would you buy a "How to Win the Lottery" book from a lottery winner?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 01:45:40 PM
Thanks MDMD, you saved me some keystrokes. I'll add to your post that we need to first decide what the benchmark is going to be before we make any conclusions whatsoever. Is the benchmark just US stocks? Who gets to cherry pick the benchmark like that? It is much more realistic to use the entire global market, rather that cherry pick 1 country out of all the other possibilities. Since the dual momentum strategy as mostly described on this post uses both worldwide stocks and bonds, we should probably compare it to a balanced portfolio, rather than a 100% stock portfolio. ESPECIALLY if the small timeperiod that we're cherry picking to compare (late '80s to 2000) is literally the best period of US stocks in all of history. That to me sounds incredibly biased. Rather let's compare much greater periods of time than just that one.

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

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

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

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

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

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

Your test is still not dual momentum or absolute momentum.  If you substitute short term treasuries for long term treasuries it would be absolute momentum.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 01:47:06 PM
It's not possible to use portfoliovisualizer.com to test out the strategy as defined by Gary. Just FYI.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 27, 2015, 01:49:44 PM
Thus far, all discussion in this thread is the equivalent of that Tuesday/Thursday plan.  I've yet to see any evidence presented about why or how dual momentum investing is supposed to work in the future.

To be fair, in response to my question in post # 145 above (http://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/msg636063/#msg636063) expressing the same concern, Miles identified and attempted to explain the logic behind the dual momentum strategy.  In my view, the most compelling argument he described basically boils down to this:  "we can rely on the same human behavior that caused market gyrations to occur as they did in the past to continue to cause market gyrations to occur in predictable ways in the future."  But, unless I'm misunderstanding it, I still don't find this argument particularly compelling.
Title: Re: Dual Momentum Investing
Post by: MDM on April 27, 2015, 01:50:41 PM
Generic question: is it possible to use the www.portfoliovisualizer.com site to back test DM? 

If "yes", how should the inputs be formulated?  What, if anything, is specifically incorrect about the analyses done above?

If "no", why not?  What other site(s) can one use, and how should the inputs be formulated?
It's not possible to use portfoliovisualizer.com to test out the strategy as defined by Gary. Just FYI.

Thanks.  Can you (or anyone) elaborate?
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 27, 2015, 01:53:05 PM
That said, the practice of timing the market between ONLY US Stocks and Treasuries does stand up to your test.

It only stands up to the test due to the particular timing of the last two recession/recovery cycles.  I still haven't seen anything to suggest that it will ever work again.  You can't just mine the data for some theory that worked in the past and say you've discovered the Holy Grail of investing without some justification as to WHY it worked, and should continue to work.  Otherwise you're just picking the winner of a random contest between groundless hypotheses.

There are tons of different theories about timing the market.  They all worked, for a while, which is why they became widely known theories.  If you're theory is "only buy stocks on Tuesdays and only sell on Thursdays" then in some years you will make a killing with that plan, just due to random chance.  That doesn't make the theory any good for this year or any year in the future.

Thus far, all discussion in this thread is the equivalent of that Tuesday/Thursday plan.  I've yet to see any evidence presented about why or how dual momentum investing is supposed to work in the future.

Would you buy a "How to Win the Lottery" book from a lottery winner?

This was my argument earlier as well, asking for a logical reason why it works, and will continue to work, not back tested data of how it has worked (a priori, not a posteriori -- in other words, from reason, not experience).

Thus far, all discussion in this thread is the equivalent of that Tuesday/Thursday plan.  I've yet to see any evidence presented about why or how dual momentum investing is supposed to work in the future.

To be fair, in response to my question in post # 145 above (http://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/msg636063/#msg636063) expressing the same concern, Miles identified and attempted to explain the logic behind the dual momentum strategy.  In my view, the most compelling argument he described basically boils down to this:  "we can rely on the same human behavior that caused market gyrations to occur as they did in the past to continue to cause market gyrations to occur in predictable ways in the future."  But, unless I'm misunderstanding it, I still don't find this argument particularly compelling.

Agreed.  Counting on people to be rationally irrational seems like a big gamble to me.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 02:04:55 PM
Thanks.  Can you (or anyone) elaborate?

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

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

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

Closest I can get to Gary's implementation on portfoliovisualizer is VFINX, VWIGX and VBMFX. That's S&P 500, Int'l Growth, and Total US Bonds. Using a 12 month lookback and 12 month Moving Average I get:

1988-2014
12.46% CAGR
11.35% Std Dev
-20.27% DD
https://www.portfoliovisualizer.com/test-market-timing-model?s=y&timingWeights[2]=0&endYear=2014&volatilityPeriodWeight=0&movingAverageType=1&windowSize=6&timingUnits[2]=2&timingModel=4&volatilityWindowSize=0&startYear=1985&assetsToHold=1&multipleTimingPeriods=true&timingUnits[1]=2&timingPeriods[2]=6&outOfMarketAssetType=1&timingPeriods[0]=12&timingWeights[0]=100&volatilityWindowSizeInDays=0&riskControl=true&symbols=VFINX%2C+VWIGX%2C+VBMFX&volatilityPeriod=20&riskWindowSizeInDays=0&timingUnits[0]=2&timingPeriods[1]=3&timingWeights[1]=0&windowSizeInDays=105&volatilityPeriodUnit=1&riskWindowSize=12&rebalancePeriod=1

6 Month lookback and 12 month Moving Average I get:

13.38% CAGR
10.68% Std Dev
-17.56% DD
https://www.portfoliovisualizer.com/test-market-timing-model?s=y&timingWeights[2]=0&endYear=2014&volatilityPeriodWeight=0&movingAverageType=1&windowSize=6&timingUnits[2]=2&timingModel=4&volatilityWindowSize=0&startYear=1985&assetsToHold=1&multipleTimingPeriods=true&timingUnits[1]=2&timingPeriods[2]=6&outOfMarketAssetType=1&timingPeriods[0]=12&timingWeights[0]=100&volatilityWindowSizeInDays=0&riskControl=true&symbols=VFINX%2C+VWIGX%2C+VBMFX&volatilityPeriod=20&riskWindowSizeInDays=0&timingUnits[0]=2&timingPeriods[1]=3&timingWeights[1]=0&windowSizeInDays=105&volatilityPeriodUnit=1&riskWindowSize=12&rebalancePeriod=1

Combination 12 month, 6 month, 3 month lookback windows and 12 month moving average I get:

12.90% CAGR
10.80% Std Dev
-15.38% DD
https://www.portfoliovisualizer.com/test-market-timing-model?s=y&timingWeights[2]=33&endYear=2014&volatilityPeriodWeight=0&movingAverageType=1&windowSize=6&timingUnits[2]=2&timingModel=4&volatilityWindowSize=0&startYear=1985&assetsToHold=1&multipleTimingPeriods=true&timingUnits[1]=2&timingPeriods[2]=6&outOfMarketAssetType=1&timingPeriods[0]=12&timingWeights[0]=34&volatilityWindowSizeInDays=0&riskControl=true&symbols=VFINX%2C+VWIGX%2C+VBMFX&volatilityPeriod=20&riskWindowSizeInDays=0&timingUnits[0]=2&timingPeriods[1]=3&timingWeights[1]=33&windowSizeInDays=105&volatilityPeriodUnit=1&riskWindowSize=12&rebalancePeriod=1

Combination 12 month, 6 month, 3 month lookback windows, 20 day volatility, 12 month moving average I get:

14.94% CAGR
9.95% Std Dev
-9.85% DD
https://www.portfoliovisualizer.com/test-market-timing-model?s=y&timingWeights[2]=25&endYear=2014&volatilityPeriodWeight=25&movingAverageType=1&windowSize=6&timingUnits[2]=2&timingModel=4&volatilityWindowSize=0&startYear=1985&assetsToHold=1&multipleTimingPeriods=true&timingUnits[1]=2&timingPeriods[2]=6&outOfMarketAssetType=1&timingPeriods[0]=12&timingWeights[0]=25&volatilityWindowSizeInDays=0&riskControl=true&symbols=VFINX%2C+VWIGX%2C+VBMFX&volatilityPeriod=20&riskWindowSizeInDays=0&timingUnits[0]=2&timingPeriods[1]=3&timingWeights[1]=25&windowSizeInDays=105&volatilityPeriodUnit=1&riskWindowSize=12&rebalancePeriod=1
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 02:05:15 PM
That said, the practice of timing the market between ONLY US Stocks and Treasuries does stand up to your test.

It only stands up to the test due to the particular timing of the last two recession/recovery cycles.  I still haven't seen anything to suggest that it will ever work again.  You can't just mine the data for some theory that worked in the past and say you've discovered the Holy Grail of investing without some justification as to WHY it worked, and should continue to work.  Otherwise you're just picking the winner of a random contest between groundless hypotheses.

There are tons of different theories about timing the market.  They all worked, for a while, which is why they became widely known theories.  If you're theory is "only buy stocks on Tuesdays and only sell on Thursdays" then in some years you will make a killing with that plan, just due to random chance.  That doesn't make the theory any good for this year or any year in the future.

Thus far, all discussion in this thread is the equivalent of that Tuesday/Thursday plan.  I've yet to see any evidence presented about why or how dual momentum investing is supposed to work in the future.

Would you buy a "How to Win the Lottery" book from a lottery winner?

equating momentum or trendfollowing to arbitrary rules like buy on tuesday/sell on thursday, or butter production in bangladesh is a false equivalency.

This ignores the mountain of evidence spanning centuries, that trend following does reproducibly decrease drawdowns, and increase returns in in and out of sample data sets.  This book with 800 years of data might pique your interest:

http://www.amazon.com/dp/1118890973/ref=cm_sw_r_awd_RsZlvb04E7KX8

Similarly relative price momentum has persisted since first described academically in the 80s, and has been backtested for over 200 years: 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2292544

Perhaps the "story" of momentum isn't your cup of tea.  Fair enough.  (No story could be more convincing to me personally, to each his own.) But to write of this form of lasting and unchanging market anomaly as a groundless hypothesis or as curve fitting just seems lazy and uninformed to the extreme.

As to your claim that dual momentum only worked in since 2000, that is demonstrably false.  Just wrong, wrong, wrong.  Not sure what evidence you considered for that flimsy claim, (feel free to share it) but here is convincing evidence to the contrary.

http://www.optimalmomentum.com/trackrecord3.html

Title: Re: Dual Momentum Investing
Post by: Chuck on April 27, 2015, 02:16:17 PM
The last two recession/bull market cycles are the reason the last 28 years looks good for Absolute Momentum, but what about looking at different 30 year periods? Is there a site that this can be looked at? How would you check that?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 02:23:13 PM
The last two recession/bull market cycles are the reason the last 28 years looks good for Absolute Momentum, but what about looking at different 30 year periods? Is there a site that this can be looked at? How would you check that?

So look at the results from 1972-2000, a 28 year period that does not include the last 2 bear markets. 

http://www.optimalmomentum.com/trackrecord3.html
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 02:25:09 PM
Taken from Meb Faber's paper (originally written in 2006, updated in 2013, I've posted this before on this thread and I'm pretty sure nobody has read it...) http://www.ffplan.com/docs/gtaa_paper.pdf I'm literally going to have to cut and paste screenshots here because I'm almost certain nobody will read the links I've provided.

S&P 500 using the 10 month moving average as a timing signal, since 1901
(http://s12.postimg.org/6wqhvlnp9/SP500_Timing_Returns.jpg)

Graph of the same
(http://s12.postimg.org/w41dvuqt9/SP500_Timing_Graph.jpg)

Drawdowns
(http://s12.postimg.org/b9p1e0wfx/SP500_Drawdowns.jpg)

Using S&P 500, MSCI EAFE, REITs, US 10 Yr Treasury Bonds, Commodities, and Treasury Bills for 'safe' asset with the 10 month moving average timing signal
(http://s12.postimg.org/fhjtmrxvh/GTAA_Backtest.jpg)

Using different moving average lengths for the timing signal
(http://s12.postimg.org/gsrkv8th9/GTAA_Parameters.jpg)

Using the 10 month moving average and combination 1,3,6,12 month returns on an expanded group of asset classes (total of 13), buying the top 3 or top 6
(http://s12.postimg.org/5a1aadbnh/GTAA_Extensions.jpg)
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 27, 2015, 02:41:17 PM
That said, the practice of timing the market between ONLY US Stocks and Treasuries does stand up to your test.

It only stands up to the test due to the particular timing of the last two recession/recovery cycles.  I still haven't seen anything to suggest that it will ever work again.  You can't just mine the data for some theory that worked in the past and say you've discovered the Holy Grail of investing without some justification as to WHY it worked, and should continue to work.  Otherwise you're just picking the winner of a random contest between groundless hypotheses.

There are tons of different theories about timing the market.  They all worked, for a while, which is why they became widely known theories.  If you're theory is "only buy stocks on Tuesdays and only sell on Thursdays" then in some years you will make a killing with that plan, just due to random chance.  That doesn't make the theory any good for this year or any year in the future.

Thus far, all discussion in this thread is the equivalent of that Tuesday/Thursday plan.  I've yet to see any evidence presented about why or how dual momentum investing is supposed to work in the future.

Would you buy a "How to Win the Lottery" book from a lottery winner?

equating momentum or trendfollowing to arbitrary rules like buy on tuesday/sell on thursday, or butter production in bangladesh is a false equivalency.

This ignores the mountain of evidence spanning centuries, that trend following does reproducibly decrease drawdowns, and increase returns in in and out of sample data sets.

That.  Doesn't.  Matter.

You keep going back to historical data, which is irrelevant to the question we're asking.

If we backtested and found that a rule of "invest every 7th Tuesday exept in months starting with J, then skip, and sell exactly 19 days later and you'd have beat the market after taxes by 5% annually, stretching back centuries," would you invest in it?

Now I know you're going to tell me this example is a false equivalency, but I promise you it's not, because I'm not comparing that strategy to dual momentum, I'm using it as an illustration as to why back tested data is irrelevant when we're talking about why a strategy works.

If that 7th Tuesday strategy did backtest well, and someone asked "why does it work" -- you'd be at a loss for words.  Maybe it's done it long enough that you're willing to give it a shot.  And that's fine for you. 

But we're not asking "has this worked historically."  We're asking that equivalent of "why does it work" question.

I really don't see how we could be clearer, but you keep coming back to the same answers which don't answer what we're asking, so clearly we aren't communicating something right.

Can you answer why a dual momentum strategy should work going forward without using any previous historical data or saying "it empirically has worked" or anything like that?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 02:48:22 PM
That said, the practice of timing the market between ONLY US Stocks and Treasuries does stand up to your test.

It only stands up to the test due to the particular timing of the last two recession/recovery cycles.  I still haven't seen anything to suggest that it will ever work again.  You can't just mine the data for some theory that worked in the past and say you've discovered the Holy Grail of investing without some justification as to WHY it worked, and should continue to work.  Otherwise you're just picking the winner of a random contest between groundless hypotheses.

There are tons of different theories about timing the market.  They all worked, for a while, which is why they became widely known theories.  If you're theory is "only buy stocks on Tuesdays and only sell on Thursdays" then in some years you will make a killing with that plan, just due to random chance.  That doesn't make the theory any good for this year or any year in the future.

Thus far, all discussion in this thread is the equivalent of that Tuesday/Thursday plan.  I've yet to see any evidence presented about why or how dual momentum investing is supposed to work in the future.

Would you buy a "How to Win the Lottery" book from a lottery winner?

equating momentum or trendfollowing to arbitrary rules like buy on tuesday/sell on thursday, or butter production in bangladesh is a false equivalency.

This ignores the mountain of evidence spanning centuries, that trend following does reproducibly decrease drawdowns, and increase returns in in and out of sample data sets.

That.  Doesn't.  Matter.

You keep going back to historical data, which is irrelevant to the question we're asking.

If we backtested and found that a rule of "invest every 7th Tuesday exept in months starting with J, then skip, and sell exactly 19 days later and you'd have beat the market after taxes by 5% annually, stretching back centuries," would you invest in it?

Now I know you're going to tell me this example is a false equivalency, but I promise you it's not, because I'm not comparing that strategy to dual momentum, I'm using it as an illustration as to why back tested data is irrelevant when we're talking about why a strategy works.

If that 7th Tuesday strategy did backtest well, and someone asked "why does it work" -- you'd be at a loss for words.  Maybe it's done it long enough that you're willing to give it a shot.  And that's fine for you. 

But we're not asking "has this worked historically."  We're asking that equivalent of "why does it work" question.

I really don't see how we could be clearer, but you keep coming back to the same answers which don't answer what we're asking, so clearly we aren't communicating something right.

Can you answer why a dual momentum strategy should work going forward without using any previous historical data or saying "it empirically has worked" or anything like that?


ARS.

With all due respect I'm calling bullshit on this premise.  And I will write an entire blog post on the falseness of your premise that people choose indexing because it has a convincing story, a priori.  You are fooling yourself IMO.

People choose indexing for the same reason they choose any strategy.  Because they think it will provide superior results, BASED ON PAST DATA.  (WHich is a smart conclusion pased on PAST DATA.) All of the efficient market talk is post facto attribution events that have already transpired.

I've already given you my post facto attribution for why I believe momentum has worked and will continue to work.  Because human investors and institutions chase performance. 

If that story doesn't ring true to you, fair enough, but to claim that all strategies other than your own strategy are equivalent, simply because they don't agree with your own personal vision for how the market works is solipsistic.

There is value in robustness testing a strategy with out of sample testing.  There is value in seeing if an anomaly persists AFTER it is described.  If you don't see the value in this, then you don't really understand the scientific method of testing ones hypotheses.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 02:58:00 PM
http://blog.alphaarchitect.com/2015/04/21/are-value-investing-and-momentum-investing-robust-anomalies/ I think I already posted this...

Legitimate anomalies can usually be described via a behavioral finance lens:

Can we identify poor psychology in the market? (Why do prices get dislocated along the way)
Can we identify the limits to arbitrage? (Why don’t large pools of capital arbitrage the anomaly away)
There are 2 anomalies that stand out among all other anomalies: Value investing and momentum investing.
Title: Re: Dual Momentum Investing
Post by: sol on April 27, 2015, 03:07:16 PM
Can you answer why a dual momentum strategy should work going forward without using any previous historical data or saying "it empirically has worked" or anything like that?

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

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

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

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

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

Title: Re: Dual Momentum Investing
Post by: arebelspy on April 27, 2015, 03:09:45 PM
First of all: chill out, miles.  No one's attacking you personally, so you don't need to get so aggressive. We're all friends here.  :)

ARS.

With all due respect I'm calling bullshit on this premise.  And I will write an entire blog post on the falseness of your premise that people choose indexing because it has a convincing story, a priori.  You are fooling yourself IMO.

Make sure you get your story straight before you waste any time.  I never claimed people choose indexing "because it has a convincing story."


People choose indexing for the same reason they choose any strategy.  Because they think it will provide superior results, BASED ON PAST DATA.  (WHich is a smart conclusion pased on PAST DATA.)

If you think I'm a fan of indexing solely because it's backtested well, you're the one fooling yourself.  If that's the only reason why you like indexing, you may want to read further on why indexing works.

I like indexing because I want the average returns of the market and the lowest fees.  That is rational reasoning for a logical strategy. If it backtests well over a certain timeframe, great.  If it doesn't, fine.  The past data is not what is convincing about indexing, to me. The rationale is.

There is value in robustness testing a strategy with out of sample testing.  There is value in seeing if an anomaly persists AFTER it is described.

Absolutely there is.  But testing a strategy that logically should work > coming up with a strategy based on testing, and having no logical reason for why it works. 

If you don't see the value in this, then you don't really understand the scientific method of testing ones hypotheses.

You need a hypothesis to test, first.  I haven't yet heard one. That's what we've been asking for.

Index funds' hypothesis would go something like: since you're unlikely to beat the market, taking the average of the market minus the least amount of fees possible will maximize your returns.  Then feel free to test that hypothesis.

What is the hypothesis of dual momentum?  As I understand it: Assets that have done well will continue to do so, and vice-versa.  Okay, now: why?

Without the hypothesis, with just the sample testing, and describing an anomaly, and then seeing if it continues to persist, you have the Tuesday/Thursday problem.

It seems apparent though by your response that you don't have an answer though.  It's what I had figured after a few pages of this thread, but still disappointing.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 27, 2015, 03:10:44 PM
With all due respect I'm calling bullshit on this premise.  And I will write an entire blog post on the falseness of your premise that people choose indexing because it has a convincing story, a priori.  You are fooling yourself IMO.

People choose indexing for the same reason they choose any strategy.  Because they think it will provide superior results, BASED ON PAST DATA.  (WHich is a smart conclusion pased on PAST DATA.) All of the efficient market talk is post facto attribution events that have already transpired.

The reason people choose indexing is irrelevant.  Let's just assume for the sake of argument that you are correct that people choose indexing solely because it worked in the past.  That doesn't change the fact that there are logical, a priori reasons to explain why indexing should continue to work in the future.

All we are asking is for you to explain why dual momentum should continue to work in the future.  And the answer to that question cannot be "because it worked in the past," no more than that answer could be used to explain why a 7th-Tuesday-like investment strategy that happened to work in the past will continue to work in the future.

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

And to Sol's and Rebs' point, in this five-page-and-counting thread, the dearth of discussion regarding the logic behind this strategy, despite the fact that we keep asking about it, seems telling.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 27, 2015, 03:11:20 PM
Can you answer why a dual momentum strategy should work going forward without using any previous historical data or saying "it empirically has worked" or anything like that?

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

...[vague answers to that question]...

Right.  Like I said earlier, it seems to be dependent on people being rational in their irrationality.  I also am not convinced that's worth betting on.
Title: Re: Dual Momentum Investing
Post by: sol on April 27, 2015, 03:21:10 PM
With all due respect I'm calling bullshit on this premise.  And I will write an entire blog post on the falseness of your premise that people choose indexing because it has a convincing story, a priori.  You are fooling yourself IMO.

People choose indexing for the same reason they choose any strategy.  Because they think it will provide superior results, BASED ON PAST DATA. 

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

Quote
I've already given you my post facto attribution for why I believe momentum has worked and will continue to work.  Because human investors and institutions chase performance. 

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

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

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

Quote
with your own personal vision for how the market works is solipsistic.

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

Quote
see the value in this, then you don't really understand the scientific method of testing ones hypotheses.

I have a bunch of letters after my name that suggest I understand the scientific method better than most people.  To follow your lead here, what's your null hypothesis?  What useful insight can you extract from that?  Surely you already know that you can never test a hypothesis using existing data if you've used that data to generate the hypothesis, right?
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 03:31:55 PM
For the love arebelspy, brooklynguy, sol, forummm. Would ya'll read my links before you post anymore on this thread? Just about all the information is in there to answer your questions. I'm really tired of doing your research for you.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435323

Momentum is the phenomenon that securities which have performed well relative to peers (winners) on average continue to outperform, and securities that have performed relatively poorly (losers) tend to continue to underperform.2
The existence of momentum is a well-established empirical fact. The return premium is evident in 212 years (yes, this is not a typo, two hundred and twelve years of data from 1801 to 2012) of U.S. equity data,3 dating back to the Victorian age in U.K equity data,4 in over 20 years of out-of-sample evidence from its original discovery, in 40 other countries, and in more than a dozen other asset classes.5 Some of this evidence predates academic research in financial economics, suggesting that the momentum premium has been a part of markets since their very existence, well before researchers studied them as a science.
However, as momentum strategies have grown in popularity, so have myths around them. Some of the most common myths are that momentum is too “small and sporadic” a factor, works mostly on the short-side, works well only among small stocks and doesn’t survive trading costs. Furthermore, some argue that momentum is best used as a "screen", not as a regular factor in an investment process. Others will go so far as to say that momentum investing is like a game of “hot potato”, implying that it isn’t a serious investment strategy, with no theory or reasonable explanation to back it up.
Frankly, we’re a little irked (if that was not clear) by those who should know better but continue to repeat these myths, stretching the limits of credulity. In this essay we address and refute these myths using academic papers (that have been widely circulated throughout the academic and practitioner communities, have been presented and debated at top-level academic seminars and conferences, and have been published in peer-reviewed journals) and the simplest data taken from Kenneth French’s publicly available website, a standard dataset used by both academics and practitioners. Anyone repeating these myths, in any dimension, after reading this piece is simply ignoring the facts.


Myth #10: There is no theory behind momentum.
One of the myths often said about momentum is that “it has no theory” as those, for instance, who dismiss it as a “hot potato” strategy imply. This is false. Like other robust return premia, such as size and value, there is much debate regarding the explanation behind momentum, and again, like size and value, none of the models are so compelling that a consensus exists on their explanation. Still, there are several reasonable theories.
Most theories fall into one of two categories: risk-based and behavioral. While the jury is still out on which of these explanations better fit the data, the same can also be said for the size and value premia.
The behavioral models typically explain momentum as either an underreaction or delayed overreaction phenomenon (it is of course possible that both occur, making it harder to empirically sort things out). In the case of underreaction, the idea is that information travels slowly into prices for a variety of reasons (e.g., investors being too conservative, being inattentive, facing liquidity issues, or displaying the disposition effect—the tendency to sell winners too quickly and hold onto losers too long). In the case of overreaction, investors may chase returns, providing a feedback mechanism that drives prices even higher.26
The other possibility is that the momentum premium is compensation for risk. One set of models argues that economic risks that affect firm investment and growth rates can impact the long-term cash flows and dividends of the firm that generate momentum patterns. The idea is that high-momentum stocks face greater cash flow risk because of their growth prospects or face greater discount rate risk because of their investment opportunities, causing them to face a higher cost of capital.27 In addition, others argue that the presence of a correlation structure across markets and asset classes of momentum strategies is indicative of a shared economic risk.28
While academics debate whether risk or behavioral explanations matter more, for the practical investor the distinction is far less relevant. Why? Because both the risk and non-risk based explanations provide an economic reason for the premium to exist and, importantly, persist.
From a risk-based perspective, as long as risks and tastes for risks don't change, the premium will remain stable and long-lived. Likewise, under the behavioral explanations, as long as the biases, behaviors and limits to arbitrage remain stable, the premium will as well. The evidence from over 200 years of data, in dozens of financial markets, and in many different asset classes suggests that these phenomena are not short-lived.
And remember, some of momentum’s biggest myth spreaders still want to use it in some capacity (as a “screen” or in an “ancillary” way). While we’ve already discussed this in depth, it’s important to again note this means they believe in momentum. Earlier we said “you can’t be a little pregnant” so one wonders, since these folks are clearly expecting, was the father behavioral or risk-based?
Despite all this, there are still some that say “the momentum premium is not large enough to trade profitably, because if it was it would be an example of market mispricing.” This statement seems to be based mostly on religion rather than fact. The idea is that if the momentum premium is really as large and robust as we show it to be, then it must be due to a market inefficiency and therefore (and here’s where the religion comes in) it can’t be real, as markets are obviously perfectly efficient. This thinking implies that if markets are efficient, then the data on momentum must be wrong. While we believe risk-based efficient market explanations play an important part in all of these factors’ returns, we also believe there is a role in each, perhaps at different degrees, for behavioral explanations. Some believe it’s all one or the other.29 But, even if you believe that, the statement “what you’re saying can’t possibly be true despite the overwhelming evidence or my one-sided view of the world would be wrong” is not an argument but a tacit admission of defeat!
There are two alarming things with this myth. First, the data are undeniable, and (as history has shown repeatedly) rejecting data on the basis of theory can be dangerous (cf. Christopher Columbus 1492, Galileo Galilei 1615, and Salem Massachusetts 1692). Second, the statement denies any possible efficient markets stories for momentum, which, as discussed above, do indeed exist (and is ironic coming from the efficient-markets-only crowd).
Most importantly, while we can debate forever how efficient or inefficient markets are (indeed, the Nobel Prize committee this year couldn’t decide and split the prize between the two camps), none of this debate should diminish momentum as a valuable investment tool. The point is not to confuse the theoretical debate (which is ongoing, not just for momentum, but for other premia, like value, as well) with the empirical consensus on the efficacy of momentum. We discovered the world wasn’t flat before we understood and agreed why.

Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 03:36:30 PM

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

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

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

Don't think you saw my screenshot of data showing different timing lookback lengths above. All performed well, didn't matter which one you chose. All of this came from links I provided before, which you obviously didn't read.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 27, 2015, 03:41:57 PM
Did you read it hoded?

It doesn't address what we're asking.

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

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

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

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

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

...Alright?

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

If they say there's a theory (or "story" as they call it), what story tells us what the look back period should be, logically (not which look back period back tested the best).
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 03:48:30 PM
Quote
I think you've misunderstood, miles.  People don't choose indexing because it backtests well against an index.  They choose indexing because they want to get market returns, good or bad, without taking on any additional risk by trying to beat the system.  I choose indexing because I'm prepared to play the game straight and accept average returns the same as everyone else is getting, at the lowest cost to me.  I'm not trying to win at anyone else's expense.

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

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

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

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

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

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

Fair criticism.

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

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

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

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

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

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


Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 03:54:26 PM
Did you read it hoded?

It doesn't address what we're asking.

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

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

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

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

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

...Alright?

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

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

We discovered the world was round and circling the sun with empirical observation.  The theory was the church's, and the more data we had, the more apparently wrong it became.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 27, 2015, 03:55:35 PM
Quote
I have a bunch of letters after my name that suggest I understand the scientific method better than most people.  To follow your lead here, what's your null hypothesis?  What useful insight can you extract from that?  Surely you already know that you can never test a hypothesis using existing data if you've used that data to generate the hypothesis, right?

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

You're okay attacking me, but don't want sol to respond to it, even defending the same position as I am?  (https://dl.dropboxusercontent.com/u/9743562/icon_lol.gif)

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

And I'll take being the house.  Good luck.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 27, 2015, 03:57:56 PM
We discovered the world was round and circling the sun with empirical observation.  The theory was the church's, and the more data we had, the more apparently wrong it became.

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

Or providing supporting evidence for a theory.

But I'd still like a theory.

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

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

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

But disregarding one for the other means you're much more likely to be wrong, IMO, than if you have them supporting each other.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 03:59:41 PM
Did you read it hoded?

It doesn't address what we're asking.

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


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

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


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


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

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

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

(http://s12.postimg.org/gsrkv8th9/GTAA_Parameters.jpg)
Title: Re: Dual Momentum Investing
Post by: MDM on April 27, 2015, 04:03:04 PM
Logically I would favor a 3,6. and 12 month split of lookback periods to diversify away whipsaw risk
Ensuring I understand: by this do you mean you
  - have some money (e.g., 1/3 each) invested according to each of the different look back periods so you could be investing in up to 3 different places at any given time, or
  - you take some weighted average (e.g., 1/3 each) of the performances for the different look back periods, and use that to invest in only one place at any given time?
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 27, 2015, 04:03:39 PM
Doesn't matter which lookback period you choose, just pick one.

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

How does that not strike you as crazy?

Okay... I choose 31.415 years!
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 04:10:33 PM
Doesn't matter which lookback period you choose, just pick one.

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

How does that not strike you as crazy?

Okay... I choose 31.415 years!

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

If you still don't know the answer to this question after reading the above thread, I got nothing for you man.... Momentum exists in the 3-15 month timeframe, so a 3.14 year look back would betray a fundamental ingonrance about the momentum anomaly. 
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 04:13:07 PM
He wants us to tell him why it works in those timeframes...

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

I personally use multiple timeframes as I don't want to get locked into just 1. I asked this question to a retired hedge fund manager profiled in the Market Wizards' books. He told me to pick the timeframe I'm comfortable with and don't worry so much about the entries and exits. Any decent trend following system will get you on the right side of the trend. The more important stuff is choosing the markets you'll trade and your risk control and personal psychology/discipline.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 04:22:52 PM
He wants us to tell him why it works in those timeframes...

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

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

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

http://cgt.columbia.edu/wp-content/uploads/2013/12/Woolley-Santos-Jurek-Theoretical-Analysis-of-Value-and-Momentum.pdf
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 27, 2015, 04:30:39 PM
He wants us to tell him why it works in those timeframes...

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

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

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

Yeah, I was afraid it came down to a "the trend is your friend" classic technical trading scheme.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 04:38:20 PM


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

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

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


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

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

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

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

Look at the DM information out there. Be convinced. Or don't. Whatever
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 04:46:45 PM
And ARS I apologize for my earlier snarkiness.  I got frustrated.  I take it back.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 05:18:29 PM
Quote
I have a bunch of letters after my name that suggest I understand the scientific method better than most people.  To follow your lead here, what's your null hypothesis?  What useful insight can you extract from that?  Surely you already know that you can never test a hypothesis using existing data if you've used that data to generate the hypothesis, right?

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

You're okay attacking me, but don't want sol to respond to it, even defending the same position as I am?  (https://dl.dropboxusercontent.com/u/9743562/icon_lol.gif)

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

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

You live in Vegas right?  Haven't you ever wondered why casinos blacklist card counters?  What's your theory there???
Title: Re: Dual Momentum Investing
Post by: forummm on April 27, 2015, 05:44:39 PM
Thanks MDMD, you saved me some keystrokes. I'll add to your post that we need to first decide what the benchmark is going to be before we make any conclusions whatsoever. Is the benchmark just US stocks? Who gets to cherry pick the benchmark like that? It is much more realistic to use the entire global market, rather that cherry pick 1 country out of all the other possibilities. Since the dual momentum strategy as mostly described on this post uses both worldwide stocks and bonds, we should probably compare it to a balanced portfolio, rather than a 100% stock portfolio. ESPECIALLY if the small timeperiod that we're cherry picking to compare (late '80s to 2000) is literally the best period of US stocks in all of history. That to me sounds incredibly biased. Rather let's compare much greater periods of time than just that one.

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

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

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

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

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

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

Thanks for this idea. Interestingly, the timing portfolio is also the worst for quite some time, then moves up slowly and eventually is the highest return. At one point, the stock portfolio is nearly double the timing portfolio. It's interesting how much variability there is just by changing the inputs a bit. Whether or not we're doing what MDMD is calling DM, it's interesting how variable the results can be depending on what asset class you use.
Title: Re: Dual Momentum Investing
Post by: forummm on April 27, 2015, 05:54:14 PM
Thanks.  Can you (or anyone) elaborate?

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

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

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

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

Unfortunately, I'm still not sure I understand fully what the steps are. Could you describe them in more detail the way you understand it? The whole DM idea seems interesting and I think it warrants some independent examination. You and others have said it's been validated by the book author. I'd just like to look at the data for myself using independent sources and learn more about it. Thanks in advance.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 06:03:07 PM
Step 1:  take 2 or more imperfectly correlated assets plus a risk free asset (cash, or short term treasuries)
Step 2:  Pick a lookback period between 3 and 12 months.
Step 3:  At the end of each month figure out the total returns for your assets over the look back period.
Step 4:  Invest 100% of your assets in the winner.

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

as an example....

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

Here is the seminal paper...

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042750
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 27, 2015, 06:35:02 PM
You live in Vegas right?  Haven't you ever wondered why casinos blacklist card counters?  What's your theory there???

I don't understand the point of the card counting analogy.  Card counters perform better because they have an edge in handicapping the next card to be drawn, for the logical reason that card counters know which cards have already been drawn.  Card counters do not perform better for the reason that card counters have always performed better.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 06:39:29 PM
Card counters are empiricists.  They use readily available data to shift the probability of winning in their favor.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 27, 2015, 06:55:39 PM
They are also executing a strategy that logically makes sense.  They are counting cards and thereby shifting the odds in their favor.  It's a strategy that logically makes sense, even if it had never been done before (i.e., it would make sense in the total absence of any empirical evidence that it works).
Title: Re: Dual Momentum Investing
Post by: smilla on April 27, 2015, 06:56:04 PM
Momentum is the phenomenon that securities which have performed well relative to peers (winners) on average continue to outperform, and securities that have performed relatively poorly (losers) tend to continue to underperform....
/snip

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

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

*specifically, for at least the next month

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

And the sub-hypothesis is:

An investor can take advantage of dual momentum by
Step 1:  take 2 or more imperfectly correlated assets plus a risk free asset (cash, or short term treasuries)
Step 2:  Pick a lookback period between 3 and 12 months.
Step 3:  At the end of each month figure out the total returns for your assets over the look back period.
Step 4:  Invest 100% of your assets in the winner.
Title: Re: Dual Momentum Investing
Post by: smilla on April 27, 2015, 07:21:07 PM
Also assumptions.

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

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

Indexing comes from a more positive mindset, and I know MMM is a crazy optimist but maybe dual momentum is more realistic.  Either way, the DM assumption seems just as reasonable as the Indexing assumption.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 07:22:03 PM

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

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


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Title: Re: Dual Momentum Investing
Post by: arebelspy on April 27, 2015, 07:48:25 PM

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

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


BG didn't bring it up; miles did.

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

Title: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 08:21:56 PM
Okay. Here's a sincere question for Brooklyn, ARS, forummm, sol.

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

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

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

I prefer you stick to the topic at hand, I thought maybe we were finally getting somewhere.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 08:35:51 PM
Miles didn't start it, someone else did.


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Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 08:41:46 PM
Check the thread. I didn't start it.
Title: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 08:43:32 PM
And where is it that you thought we were getting to Sol?
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 09:00:12 PM


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

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


BG didn't bring it up; miles did.

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

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


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Title: Re: Dual Momentum Investing
Post by: 691175002 on April 27, 2015, 09:01:38 PM
Interesting you bring up card counting and what we're talking about here. The man who discovered how to beat blackjack himself, Ed Thorp, gave up beating the casinos after they tried to kill him. He turned to the biggest casino: stock/bond/commodity/currency markets and set up a hedge fund that did 20%+ returns over decades with very low risk. He eventually began trading a diversified trend following strategy very similar to what we've been discussing for the past 6 pages. He views the markets the same way as blackjack. He looks for an edge and exploits it.
Wikipedia points out that Ed Thorp only has unverifiable claims that his personal accounts returned 20%+ a year.  His hedge fund liquidated after blowing itself up in junk bonds.
Anecdotal evidence is worth nothing, especially since thousands (if not hundreds of thousands) of mutual/hedge funds that failed have been forgotten.

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

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

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

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

When the market rolls over and you sell your S&P500 ETF it doesn't spontaneously turn into cash.  Some guy on another computer has one more ETF unit and a little less cash.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 09:08:52 PM
The same is true when you buy or sell an etf for investment, rebalancing, or liquidation purposes.

Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 09:19:47 PM

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

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

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


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Title: Re: Dual Momentum Investing
Post by: Dodge on April 27, 2015, 09:33:04 PM
Also assumptions.

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

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

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

Indeed.

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

Compared to:

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

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

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

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

With X being the same value each time.  Sometimes the strategies even link to psychology experiments (http://en.wikipedia.org/wiki/Behavioral_economics), which point to certain deficiencies in the brain, which lead to seeing patterns which aren't there, therefore you should buy/sell at X.  My favorite was the mouse experiment (https://books.google.com/books?id=D4o0nkOmxMgC&pg=PA40&lpg=PA40&dq=tetlock+pitted+the+predictive+abilities+of+a+classroom+of+Yale+undergraduates+against+those+of+a+single+Norwegian+rat&source=bl&ots=sMpVU0wy81&sig=ZrPTCl7PcF4Z9UxlQn0uuzihfZg&hl=en&sa=X&ei=4vw-VZ3wOOOxsASct4C4CQ&ved=0CC4Q6AEwAg#v=onepage&q=tetlock%20pitted%20the%20predictive%20abilities%20of%20a%20classroom%20of%20Yale%20undergraduates%20against%20those%20of%20a%20single%20Norwegian%20rat&f=false).  They took a group of Yale students, and showed them two boxes.  A piece of cheese would show up 60% in the left box, and 40% in the right box, but the students weren't told this.  They were just told to try and get the most amount of cheese possible.  The students ended up creating some complex algorithm to try and predict where the cheese should show up.  In the end, they only got the cheese 52% of the time, and when asked they were all convinced they were making headway in solving the riddle.

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

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

Indeed, these type of hooks can seem promising, even exciting.  My advice to any newbies in this thread, don’t fall into the trap.  You buy the market not because it promises to exploit the “human emotion” factor, making you rich in the process.  You buy VTSAX, the Total US Stock Market Index Fund (https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT), simply because you want to capture the market.  Again, indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future.

You don’t buy VBTLX, the Total US Bond Market Index Fund (https://personal.vanguard.com/us/funds/snapshot?FundId=0584&FundIntExt=INT) because it less volatile in the past, but because bonds are a written contract (https://www.youtube.com/watch?v=yRCZFs2GpYU&index=3&list=PLdpkIg5_Ms4At-DZbPbkxujh2EGOnOu6H), where you are paid periodic interest payments, and in the end you get your full investment back.  In most cases (70% of VBTLX) the contract is guaranteed by the government.  This makes it a relatively safe place to put your money.

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

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

Assuming the strategy in this thread is indeed based solely on backtesting, my advice to any newbies would be to proceed with caution.  Survivorship bias is the single greatest fallacy in investing (http://forum.mrmoneymustache.com/investor-alley/survivorship-bias-the-single-greatest-fallacy-in-investing-35417/msg627859/#msg627859), and it’s better to find out now, than after 16 years of underperformance.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 09:33:24 PM
Instructions from Gary's book on how to implement his strategy
(http://images.tapatalk-cdn.com/15/04/27/a00409add573b7924b788d5e37e88beb.jpg)


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Title: Re: Dual Momentum Investing
Post by: hodedofome on April 27, 2015, 09:47:44 PM
Returns based on various look back periods since 1974 (http://images.tapatalk-cdn.com/15/04/27/d96c0f52a03dca75db9c15df1f06b481.jpg)


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

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

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

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

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

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

OTOH the DMer buys on the high side (top performer) so wouldn't that morally balance out the buying back in on the low side?  :)
Title: Re: Dual Momentum Investing
Post by: smilla on April 27, 2015, 11:28:26 PM
"Indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future."
-------------------------------------

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

And also

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

Thanks Dodge and 691175002.  I didn't like watching my investments plummet in 2008/09 and although I knew enough not to sell, I am sorry to say I was too nervous to buy and funnelled most of my savings to my mortgage for 2 years.  The idea of avoiding the next bear is very very seductive but....
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 27, 2015, 11:28:40 PM
Can you answer why a dual momentum strategy should work going forward without using any previous historical data or saying "it empirically has worked" or anything like that?

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

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

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

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

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

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

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

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

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

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

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

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

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



Title: Re: Dual Momentum Investing
Post by: forummm on April 28, 2015, 07:43:29 AM
Instructions from Gary's book on how to implement his strategy
(http://images.tapatalk-cdn.com/15/04/27/a00409add573b7924b788d5e37e88beb.jpg)


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

Is there an explanation for why aggregate bonds are better than T-bills for holding during times when T-bills outperform equities?
Title: Re: Dual Momentum Investing
Post by: forummm on April 28, 2015, 07:46:01 AM
Returns based on various look back periods since 1974 (http://images.tapatalk-cdn.com/15/04/27/d96c0f52a03dca75db9c15df1f06b481.jpg)


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Also interesting. I wonder why a 12 month lookback would have a better associated return. It seems like this would maybe avoid whipsaw more. But also would leave you in market crashes (and out of initial bull markets) longer.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 28, 2015, 07:47:28 AM
The argument for indexing is an unavoidable mathematical truth:  Investors in aggregate must achieve the market return, as they are by definition the market. Agreed  Every time an active investor beats the market, there is some sucker counterparty who has footed the bill.  Throw in fees and everyone (in aggregate) loses. 

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

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

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

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

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

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

The market is not zero-sum. 

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

The same is true for the market as a whole.  The entire market uses the capital invested to generate real wealth and economic growth.
Title: Re: Dual Momentum Investing
Post by: 691175002 on April 28, 2015, 08:26:58 AM
I agree with what you say about indexing but I am not sure about the rest.  I understand the math, that the market is a zero sum game in and of itself but is it zero sum in the experience of investors over their investing life?
You are basically right.  I tried to be fairly careful in my post to qualify that it only applies to abnormal risk-adjusted returns which has a fairly narrow definition.

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

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

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


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

Risk includes more than just historical standard deviation.  I believe a major contributor to momentum returns is the generally held belief that it cannot persist.
Title: Re: Dual Momentum Investing
Post by: forummm on April 28, 2015, 09:29:38 AM
I agree with what you say about indexing but I am not sure about the rest.  I understand the math, that the market is a zero sum game in and of itself but is it zero sum in the experience of investors over their investing life?
You are basically right.  I tried to be fairly careful in my post to qualify that it only applies to abnormal risk-adjusted returns which has a fairly narrow definition.

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

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

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


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

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

I tend to agree with you that momentum is actually more risky in some ways. The proponents in this thread have repeatedly said that it's 'proven' to be less risky. But I think that momentum carries additional risks that are not accounted for in the standard deviations cited. This could explain why the technique may work but is still not a free lunch (i.e. doesn't have higher returns and lower risk simultaneously).
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 09:37:06 AM
Also assumptions.

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

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

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

Indeed.

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

Compared to:

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

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

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

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

With X being the same value each time.  Sometimes the strategies even link to psychology experiments (http://en.wikipedia.org/wiki/Behavioral_economics), which point to certain deficiencies in the brain, which lead to seeing patterns which aren't there, therefore you should buy/sell at X.  My favorite was the mouse experiment (https://books.google.com/books?id=D4o0nkOmxMgC&pg=PA40&lpg=PA40&dq=tetlock+pitted+the+predictive+abilities+of+a+classroom+of+Yale+undergraduates+against+those+of+a+single+Norwegian+rat&source=bl&ots=sMpVU0wy81&sig=ZrPTCl7PcF4Z9UxlQn0uuzihfZg&hl=en&sa=X&ei=4vw-VZ3wOOOxsASct4C4CQ&ved=0CC4Q6AEwAg#v=onepage&q=tetlock%20pitted%20the%20predictive%20abilities%20of%20a%20classroom%20of%20Yale%20undergraduates%20against%20those%20of%20a%20single%20Norwegian%20rat&f=false).  They took a group of Yale students, and showed them two boxes.  A piece of cheese would show up 60% in the left box, and 40% in the right box, but the students weren't told this.  They were just told to try and get the most amount of cheese possible.  The students ended up creating some complex algorithm to try and predict where the cheese should show up.  In the end, they only got the cheese 52% of the time, and when asked they were all convinced they were making headway in solving the riddle.

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

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

Indeed, these type of hooks can seem promising, even exciting.  My advice to any newbies in this thread, don’t fall into the trap.  You buy the market not because it promises to exploit the “human emotion” factor, making you rich in the process.  You buy VTSAX, the Total US Stock Market Index Fund (https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT), simply because you want to capture the market.  Again, indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future.

You don’t buy VBTLX, the Total US Bond Market Index Fund (https://personal.vanguard.com/us/funds/snapshot?FundId=0584&FundIntExt=INT) because it less volatile in the past, but because bonds are a written contract (https://www.youtube.com/watch?v=yRCZFs2GpYU&index=3&list=PLdpkIg5_Ms4At-DZbPbkxujh2EGOnOu6H), where you are paid periodic interest payments, and in the end you get your full investment back.  In most cases (70% of VBTLX) the contract is guaranteed by the government.  This makes it a relatively safe place to put your money.

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

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

Assuming the strategy in this thread is indeed based solely on backtesting, my advice to any newbies would be to proceed with caution.  Survivorship bias is the single greatest fallacy in investing (http://forum.mrmoneymustache.com/investor-alley/survivorship-bias-the-single-greatest-fallacy-in-investing-35417/msg627859/#msg627859), and it’s better to find out now, than after 16 years of underperformance.

Well said Dodge!

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

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

It doesn't address what we're asking.

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

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

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

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

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

...Alright?

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

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




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





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


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

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


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

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

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

...

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


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

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


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

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

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

My quotes were indicative of why market timing can be a fool's game, even when you're right.  They don't indicate that one should "use momentum in the past as a loss-avoidance strategy," as you claim.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 28, 2015, 11:18:56 AM
http://turtletrader.com/pdfs/zerosum.pdf

Three groups of stylized characteristic traders are examined. Winning traders trade for profit. Utilitarian traders trade because their external benefits of trading are greater than their losses. Futile traders expect to profit but for a variety of reason their expectation are now realized.

Winning traders make prices efficient and provide most liquidity. Utilitarian and futile traders effectively underwrite the winning traders' efforts.


Consistent with my link several pages before, on the podcast with Eric Crittendon where he describes commercial hedgers provide for a consistent stream of profits to trend following traders. Commercial hedgers are willing to do this because they see it as buying insurance, and trend following traders are on the other side of those trades. As long as commercial hedgers are willing to do this, there should be profits available for trend followers.

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

I'm reposting Miles' link because I can pretty much guarantee you that nobody here read it.

George Soros' theory of reflexivity, where price movements themselves cause people to react to it, creating a cycle of disequilibrium http://www.ft.com/cms/s/2/0ca06172-bfe9-11de-aed2-00144feab49a.html#axzz3Ycqf2W2I

There's good research out there for the continuation of trends, but if you aren't gonna believe it then there's nothing I or anyone else can do for you.
Title: Re: Dual Momentum Investing
Post by: Mississippi Mudstache on April 28, 2015, 11:24:26 AM
I don't think you understand the phrase "catching a falling knife"--it means don't attempt to time the market, and say "oh, momentum is down, so let me buy it" because you'll get cut as it falls further.

My quotes were indicative of why market timing can be a fool's game, even when you're right.  They don't indicate that one should "use momentum in the past as a loss-avoidance strategy," as you claim.

I'm not going to argue that you don't understand the phrase, but I certainly do. To argue against buying when momentum is negative is, by definition, a momentum strategy. Trying to perfectly time the bottom is not a momentum strategy.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 11:36:08 AM
I don't think you understand the phrase "catching a falling knife"--it means don't attempt to time the market, and say "oh, momentum is down, so let me buy it" because you'll get cut as it falls further.

My quotes were indicative of why market timing can be a fool's game, even when you're right.  They don't indicate that one should "use momentum in the past as a loss-avoidance strategy," as you claim.

I'm not going to argue that you don't understand the phrase, but I certainly do. To argue against buying when momentum is negative is, by definition, a momentum strategy. Trying to perfectly time the bottom is not a momentum strategy.

Please don't put words in my mouth.  I'm not arguing against buying when momentum is negative.  Or positive.  Or trying to time anything at all.  I never have.

I advocate for making investments on fundamentals and reason/logic.  Momentum has nothing to do with it.  Solid investment strategies do.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 11:42:04 AM
I don't think you understand the phrase "catching a falling knife"--it means don't attempt to time the market, and say "oh, momentum is down, so let me buy it" because you'll get cut as it falls further.

My quotes were indicative of why market timing can be a fool's game, even when you're right.  They don't indicate that one should "use momentum in the past as a loss-avoidance strategy," as you claim.

I'm not going to argue that you don't understand the phrase, but I certainly do. To argue against buying when momentum is negative is, by definition, a momentum strategy. Trying to perfectly time the bottom is not a momentum strategy.

Please don't put words in my mouth.  I'm not arguing against buying when momentum is negative.  Or positive.  Or trying to time anything at all.  I never have.

I advocate for making investments on fundamentals and reason/logic.  Momentum has nothing to do with it.  Solid investment strategies do.

Please articulate the underlying fundamentals and reason/logic of your "solid investment strategy."  I don't believe you've done that yet.
Title: Re: Dual Momentum Investing
Post by: forummm on April 28, 2015, 11:42:48 AM
I don't think you understand the phrase "catching a falling knife"--it means don't attempt to time the market, and say "oh, momentum is down, so let me buy it" because you'll get cut as it falls further.

My quotes were indicative of why market timing can be a fool's game, even when you're right.  They don't indicate that one should "use momentum in the past as a loss-avoidance strategy," as you claim.

I'm not going to argue that you don't understand the phrase, but I certainly do. To argue against buying when momentum is negative is, by definition, a momentum strategy. Trying to perfectly time the bottom is not a momentum strategy.

The thread context you're citing is ARS saying why applying leverage and market timing is hard. In that case, he was saying that if you think you're at the bottom of the market and lever up, you might be wrong and get cut really badly if the market continues to fall. His position there was making no statement about momentum. He was saying it was very risky to try to time the market like that because it can go very poorly (even wipe you out) if you get the timing wrong. The discussion there about leverage does not really apply to this discussion. And I don't find anything inconsistent with his statements here and those from the prior thread.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 11:48:17 AM
Please articulate the underlying fundamentals and reason/logic of your "solidi nvestment strategy."  I don't believe you've done that yet.

At the risk of getting sucked into an irrelevant discussion earlier that sol was trying to avoid with the "why does it matter?" ...Sure.  Here's an example of one I find compelling:
http://www.gocurrycracker.com/path-100-equities/

I'm less sold on JLCollins' investment strategy/AA, mainly because I'm not a huge fan of REITs (though those were in his earlier ones, I believe he cut them from his latest AA), and I think International is more important than he does.

But it's still a good example of what I'd consider a "solid investment strategy."

I think earlier on your blog you made some decent arguments for certain AAs, but I don't feel like going to dig for them.

Hope that helps!  Now maybe we can get back on topic.  :)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 11:53:00 AM
So your solid strategy is 100 % equities?  Fair enough.

But what is your "reason/logic" that led you to this unique allocation?  You have claimed that your asset allocation flows from a priori knowledge.  That is what is missing here.

Please share your a priori knowledge from which this AA flows.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 11:59:04 AM
miles, you seem to only want to address me.  Why is that?

Dodge had a post on the previous page laying out the reason/logic for index funds that was conveniently ignored.

Other people--arguing the same things I am--are posting, and you seem offended when they address your questions targeted at me, even calling sol out for it at one point.

Do you have an issue with me?  If so, fucking clear your chest and let's move past that so we can have reasonable discussion.  But jesus, get over it one way or another.  (https://dl.dropboxusercontent.com/u/9743562/icon_rolleyes.gif)
Title: Re: Dual Momentum Investing
Post by: sol on April 28, 2015, 12:03:43 PM
Quote from: arebelspy
At the risk of getting sucked into an irrelevant discussion earlier that sol was trying to avoid with the "why does it matter?" ...Sure.

I was trying to avoid it because I get the feeling miles would rather attack your strategy than defend his own.  I think he's struggling to justify dual momentum on a theoretical basis, so rather than try he wants to try to say that the alternatives may also have shaky theoretical bases.

Which would be a fine strategy for argument if this were a thread about choosing between investment strategies, which I don't think it is.

But now that ars has broken the seal, I'll play along.  Miles,  my logic for choosing passive index investing is that it is guaranteed to track the market at the lowest possible cost.  Not outperform. Nothing to do with past performance. Not based on any preconceived notion of market behavior.  Just capture everything the market does, as a mathematical certainty, at minimum cost.

If you would like to attack the theoretical basis for numerical averaging, I'm all ears.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 12:04:53 PM
Wait, sol, let me post it.  Maybe he'll respond then.

Quote
Miles,  my logic for choosing passive index investing is that it is guaranteed to track the market at the lowest possible cost.  Not outperform. Nothing to do with past performance. Not based on any preconceived notion of market behavior.  Just capture everything the market does, as a mathematical certainty, at minimum cost.

If you would like to attack the theoretical basis for numerical averaging, I'm all ears.

I agree though.  I don't understand how attacking some other strategy boosts Dual Momentum, which is why I asked after posting it if we could get back on topic.
Title: Re: Dual Momentum Investing
Post by: Chuck on April 28, 2015, 12:06:17 PM
Wait, sol, let me post it.  Maybe he'll respond then.
Ooooooooh :o
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 12:14:20 PM
ARS,

I have absolutely no issue with you, personally.  Honest.

I am interested (and skeptical) of your claim that your chosen investment strategy comes from a priori knowledge, whhich I find to be very interesting, and admittedly somewhat unbelievable.

I've stated my theory that we choose our strategies based on probabilistic estimations of the what we think gives us the highest chance of future success.  And that the only rational way to calculate such a probability is to look to the past.

I think indexing is smart because it is cheap and it works better than active strategies 80 % of the time.  You criticized this method of choosing a strategy as a posteriori logic.

I am honestlyinterested in the a priori logic that informs your strategy.

That's it.

Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 12:15:14 PM
Wait, sol, let me post it.  Maybe he'll respond then.
Ooooooooh :o

(https://ddrgqsxlcy7wq.cloudfront.net/imported_assets/1942691/ddM8HCk.gif)
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 12:18:42 PM
I've stated my theory that we choose our strategies based on probabilistic estimations of the what we think gives us the highest chance of future success. 

Yes, this is now explicit.

Earlier, before you had made that clear, in a PM to another poster (initiated by him), trying to figure out where you were coming from, I stated:
Quote
I think I got a hint of his thinking though from his latest post regarding index funds.  Apparently the only way he invests is based on back testing and assuming everyone invests solely on what they think will beat the market.

He only indexes because he thinks it can beat the market via lowest fees.

If that's your perspective, then Dual Momentum having no rationale wouldn't bother you, because it's worked before, and that's good enough.

So he's having trouble understanding why it's not good enough for us.  At least that's my impression at this point.

So let me be clear: no, not everyone invests solely based on whatever has beaten the market in the past in an attempt to beat it in the future.

I'd have thought Dodge's and sol's posts (among others) would have given you ample other reasons why one might index other than back testing.  No?
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 28, 2015, 12:19:05 PM
But now that ars has broken the seal, I'll play along.  Miles,  my logic for choosing passive index investing is that it is guaranteed to track the market at the lowest possible cost.  Not outperform. Nothing to do with past performance. Not based on any preconceived notion of market behavior.  Just capture everything the market does, as a mathematical certainty, at minimum cost.

Ok, I'll play too.  I follow a passive indexing strategy for the same reason, coupled with the fact that my shareholdings are not just pieces of paper (or digital entries in a Vanguard mainframe), but representational ownership in underlying businesses, each of which is competing to create wealth, and I therefore believe that the market will in the long term go up.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 12:31:46 PM
coupled with the fact that my shareholdings are not just pieces of paper (or digital entries in a Vanguard mainframe), but representational ownership in underlying businesses, each of which is competing to create wealth, and I therefore believe that the market will in the long term go up.

This is the other half of the logic behind "why total market"--index fund reasoning as explained above, and "why equities" because of belief in the growth of businesses, competition, capitalism, etc. (whatever logical arguments you find compelling).

I'd question a 100% cash strategy because of the logical problem of inflation.   I can accept a mixed bonds/stock AA for reasons of rebalancing, volatility, efficient frontiers, etc.

Heck, even the permenent portfolio has some good logic/rationale: picking uncorrelated assets that should--in theory--perform well in any given environment.  And it has performed well. The theory drives it, and the back test proves it.

But there should be some logic and theory to a strategy that one can explain. 

Market timing doesn't generally have this, which is why I'm skeptical that it will continue to work in the future (not that any of the above certainly will, but there's at least compelling reasons to believe they will).
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 12:32:55 PM
Quote from: arebelspy
At the risk of getting sucked into an irrelevant discussion earlier that sol was trying to avoid with the "why does it matter?" ...Sure.

I was trying to avoid it because I get the feeling miles would rather attack your strategy than defend his own.  I think he's struggling to justify dual momentum on a theoretical basis, so rather than try he wants to try to say that the alternatives may also have shaky theoretical bases.

Which would be a fine strategy for argument if this were a thread about choosing between investment strategies, which I don't think it is.

But now that ars has broken the seal, I'll play along.  Miles,  my logic for choosing passive index investing is that it is guaranteed to track the market at the lowest possible cost.  Not outperform. Nothing to do with past performance. Not based on any preconceived notion of market behavior.  Just capture everything the market does, as a mathematical certainty, at minimum cost.

If you would like to attack the theoretical basis for numerical averaging, I'm all ears.

This is an elegant and intelligent defense of your strategy.  I would expect nothing less from you Sol.

I wholeheartedly agree that Indexing's prime strength is that it is very, very, cheap.

Here is where I think your logic may have some holes in it....  (But not knowing your asset allocation I can't be sure.)

This is what the global financial market really looks like....

24 %  foreign stocks
21% foreign bonds
19% investment grade corporate bonds
16%  US stocks
10% US gov bonds
5% REITS
2% TIPS
2% EM bonds
1% high yield bonds

(Source:  http://z822j1x8tde3wuovlgo7ue15.wpengine.netdna-cdn.com/wp-content/uploads/2014/08/GFAP3.png)

If you want to match the market, there is no cheaper way than to buy cap weighted ETFs for  each of these assets and in these exact proportions.  You would never have to rebalance, (aside from the small problem of dividends.)

If your goal is truly to match the market in the cheapest way possible, and your allocation is dramatically different from above, then the question I have is why are you deviating from your underlying logic?




Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 28, 2015, 12:41:58 PM
If your goal is truly to match the market in the cheapest way possible, and your allocation is dramatically different from above, then the question I have is why are you deviating from your underlying logic?

risk tolerance
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 28, 2015, 12:46:41 PM
Just depends what "market" you want to match.  If you set the parameters broadly enough, you can further expand the market (and its associated breakdown) to include beanie babies, alpacas, tulip bulbs, cannabis plants, etc.

If perfectly matching the "global financial market" is your goal, then the asset allocation for your passive index investments currently needs to match the breakdown you provided (but in that case the associated costs are going to go up).

My goal is for 80% of my portfolio to match the U.S. stock market, and for 20% of my portfolio to match the international (ex-U.S.) stock markets, because I believe that is a reasonable exposure (only one of many possible reasonable exposures) to capture the gains that the worldwide equity markets will probably provide in the long-run for the reasons stated above.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 12:49:09 PM
If your goal is truly to match the market in the cheapest way possible, and your allocation is dramatically different from above, then the question I have is why are you deviating from your underlying logic?

risk tolerance

Please expand.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 12:49:48 PM
Just depends what "market" you want to match.  If you set the parameters broadly enough, you can further expand the market (and its associated breakdown) to include beanie babies, alpacas, tulip bulbs, cannabis plants, etc.

If perfectly matching the "global financial market" is your goal, then the asset allocation for your passive index investments currently needs to match the breakdown you provided (but in that case the associated costs are going to go up).

My goal is for 80% of my portfolio to match the U.S. stock market, and for 20% of my portfolio to match the international (ex-U.S.) stock markets, because I believe that is a reasonable exposure (only one of many possible reasonable exposures) to capture the gains that the worldwide equity markets will probably provide in the long-run for the reasons stated above.

So what is your a priori logic for 80/20?

Is it not a coincidence that you are 100 % in the asset class that has returned the most historically?
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 28, 2015, 12:56:15 PM
If your goal is truly to match the market in the cheapest way possible, and your allocation is dramatically different from above, then the question I have is why are you deviating from your underlying logic?

risk tolerance

Please expand.

Why would I go 19% in corporate bonds, and 10% in gov bonds, etc?  I would rather take on more risk for more reward.  As long as you understand the risks you are assuming I see no fundamental problem deviating your AA from the global break down you posted into one that has higher risk/reward, ie one that is concentrated much more in equities.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 28, 2015, 01:00:10 PM
So what is your a priori logic for 80/20?

I have no a priori justification for an 80/20 split over, say, a 78/22 split, or 90/10, or 60/40.  I just know that I want the majority of my exposure to be to the US stock market, because the US has the most robust and transparent equity market in the world, and it will not expose me, as a US resident, to currency risk.  So I picked an 80/20 allocation because it seems as good as any other.

But all of this is beside the point.  This is all in service of providing an explanation for why there should be some logic behind a strategy, beyond the fact that "it worked in the past."

No-one should rely on an every-7th-Tuesday-type strategy that happened to work in the past (even if it did so in every market in the world over the course of the past five centuries), because there's no reason to believe it should continue to work in the future.

We've been asking for the reasons to believe that dual momentum will continue to work in the future, and some explanations have been put forward.  So we should turn our attention back to discussing those.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 01:13:29 PM
So what is your a priori logic for 80/20?

I have no a priori justification for an 80/20 split over, say, a 78/22 split, or 90/10, or 60/40.  I just know that I want the majority of my exposure to be to the US stock market, because the US has the most robust and transparent equity market in the world, and it will not expose me, as a US resident, to currency risk.  So I picked an 80/20 allocation because it seems as good as any other.

But all of this is beside the point.  This is all in service of providing an explanation for why there should be some logic behind a strategy, beyond the fact that "it worked in the past."

No-one should rely on an every-7th-Tuesday-type strategy that happened to work in the past (even if it did so in every market in the world over the course of the past five centuries), because there's no reason to believe it should continue to work in the future.

We've been asking for the reasons to believe that dual momentum will continue to work in the future, and some explanations have been put forward.  So we should turn our attention back to discussing those.

I was asked for the story behind momentum/trendfollowing as I understand it and I gave it:

Human performance chasing and the flow of capital in and out of markets based on human performance chasing.

You can agree or disagree with my story, of course, that's why we all have different approaches.

But to claim that we choose our strategies based on a priori theories seems suspicious to me.

In my view, passive investing continues to grow in popularity for one reason and one reason only:  It works.

People are not more logical or better able to come up with a priori theories of how to invest their money than they were in 1985.  The difference is that we have decades of evidence that indexing outperforms most other strategies.

You can say that you are overweight equities because of some underlying logic about risk or the inevitability of corporate growth, but my suspicion is that it is NOT coincidence that everyone here over weights the asset class that has historically performed the best.

It is hard for me to understand my own motivations let alone yours, so I have no idea what drives you, I will admit. but that is how I see it.

Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 28, 2015, 01:15:23 PM
If your goal is truly to match the market in the cheapest way possible, and your allocation is dramatically different from above, then the question I have is why are you deviating from your underlying logic?

risk tolerance

Why do you think that equities will promise more reward than all other asset classes going forward?  There are riskier investments.  For example  junk bonds for the lowest rated companies in Greece would be a a riskier play than investing in the US equity market.


Please expand.

Why would I go 19% in corporate bonds, and 10% in gov bonds, etc?  I would rather take on more risk for more reward.  As long as you understand the risks you are assuming I see no fundamental problem deviating your AA from the global break down you posted into one that has higher risk/reward, ie one that is concentrated much more in equities.

Because historically they have, along with the underlying reasons already laid out in this thread that explain why they have had (and I expect them to continue to have) better returns.

I've also never understood the way risk was used in reference to investments.  It seems that it is always used in reference to volatility, and the short to mid term risk of losing money, but not the long term.  Over long time frames that risk appears to melt away, paradoxically making investing in higher risk assets actually less risk. 

I am not familiar enough with companies in greece to feel comfortable taking on that risk of junk bonds.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 28, 2015, 01:20:40 PM
In my view, passive investing continues to grow in popularity for one reason and one reason only:  It works.

Not only it works, but nearly everyone understand why it works.   Once you accept the fact that professional money managers are unable to consistently beat the market (which I do, I have seen enough evidence to convince me of this), then it makes perfect logical sense that you can invest and compound all that money that formerly went to active managers.  You aren't getting a free lunch, you just stop giving active fund managers their free lunch.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 01:24:06 PM
If your goal is truly to match the market in the cheapest way possible, and your allocation is dramatically different from above, then the question I have is why are you deviating from your underlying logic?

risk tolerance

Why do you think that equities will promise more reward than all other asset classes going forward?  There are riskier investments.  For example  junk bonds for the lowest rated companies in Greece would be a a riskier play than investing in the US equity market.


Please expand.

Why would I go 19% in corporate bonds, and 10% in gov bonds, etc?  I would rather take on more risk for more reward.  As long as you understand the risks you are assuming I see no fundamental problem deviating your AA from the global break down you posted into one that has higher risk/reward, ie one that is concentrated much more in equities.

Because historically they have, along with the underlying reasons already laid out in this thread that explain why they have had (and I expect them to continue to have) better returns.

I've also never understood the way risk was used in reference to investments.  It seems that it is always used in reference to volatility, and the short to mid term risk of losing money, but not the long term.  Over long time frames that risk appears to melt away, paradoxically making investing in higher risk assets actually less risk. 

I am not familiar enough with companies in greece to feel comfortable taking on that risk of junk bonds.

Right.  Because historically they have.

Logic would say that if you believe in a perfect risk reward relationship that you would invest in the riskiest assets if you want the highest rewards.  But you don't do that because some assets have higher risk adjusted rewards relative to others historically.

That is my point precisely.

Title: Re: Dual Momentum Investing
Post by: Dodge on April 28, 2015, 01:24:34 PM
Taking a percentage stake in all companies across the world, is in no way comparable to your Dual Momentum strategy.  They are on completely different levels.  One is a grabbing a percentage of the total world output/productivity.  The other is an attempt to beat millions of participants in a competition, based on what worked against those participants in the past.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 28, 2015, 01:31:59 PM
Right.  Because historically they have.

Logic would say that if you believe in a perfect risk reward relationship that you would invest in the riskiest assets if you want the highest rewards.  But you don't do that because some assets have higher risk adjusted rewards relative to others historically.

That is my point precisely.

You are missing the second half of my sentence.  It's not only that they historically have, but it makes perfect sense to me why they have historically.  It's not an anomaly that leaves me scratching my head.  It's a perfectly logical argument that they should have higher returns, and history has merely confirmed that logical argument imo.
Title: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 01:33:49 PM
Taking a percentage stake in all companies across the world, is in no way comparable to your Dual Momentum strategy.  They are on completely different levels.  One is a grabbing a percentage of the total world output/productivity.  The other is an attempt to beat millions of participants in a competition, based on what worked against those participants in the past.

Kind of a strawman argument here Dodge. I'm not arguing that the strategies are the same.

You make judgemental presumptions about my motivation to adopt this strategy which are in fact incorrect.

And your comment still doesn't Address the amazing coincidence that everyone here over weights the asset class that has been historically the most successful.
Title: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 01:52:16 PM
Oh. I didn't miss it at all. I just didn't find it very convincing or worthy of further discussion .

The problem is that I have no way of judging what makes sense to you personally or not.

What makes sense to me is the fact that everyone over weights a certain asset class with favorable risk-adjusted return characteristics is in no way a coincidence.

To me that is convincing evidence of performance chasing. Much more convincing than say everyone coming up with their own story a priori which leads them to the exact same conclusion.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 01:54:32 PM
Oh. I didn't miss it at all. I just didn't find it very convincing or worthy of further discussion .

The problem is that I have no way of judging what makes sense to you personally or not.

What makes sense to me is the fact that everyone over weights a certain asset class with favorable risk-adjusted return characteristics is in no way a coincidence.

To me that is convincing evidence of performance chasing. Much more convincing than say everyone coming up with their own story a priori which leads them to the exact same conclusion.

And if someone has never run a back test on their particular AA, because that's not how they chose it?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 01:58:46 PM
Oh. I didn't miss it at all. I just didn't find it very convincing or worthy of further discussion .

The problem is that I have no way of judging what makes sense to you personally or not.

What makes sense to me is the fact that everyone over weights a certain asset class with favorable risk-adjusted return characteristics is in no way a coincidence.

To me that is convincing evidence of performance chasing. Much more convincing than say everyone coming up with their own story a priori which leads them to the exact same conclusion.

And if someone has never run a back test on their particular AA, because that's not how they chose it?

If 100 people had no knowledge of the historical return characteristics of several different asset classes and were asked to come up with an ideal asset allocation for themselves based on what made the most sense, I would not expect everyone to choose to overweight the asset class that in fact had the most favorable return characteristics.  Would you?
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 28, 2015, 02:09:12 PM
Miles, the argument that everyone engages in performance chasing and, as a factual matter, picked their chosen investment strategy solely on the basis of past performance, is completely irrelevant.  As I said earlier, let's just assume for the sake of argument that you are correct that the one and only reason anyone in the world chooses to passively index is because history tells us that it worked in the past.  We can still come up with logical, reasoned explanations for why those strategies that worked in the past will continue to work in the future.

The same can't be said about an every-7th-Tuesday strategy.

We started down this road because Rebs and others asked whether there are logical reasons to believe that dual momentum will continue to work, or whether instead it is equivalent to an every-7th-Tuesday strategy.

Explanations for why we should expect dual momentum to continue to work in the future have now been put forward.  We can all debate whether or not those reasons are compelling.  But I don't understand how you can continue fail to see why we require there to be logical reasons to support our investment strategy.  If you found an every-7th-Tuesday strategy that backtested as well as dual momentum, would you follow it?
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 02:12:31 PM
If 100 people had no knowledge of the historical return characteristics of several different asset classes and were asked to come up with an ideal asset allocation for themselves based on what made the most sense, I would not expect everyone to choose to overweight the asset class that in fact had the most favorable return characteristics.  Would you?

If they had no knowledge of historical returns, and they all chose a similar asset class that also had high returns, I'd say that the emperical returns matched the logical reasons for why they chose it.

Miles, the argument that everyone engages in performance chasing and, as a factual matter, picked their chosen investment strategy solely on the basis of past performance, is completely irrelevant.

Besides being irrelevant, I just can't fathom it as true.  If everyone were doing that, why don't we all have the same AA, the one that has had the best returns?

Clearly something more than just performance chasing is in play for almost everyone.
Title: Re: Dual Momentum Investing
Post by: Dodge on April 28, 2015, 02:20:22 PM

Taking a percentage stake in all companies across the world, is in no way comparable to your Dual Momentum strategy.  They are on completely different levels.  One is a grabbing a percentage of the total world output/productivity.  The other is an attempt to beat millions of participants in a competition, based on what worked against those participants in the past.

Kind of a strawman argument here Dodge. I'm not arguing that the strategies are the same.

You make judge mental presumptions about my motivation to adopt this strategy which are in fact incorrect.

And your comment still doesn't Address the amazing coincidence that everyone here over weights the asset class that has been historically the most successful.

If you acknowledge the strategies aren't comparable, then it should be clear that your current line of questioning is invalid.

As companies make money, people who own percentage stakes in those companies, make money.  Currently the easiest way to grab a percentage of the total world output/productivity is to own percentage stakes in companies.  Correlation does not imply causation (https://en.wikipedia.org/wiki/Correlation_does_not_imply_causation):

------------------------------
Owning the total world output/productivity, is strongly correlated with choosing an asset class that is historically successful.
Therefore, the desire to be historically successful causes people to own the total world output/productivity.
------------------------------

The above example commits the correlation-implies-causation fallacy, as it prematurely concludes that people have a desire to choose an asset class that's historically successful, and that causes them to own the total world output/productivity.  A more plausible explanation is that owning the total world output/productivity is the best way to capture economic growth, so they end up choosing an asset class that's historically successful, which thereby gives rise to a correlation.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 02:48:25 PM

Taking a percentage stake in all companies across the world, is in no way comparable to your Dual Momentum strategy.  They are on completely different levels.  One is a grabbing a percentage of the total world output/productivity.  The other is an attempt to beat millions of participants in a competition, based on what worked against those participants in the past.

Kind of a strawman argument here Dodge. I'm not arguing that the strategies are the same.

You make judge mental presumptions about my motivation to adopt this strategy which are in fact incorrect.

And your comment still doesn't Address the amazing coincidence that everyone here over weights the asset class that has been historically the most successful.

If you acknowledge the strategies aren't comparable, then it should be clear that your current line of questioning is invalid.

As companies make money, people who own percentage stakes in those companies, make money.  Currently the easiest way to grab a percentage of the total world output/productivity is to own percentage stakes in companies.  Correlation does not imply causation (https://en.wikipedia.org/wiki/Correlation_does_not_imply_causation):

------------------------------
Owning the total world output/productivity, is strongly correlated with choosing an asset class that is historically successful.
Therefore, the desire to be historically successful causes people to own the total world output/productivity.
------------------------------

The above example commits the correlation-implies-causation fallacy, as it prematurely concludes that people have a desire to choose an asset class that's historically successful, and that causes them to own the total world output/productivity.  A more plausible explanation is that owning the total world output/productivity is the best way to capture economic growth, so they end up choosing an asset class that's historically successful, which thereby gives rise to a correlation.

Your argument is lost on me here Dodge.  I can't even respond because I have no idea what you are attempting to communicate.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 03:01:45 PM
Quote
If they had no knowledge of historical returns, and they all chose a similar asset class that also had high returns, I'd say that the emperical returns matched the logical reasons for why they chose it.

That's probably true and it is also an answer to a completely unrelated question.  The question is do you think they would choose the same thing if given no access to historical records?  I don't.  That is a highly unlikely outcome.

Quote
If everyone were doing that, why don't we all have the same AA, the one that has had the best returns?

Clearly something more than just performance chasing is in play for almost everyone.

No one is arguing that everyone uses exclusively performance chasing to design their portfolios.  What  I am arguing is that people generally construct their portfolios based on their best guess of the future performance of assets.  And their best guess of the future performance of assets is highly influenced by the past performance of assets.

ie.  the dominant driver of yours and my and most peoples portfolio is NOT a priori theories of market structure as you seem to believe, it is a posteriori.  That's it.

We all have our own risk tolerance and picadillos and biases, and we all have shiny stories that we use to justify our decisions.  So we all have different approaches. 

Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 28, 2015, 03:04:23 PM
Your argument is lost on me here Dodge.  I can't even respond because I have no idea what you are attempting to communicate.

I followed Dodge's argument just fine and think it can be summarized as follows:  there is a high correlation between the asset allocations people choose and the high historical performance of those asset allocations, and from that correlation you (improperly) concluded that the historical performance caused the choice of allocation.  An equally valid explanation would be that a third factor--the underlying cause of the asset allocation's outperformance--also caused people to choose that allocation.

Was my question about the every-7th-Tuesday strategy also lost on you?  Because I genuinely believe if you think about that question, you will see the point we've been trying to make.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 03:52:56 PM
Miles, the argument that everyone engages in performance chasing and, as a factual matter, picked their chosen investment strategy solely on the basis of past performance, is completely irrelevant.  As I said earlier, let's just assume for the sake of argument that you are correct that the one and only reason anyone in the world chooses to passively index is because history tells us that it worked in the past.  We can still come up with logical, reasoned explanations for why those strategies that worked in the past will continue to work in the future.

The same can't be said about an every-7th-Tuesday strategy.

We started down this road because Rebs and others asked whether there are logical reasons to believe that dual momentum will continue to work, or whether instead it is equivalent to an every-7th-Tuesday strategy.

Explanations for why we should expect dual momentum to continue to work in the future have now been put forward.  We can all debate whether or not those reasons are compelling.  But I don't understand how you can continue fail to see why we require there to be logical reasons to support our investment strategy.  If you found an every-7th-Tuesday strategy that backtested as well as dual momentum, would you follow it?


Brooklyn,

The point that indexers performance chase too is in no way a defense of dual momentum.  Others (including you) have made the claim that indexing is more rational because it springs de novo from a rational story a priori (ie irrespective of past performance.)  I think that this is demonstrably false, and have made my case for this because:

1.  Indexers justify their choice by saying that they want to invest in the "whole market" and not try to beat the market, but they don't invest in the whole market at all.  They overweight some assets and underweight others.
2.  Oddly they overweight assets not based on their actual risk, (based on their belief in risk/reward) but based on their historical efficiencies (ie risk adjusted returns).

In other words I am arguing that their justification for selecting assets (a priori beliefs) is demonstrably false.

As to the logic of dual momentum, how many times must I re-articulate my "story?"

It has to do with the persistence human performance chasing, and the flows of capital in and out of funds based on past performance.

Maybe it's not a convincing story for you.  Fair enough.  It's obviously very convincing to me.  To each his own.

As to the every 7th tuesday question, I can come up with no plausible story for that one, so there's one difference.

Furthermore I do put faith in robustness testing.  So I would expect such a theory to fall apart after it was first described, or I would expect it to not be present EVERYWHERE in out of sample testing.

Both momentum and trend following have proven to be uniquely rubust in out of sample testing. 

So  for the last time, that is my story. 

Momentum/trendfollowing jibe with my understanding of how markets work.  More importantly they have been present everywhere they have been looked for and has persisted long since they were first described.

Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 08:14:57 PM
In other words I am arguing that their justification for selecting assets (a priori beliefs) is demonstrably false.

As to the logic of dual momentum, how many times must I re-articulate my "story?"

It has to do with the persistence human performance chasing, and the flows of capital in and out of funds based on past performance.

Please elaborate.

"It has to do with..." is quite vague.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 08:43:33 PM
Edit:  I pasted this reply into # 347 to make a 2 part post more cohesive...

Title: Re: Dual Momentum Investing
Post by: FIPurpose on April 28, 2015, 08:59:53 PM
What is the main driving point for most of us on this forum to choose an 80/20 split? And the large weighting toward US stocks? I understand that the idea is that stock markets tend to go up in general, and I believe we see that in back testing as well. But not all stock markets go up equally. What is to stop the US market from stagnating for 20 years while other markets are the only ones growing?

What other than the fact that we look at the fact that the US has previously done well, so it will continue to dominate drives us to heavily weight our portfolios toward US stock? That we're a free nation? We have good economic policy? We have smarter people?

If we to truly believe in indexing, wouldn't it be more consistent to index against all available markets?
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 28, 2015, 09:06:16 PM
What is the main driving point for most of us on this forum to choose an 80/20 split? And the large weighting toward US stocks? I understand that the idea is that stock markets tend to go up in general, and I believe we see that in back testing as well. But not all stock markets go up equally. What is to stop the US market from stagnating for 20 years while other markets are the only ones growing?

What other than the fact that we look at the fact that the US has previously done well, so it will continue to dominate drives us to heavily weight our portfolios toward US stock? That we're a free nation? We have good economic policy? We have smarter people?

If we to truly believe in indexing, wouldn't it be more consistent to index against all available markets?

Not everyone here is 100% us stocks.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 09:07:40 PM
Personally I'd think investing based on the past--rather than future--would be short sighted, if you actually thought things were predictable.

In other words, I don't think people are weighting towards the U.S. because it has done well in the past, but believe that Brazil will outperform it in the future.  They're weighting towards U.S. stocks and companies because that's what they think will perform well in the future.  The fact that XYZ company did well 30 years ago has little bearing on their future prospects.  But if their future prospects seem bright, that would be relevant.

Since I can't time that, but do think U.S. companies have an edge in many ways, it would make sense to tilt towards the U.S.--again, not because of past performance, but due to my reasonings about the state of the world today.

I have no reason to think I can predict some other specific countries or companies that will outperform, so I'll just stick with the ones that are positioned to keep doing what they're doing.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 09:08:35 PM
What is the main driving point for most of us on this forum to choose an 80/20 split? And the large weighting toward US stocks? I understand that the idea is that stock markets tend to go up in general, and I believe we see that in back testing as well. But not all stock markets go up equally. What is to stop the US market from stagnating for 20 years while other markets are the only ones growing?

What other than the fact that we look at the fact that the US has previously done well, so it will continue to dominate drives us to heavily weight our portfolios toward US stock? That we're a free nation? We have good economic policy? We have smarter people?

If we to truly believe in indexing, wouldn't it be more consistent to index against all available markets?

Not everyone here is 100% us stocks.

I'd be surprised if anyone who posted in this thread is 100% US stocks.

But it's a coherent viewpoint to hold, which miles was asking for (an AA that had rationale behind it).
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 09:13:40 PM
I don't really know how else to say it ARS.

There are about 15 heuristics in Kahneman's thinking fast and slow that explain our inexorable performance chasing tendencies.

Off the top of my head.

Recency bias (our consistent non statistical  overemphasis on the importance of recent events (ie winners/losers.)
Loss aversion (our drive to avoid loss at all cost ((which makes it hard to buy recent losers and sell recent winners.))
Representativeness. (Our need to attribute causality to that which reinforces our own non statistical biases.  ( this stock made a killing for me, proving I'm smart, which again makes me attached to its ongoing performance  which makes it hard for me to sell it. ))

Which are all subtle aspects in our cognitive make up which make it hard to buy recent losers and easy to buy recent winners.

And when you get to the institutional level, the effects are only amplified. Money flows towards recent winners, because if you are paying someone 2 and 20 to outperform the market they had better have proof of their recent outperformance.

I recognized this tendency in myself even when it came time to rebalance my buy and hold portfolio.

It is non statistical, and illogical, and powerful, and it shades almost every trade that people make,  which in combination makes price momentum. A tendency for recent price movement to be perpetuated.

It could be that I am exceptionally illogical or greedy or non statistical in my thinking, who knows?

But that's how I see the market. (At least after having become aware of the momentum effect.)

Performance chasing!

All of which only describes relative strength momentum.

Trend following and absolute momentum, on the other hand,  are 2 different methods of accomplishing the same thing, namely finding a reproducible signal that gets you on the side line during bear markets.

If the price of your index is below its 200 day moving average or has performed worse than cash over the last 3-12 months it tells you the same thing:  you are probably in a bear market. It's not 100% of course, but its pretty close,  and bear markets in anything almost always last several years and can eat away as much as 80% of equity value in a 100% equity portfolio (and that is only the biggest bear market to date, no reason we can't have a greater depression in the future.)

This is a consistent  pattern of all US bear and most foreign bear markets to date, and I don't honestly know why markets always take years to right themselves, I assume it has to do with size effects and the consequent latency from the time that economies and governments recognize that they are in trouble, to the time that corrective action begins to stop the bleeding, but the fact that trend following always but always minimizes max drawdowns in diverse markets and asset types, in backtesting of 10 years or more, is enough empirical evidence for me.  I don't need a better story than that.  Call it technical trading if you like.  I call it a smart probabilistic play, and  I am willing to put my penny down (and have.)

The cost is tracking error and whipsaw risk, which generally means that its a coin flip whether or not the trend follower will outperform in a bull market (relative momentum helps here, of course). 

I don't see this play as much different from overweighting equities in a buy and hold portfolio.  Equities have always outperformed superiorly in 30 year periods in the past, so it's smart to imagine that this trend will persist, whether or not you believe in the unstoppable intrinsic wealth expanding prowess of corporations.

Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 09:22:50 PM
What is the main driving point for most of us on this forum to choose an 80/20 split? And the large weighting toward US stocks? I understand that the idea is that stock markets tend to go up in general, and I believe we see that in back testing as well. But not all stock markets go up equally. What is to stop the US market from stagnating for 20 years while other markets are the only ones growing?

What other than the fact that we look at the fact that the US has previously done well, so it will continue to dominate drives us to heavily weight our portfolios toward US stock? That we're a free nation? We have good economic policy? We have smarter people?

If we to truly believe in indexing, wouldn't it be more consistent to index against all available markets?

Even though it goes against my own "performance chasing" thesis, I think the main driver of choosing an equity allocation weighted towards America, here in America is  simple home country bias.  All countries are guilty of this one.  Any Canadians want to volunteer how much they have invested in canadian stocks?
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 28, 2015, 09:32:00 PM
What is the main driving point for most of us on this forum to choose an 80/20 split? And the large weighting toward US stocks? I understand that the idea is that stock markets tend to go up in general, and I believe we see that in back testing as well. But not all stock markets go up equally. What is to stop the US market from stagnating for 20 years while other markets are the only ones growing?

What other than the fact that we look at the fact that the US has previously done well, so it will continue to dominate drives us to heavily weight our portfolios toward US stock? That we're a free nation? We have good economic policy? We have smarter people?

If we to truly believe in indexing, wouldn't it be more consistent to index against all available markets?

Even though it goes against my own "performance chasing" thesis, I think the main driver of choosing an equity allocation weighted towards America, here in America is  simple home country bias.  All countries are guilty of this one.  Any Canadians want to volunteer how much they have invested in canadian stocks?

But there can be some logic/sense in tilting your allocation towards companies based in your home country.  If you buy goods and services from them, and the costs of those goods rise, hopefully that rise will be offset by their stock rising also (as the companies are making more money).  Tying your income to your expenses can make some logical sense, even if it doesn't backtest as nicely as if you invested in another country, if you don't find any compelling reason to favor that country going forward, then tilting towards your own country is as good as, or better, than any.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 28, 2015, 09:42:07 PM
What is the main driving point for most of us on this forum to choose an 80/20 split? And the large weighting toward US stocks? I understand that the idea is that stock markets tend to go up in general, and I believe we see that in back testing as well. But not all stock markets go up equally. What is to stop the US market from stagnating for 20 years while other markets are the only ones growing?

What other than the fact that we look at the fact that the US has previously done well, so it will continue to dominate drives us to heavily weight our portfolios toward US stock? That we're a free nation? We have good economic policy? We have smarter people?

If we to truly believe in indexing, wouldn't it be more consistent to index against all available markets?

Even though it goes against my own "performance chasing" thesis, I think the main driver of choosing an equity allocation weighted towards America, here in America is  simple home country bias.  All countries are guilty of this one.  Any Canadians want to volunteer how much they have invested in canadian stocks?

But there can be some logic/sense in tilting your allocation towards companies based in your home country.  If you buy goods and services from them, and the costs of those goods rise, hopefully that rise will be offset by their stock rising also (as the companies are making more money).  Tying your income to your expenses can make some logical sense, even if it doesn't backtest as nicely as if you invested in another country, if you don't find any compelling reason to favor that country going forward, then tilting towards your own country is as good as, or better, than any.

There's almost always a good argument to be made towards any investing decision that we make.  That's why I'm suspicious of stories.

Incidentally, the best argument for shading home country, in my view, is that it is generally cheaper...
Title: Re: Dual Momentum Investing
Post by: ferox on April 28, 2015, 11:38:12 PM
This discussion and the concept of Dual Momentum Investing sparked my interest. If it hasn't been shared already, this Amazon review by yogiyoda (found a link through the Boglehead forums) helped me personally get a more balanced view of DM.

http://www.amazon.com/review/R1VH4QEKVTD8F9/ref=cm_cd_pg_pg1?ie=UTF8&asin=0071849440&cdForum=Fx11L2M74JQ9LV9&cdPage=1&cdThread=Tx1KVZK3EPZZIOM&store=books#wasThisHelpful
Title: Re: Dual Momentum Investing
Post by: Dodge on April 29, 2015, 12:00:24 AM
This discussion and the concept of Dual Momentum Investing sparked my interest. If it hasn't been share already, this Amazon review by yogiyoda (found a link through the Boglehead forums) helped me personally get a more balanced view of DM.

http://www.amazon.com/review/R1VH4QEKVTD8F9/ref=cm_cd_pg_pg1?ie=UTF8&asin=0071849440&cdForum=Fx11L2M74JQ9LV9&cdPage=1&cdThread=Tx1KVZK3EPZZIOM&store=books#wasThisHelpful

Very interesting!  Thanks for that!

YogiYoda from that link did an 800 year backtest (like CFiresim does).  Here are some quotes:

-------------------------------------------
I ran the 800 year back test methodology on the S&P 500 from 1960 to 2015. That's the most data I had at the time. It had significantly lower returns than buy and hold with very similar volatility. I also ran it for large-cap data from 1927 through 2015, again it had significantly lower returns with similar monthly volatility.
-------------------------------------------
-------------------------------------------
The 87 year back test shows that Absolute Momentum performed noticeably worse in the 47 years prior to the book's back test
-------------------------------------------
-------------------------------------------
However, your results do make me wonder whether the spectacular results from Dual Momentum in Gary Antonacci's book and on his website might partly be due to him finding, by trial and error, what particular set of rules worked best when back-testing historical data.
-------------------------------------------

Those in the thread who are basing your analysis solely on backtesting might want to check your data.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 12:46:43 AM

Your argument is lost on me here Dodge.  I can't even respond because I have no idea what you are attempting to communicate.

I followed Dodge's argument just fine and think it can be summarized as follows:  there is a high correlation between the asset allocations people choose and the high historical performance of those asset allocations, and from that correlation you (improperly) concluded that the historical performance caused the choice of allocation.  An equally valid explanation would be that a third factor--the underlying cause of the asset allocation's outperformance--also caused people to choose that allocation.

Was my question about the every-7th-Tuesday strategy also lost on you?  Because I genuinely believe if you think about that question, you will see the point we've been trying to make.

The unsupported and nonsensical  part of Dodges argument is this;

"If you acknowledge the strategies aren't comparable, then it should be clear that your current line of questioning is invalid."

Please translate that into something logical.

The rest is just circular logic as far as I can tell ie. "My post facto justification for believing that x happened is right because my post facto justification is right!  Proof you ask? Because X happened. "

I believe I've already answered your other concerns.
Title: Re: Dual Momentum Investing
Post by: Dodge on April 29, 2015, 01:27:02 AM

Your argument is lost on me here Dodge.  I can't even respond because I have no idea what you are attempting to communicate.

I followed Dodge's argument just fine and think it can be summarized as follows:  there is a high correlation between the asset allocations people choose and the high historical performance of those asset allocations, and from that correlation you (improperly) concluded that the historical performance caused the choice of allocation.  An equally valid explanation would be that a third factor--the underlying cause of the asset allocation's outperformance--also caused people to choose that allocation.

Was my question about the every-7th-Tuesday strategy also lost on you?  Because I genuinely believe if you think about that question, you will see the point we've been trying to make.

The unsupported and nonsensical  part of Dodges argument is this;

"If you acknowledge the strategies aren't comparable, then it should be clear that your current line of questioning is invalid."

Please translate that into something logical.

The rest is just circular logic as far as I can tell ie. "My post facto justification for believing that x happened is right because my post facto justification is right!  Proof you ask? Because X happened. "

I believe I've already answered your other concerns.

Your line of questioning about why people index, as a response to the questions posed to you regarding your active trading strategy, is invalid.  The two are so far away from each other, the fact it was even brought up shows an inherent misunderstanding somewhere.  Indeed, your misunderstanding of "correlation does not imply causation" highlights this.  Judging from your posts, the misunderstanding might stem from your assumptions on why we index.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 29, 2015, 05:12:47 AM
Maybe it's not a convincing story for you.  Fair enough.  It's obviously very convincing to me.  To each his own.

As to the every 7th tuesday question, I can come up with no plausible story for that one, so there's one difference.

The only point we have been trying to make in this entire line of questioning about the logical explanation behind dual momentum is that a logical explanation needs to exist for any investment strategy to be advisable.  If that weren't true, it would make just as much sense to follow a 7th-Tuesday approach that happened to backtest well.  This seems so self-evident to be beyond argument.  Yet we've spent a substantial portion of this thread discussing why we require a logical justification for why DM will continue to work, instead of discussing the merits of the logical justification for why DM will continue to work.  Which leads me to conclude either that you didn't understand our point, or that this was all a red herring to avoid discussion of the merits.  So, assuming you now understand why there needs to be a logical theory underpinning an investment strategy, can we move the discussion back to the topic at hand?
Title: Re: Dual Momentum Investing
Post by: matchewed on April 29, 2015, 05:34:21 AM
Essentially; why does DM work? If the answer is I don't know, or I rely on irrational behavior from others as a driver for DM (arguably also an "I don't know"). Then how do you know it will work in the future?

If the answer is I do know... well then what rational logical reason is there for it to work?
Title: Re: Dual Momentum Investing
Post by: Mississippi Mudstache on April 29, 2015, 07:37:27 AM
I don't think you understand the phrase "catching a falling knife"--it means don't attempt to time the market, and say "oh, momentum is down, so let me buy it" because you'll get cut as it falls further.

My quotes were indicative of why market timing can be a fool's game, even when you're right.  They don't indicate that one should "use momentum in the past as a loss-avoidance strategy," as you claim.

I'm not going to argue that you don't understand the phrase, but I certainly do. To argue against buying when momentum is negative is, by definition, a momentum strategy. Trying to perfectly time the bottom is not a momentum strategy.

Please don't put words in my mouth.  I'm not arguing against buying when momentum is negative.  Or positive.  Or trying to time anything at all.  I never have.

I advocate for making investments on fundamentals and reason/logic.  Momentum has nothing to do with it.  Solid investment strategies do.


Sorry, ARS - I'm not trying to ruffle your feathers, and certainly not trying to put words in your mouth. I was just making the point that the whole "catch a falling knife" metaphor is an implicit acceptance of the observation that assets that have been falling recently are likely to continue to fall in the near future, i.e., that they have momentum. If markets are efficient, then "falling knives" shouldn't exist, because a assets are rationally priced at all times - and thus, just as likely to rise as to fall any given point in time - regardless of recent performance.

As you have noted (reasonably, I think):

I'd think investing based on the past--rather than future--would be short sighted, if you actually thought things were predictable.

but to my mind, the issue here is that I believe that recent performance influences what large swaths of other peoples' expectations in the near future. In other words, momentum investing is a bit of a Keynesian beauty contest (http://en.wikipedia.org/wiki/Keynesian_beauty_contest). You're not trying to decide which asset (or asset class) is the most appealing to you. You're trying to decide which asset will be most appealing to everybody else, at least in the near term.

Maybe it's not a convincing story for you.  Fair enough.  It's obviously very convincing to me.  To each his own.

As to the every 7th tuesday question, I can come up with no plausible story for that one, so there's one difference.

The only point we have been trying to make in this entire line of questioning about the logical explanation behind dual momentum is that a logical explanation needs to exist for any investment strategy to be advisable.  If that weren't true, it would make just as much sense to follow a 7th-Tuesday approach that happened to backtest well.  This seems so self-evident to be beyond argument.  Yet we've spent a substantial portion of this thread discussing why we require a logical justification for why DM will continue to work, instead of discussing the merits of the logical justification for why DM will continue to work.  Which leads me to conclude either that you didn't understand our point, or that this was all a red herring to avoid discussion of the merits.  So, assuming you now understand why there needs to be a logical theory underpinning an investment strategy, can we move the discussion back to the topic at hand?

Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 29, 2015, 07:50:02 AM
I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Did you look at the Amazon review, above?

Quote
On the author's website and in the comments of this review, you will see references to an 87 year back-test, a 212 year study, and an 800 year study. Here are some alternative perspectives on those:

The 87 year back test shows that Absolute Momentum performed noticeably worse in the 47 years prior to the book's back test. Also, by shifting the start date of that test forward by 5 years, the returns and risk adjusted returns look significantly worse for AbsMom ...further proof of the danger of concluding too much from even an 80+ years back-test.

The 212 year study shows that individual stocks show evidence of momentum. However, it also shows that in at least 9 decades momentum underperformed.

I ran the 800 year back test methodology on the S&P 500 from 1960 to 2015. That's the most data I had at the time. It had significantly lower returns than buy and hold with very similar volatility. I also ran it for large-cap data from 1927 through 2015, again it had significantly lower returns with similar monthly volatility.

It often underperforms, and doesn't seem to always exist, in backtesting.  So now, without a reasonable story, it's hard to swallow.

As he says in point 9 of the review:
Quote
9.) Momentum is still a mystery and isn't found in all markets or time periods. Will it continue in the assets where you invest? Will increasing technological innovation change its properties or look-back period? Can you stay the course while worrying about this?

I'm not comfortable investing in mysteries, so that's why I'm interested in seeing if this one can be, or has been, solved.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 29, 2015, 07:57:26 AM
Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

Yes that's the point.  It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well.  If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 29, 2015, 09:05:28 AM
Yes that's the point.  It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well.  If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

Exactly.  The 7th-Tuesday example was only intended to illustrate why a logical explanation should be required for an investment strategy to be advisable.  No-one has said that dual momentum is like a 7th-Tuesday strategy; rather, we've only asked for an explanation of the logical theory that underpins it--in other words, we've asked why it is not like a 7th-Tuesday strategy.  And most of the discussion spurred by that question has not been "here's why it's not," but "what's the difference whether it is or not, because the past tells us that it clearly works?"

Like I said earlier (as part of the limited discussion thus far to actually address the merits of the possible theories that have been put forward to explain why dual momentum should continue to work), I think the idea that "human behavior causes people to chase performance" is the most compelling reason articulated so far to believe that a dual momentum strategy will continue to outperform in the future.  But like I and Sol and others have already said, I don't think this is a compelling enough argument on which to trade my own dollars.  What logical reason is there to believe that people will continue to performance chase in a manner that will allow the precise lookback periods that worked in the past to continue to work in the future?

Again, I'm not asking that question in a rhetorical sense because I'm assuming the answer is "there is none"; I'm asking because there needs to be some plausible answer if this strategy is anything more than an every 7th-Tuesday strategy.  This thread, I think, was intended to explore the advisability of the dual momentum strategy.  There should be zero reluctance to defend the strategy against potential weaknesses in its logic, but we've barely even made it to that stage, because we've encountered resistance to the need to even answer the question of what that logic is in the first place!
Title: Re: Dual Momentum Investing
Post by: forummm on April 29, 2015, 10:00:35 AM
What I have trouble with seeing logically, is how a preset lookback period gives the best info about when a crash or boom is coming or present, and provides that info better than someone trying to actively market time based on whatever data available then (including recent returns). I have seen people bid up assets expecting them to continue to grow beyond rationality. I have seen people fearfully sell out of assets below levels I would be comfortable buying at for long term holding. So I get that psychology plays a huge role, and that there are trends. But we never know when those trends are going to start or stop. And following the trend means you're always underperforming the asset you're about to jump to.

Maybe if you're a really good analyst, you're able to time the market right 60% of the time. Incredibly successful sports bettors average about 55% win rates on even money bets, even in a field with lots of "dumb money" and homers due to its recreational aspect being more important than financial return to many sports gamblers. With a 60% win rate, you still lose to buy-and-hold, according to this analysis saying you need an 80% win rate. http://www.jstor.org/discover/10.2307/4479061?uid=3739616&uid=2&uid=4&uid=3739256&sid=21106200794591

How could a fixed lookback period beat the market 80% of the time? And especially if it doesn't matter whether that period is 3 months, 6 months, 11.5 months, or whatever, in that range of 3-15 months?

And a lot of the market is sophisticated investors who have a lot of inside information. If they work at Merrill Lynch or BofA they know what their clients are doing with their money. They know when the tide is starting to shift. How can we beat them with a formula that reacts to a much more delayed signal?
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 29, 2015, 10:09:35 AM
Good questions forummm.  And if it has, which the data shows, how come?  That seems really odd, no?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 10:29:52 AM

Maybe it's not a convincing story for you.  Fair enough.  It's obviously very convincing to me.  To each his own.

As to the every 7th tuesday question, I can come up with no plausible story for that one, so there's one difference.

The only point we have been trying to make in this entire line of questioning about the logical explanation behind dual momentum is that a logical explanation needs to exist for any investment strategy to be advisable.  If that weren't true, it would make just as much sense to follow a 7th-Tuesday approach that happened to backtest well.  This seems so self-evident to be beyond argument.  Yet we've spent a substantial portion of this thread discussing why we require a logical justification for why DM will continue to work, instead of discussing the merits of the logical justification for why DM will continue to work.  Which leads me to conclude either that you didn't understand our point, or that this was all a red herring to avoid discussion of the merits.  So, assuming you now understand why there needs to be a logical theory underpinning an investment strategy, can we move the discussion back to the topic at hand?

Brooklyn,

I have answered the question in the exact same manner about 15 different times in this thread.

Again if my conception of how the market works does not jibe with yours, fair enough!

I have no problem with you asking for my understanding of why momentum exists, but go back and read the thread. How many times must I type the exact same thing?

AZ
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 10:37:41 AM

I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Did you look at the Amazon review, above?

Quote
On the author's website and in the comments of this review, you will see references to an 87 year back-test, a 212 year study, and an 800 year study. Here are some alternative perspectives on those:

The 87 year back test shows that Absolute Momentum performed noticeably worse in the 47 years prior to the book's back test. Also, by shifting the start date of that test forward by 5 years, the returns and risk adjusted returns look significantly worse for AbsMom ...further proof of the danger of concluding too much from even an 80+ years back-test.

The 212 year study shows that individual stocks show evidence of momentum. However, it also shows that in at least 9 decades momentum underperformed.

I ran the 800 year back test methodology on the S&P 500 from 1960 to 2015. That's the most data I had at the time. It had significantly lower returns than buy and hold with very similar volatility. I also ran it for large-cap data from 1927 through 2015, again it had significantly lower returns with similar monthly volatility.

It often underperforms, and doesn't seem to always exist, in backtesting.  So now, without a reasonable story, it's hard to swallow.

As he says in point 9 of the review:
Quote
9.) Momentum is still a mystery and isn't found in all markets or time periods. Will it continue in the assets where you invest? Will increasing technological innovation change its properties or look-back period? Can you stay the course while worrying about this?

I'm not comfortable investing in mysteries, so that's why I'm interested in seeing if this one can be, or has been, solved.

ARS,

Please define "a reasonable story."  The only conclusion I can draw from your comments is that "a reasonable story," is one that you agree with. 

I don't mean that in an accusatory fashion, I just have no idea how you define "reasonable."

A behavioral explanation that stems from a scientifically validated observation on how human beings actually make  decisions, would seem to pass the reasonableness test.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 29, 2015, 10:40:45 AM

Maybe it's not a convincing story for you.  Fair enough.  It's obviously very convincing to me.  To each his own.

As to the every 7th tuesday question, I can come up with no plausible story for that one, so there's one difference.

The only point we have been trying to make in this entire line of questioning about the logical explanation behind dual momentum is that a logical explanation needs to exist for any investment strategy to be advisable.  If that weren't true, it would make just as much sense to follow a 7th-Tuesday approach that happened to backtest well.  This seems so self-evident to be beyond argument.  Yet we've spent a substantial portion of this thread discussing why we require a logical justification for why DM will continue to work, instead of discussing the merits of the logical justification for why DM will continue to work.  Which leads me to conclude either that you didn't understand our point, or that this was all a red herring to avoid discussion of the merits.  So, assuming you now understand why there needs to be a logical theory underpinning an investment strategy, can we move the discussion back to the topic at hand?

Brooklyn,

I have answered the question in the exact same manner about 15 different times in this thread.

Again if my conception of how the market works does not jibe with yours, fair enough!

I have no problem with you asking for my understanding of why momentum exists, but go back and read the thread. How many times must I type the exact same thing?

AZ


If multiple people are saying the same thing about what you're saying (or not), and repeating it, perhaps it might be time to consider that maybe the communication issue is not solely on their end.


Please define "a reasonable story."

..

A behavioral explanation that stems from a scientifically validated observation on how human beings actually make  decisions, would seem to pass the reasonableness test.

How about any sort of story, beyond a super vague "people sometimes are irrational and we can exploit that"?

I'd love "A behavioral explanation that stems from a scientifically validated observation on how human beings actually make  decisions, would seem to pass the reasonableness test."  -- Please post said explanation.

Also you ignored the whole rest of that post to nitpick on one point.  It really seems like you don't want to talk about the merits of DM, and just want to shift the debate to whatever other things (other strategies, etc.) you can.  =/
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 10:49:01 AM

Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

Yes that's the point.  It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well.  If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

You are misusing the term "robustness."

Robustness means...

"A characteristic describing a model's, test's or system's ability to effectively perform while its variables or assumptions are altered. A robust concept can operate without failure under a variety of conditions."

If an theory provides reproducible results in myriad out of sample and out of period tests, it does not "seem" robust, it is robust.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 29, 2015, 10:57:50 AM
(https://ioneglobalgrind.files.wordpress.com/2014/02/tumblr_inline_mz91g75wzm1qbd7br.png)

Again, why are you nitpicking and not addressing the real points raised, miles?


Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

Yes that's the point.  It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well.  If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

You are misusing the term "robustness."

Robustness means...

"A characteristic describing a model's, test's or system's ability to effectively perform while its variables or assumptions are altered. A robust concept can operate without failure under a variety of conditions."

If an theory provides reproducible results in myriad out of sample and out of period tests, it does not "seem" robust, it is robust.

This is an example of a * wasted, pointless post.  Take the word "seems" out of his post, if you want. To nitpick that he said it "seems robust" instead of "it is robust" and paste in a definition of robust is the definition of pedantic.

Drop that ONE word (seems), instead of nitpicking on it and address the darn question, which is "why"?

(https://dl.dropboxusercontent.com/u/9743562/icon_rolleyes.gif)

I'm having trouble believing you're acting in good faith at this point, and not just trolling.  Picking out small things to annoy, and ignoring actual issues is classic trolling.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 11:00:50 AM


Maybe it's not a convincing story for you.  Fair enough.  It's obviously very convincing to me.  To each his own.

As to the every 7th tuesday question, I can come up with no plausible story for that one, so there's one difference.

The only point we have been trying to make in this entire line of questioning about the logical explanation behind dual momentum is that a logical explanation needs to exist for any investment strategy to be advisable.  If that weren't true, it would make just as much sense to follow a 7th-Tuesday approach that happened to backtest well.  This seems so self-evident to be beyond argument.  Yet we've spent a substantial portion of this thread discussing why we require a logical justification for why DM will continue to work, instead of discussing the merits of the logical justification for why DM will continue to work.  Which leads me to conclude either that you didn't understand our point, or that this was all a red herring to avoid discussion of the merits.  So, assuming you now understand why there needs to be a logical theory underpinning an investment strategy, can we move the discussion back to the topic at hand?

Brooklyn,

I have answered the question in the exact same manner about 15 different times in this thread.

Again if my conception of how the market works does not jibe with yours, fair enough!

I have no problem with you asking for my understanding of why momentum exists, but go back and read the thread. How many times must I type the exact same thing?

AZ


If multiple people are saying the same thing about what you're saying (or not), and repeating it, perhaps it might be time to consider that maybe the communication issue is not solely on their end.


Please define "a reasonable story."

..

A behavioral explanation that stems from a scientifically validated observation on how human beings actually make  decisions, would seem to pass the reasonableness test.

How about any sort of story, beyond a super vague "people sometimes are irrational and we can exploit that"?

I'd love "A behavioral explanation that stems from a scientifically validated observation on how human beings actually make  decisions, would seem to pass the reasonableness test."  -- Please post said explanation.

Also you ignored the whole rest of that post to nitpick on one point.  It really seems like you don't want to talk about the merits of DM, and just want to shift the debate to whatever other things (other strategies, etc.) you can.  =/

Not really a credible answer ARS.

You are saying any answer but the one I have provided.

If you haven't already, you should familiarize yourself with the work of Tversky and Kahneman, which I have referenced above. It will provide you with detailed scientifically validated (even Nobel prize winning) understanding for why human beings chase performance and are likely to do so in the future.

Your underlying assumption seems to be that a rational theory is one modelled upon a market which is made up of perfectly rational actors who make decisions based on risk. To me this is the most unrealistic  assumption of all.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 29, 2015, 11:04:13 AM
You are saying any answer but the one I have provided.

No, I'm saying any answer.  You have not provided a reasonable explanation, just a vague hand-waiving.

Let me put it another way: You think you ave provided an answer.

A bunch of us are still asking for one.

So whatever you think you have provided did not come through clear enough.

Try again please?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 11:10:14 AM

(https://ioneglobalgrind.files.wordpress.com/2014/02/tumblr_inline_mz91g75wzm1qbd7br.png)

Again, why are you nitpicking and not addressing the real points raised, miles?


Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

Yes that's the point.  It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well.  If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

You are misusing the term "robustness."

Robustness means...

"A characteristic describing a model's, test's or system's ability to effectively perform while its variables or assumptions are altered. A robust concept can operate without failure under a variety of conditions."

If an theory provides reproducible results in myriad out of sample and out of period tests, it does not "seem" robust, it is robust.

This is an example of a * wasted, pointless post.  Take the word "seems" out of his post, if you want. To nitpick that he said it "seems robust" instead of "it is robust" and paste in a definition of robust is the definition of pedantic.

Drop that ONE word (seems), instead of nitpicking on it and address the darn question, which is "why"?

(https://dl.dropboxusercontent.com/u/9743562/icon_rolleyes.gif)

I'm having trouble believing you're acting in good faith at this point, and not just trolling.  Picking out small things to annoy, and ignoring actual issues is classic trolling.

Not trolling at all. In the post referenced  the claim was that momentum "seems" robust because it has reproducible results.

If the use of the term "robust" betrays a clear lack of understanding of what "robust" means, then the only way that we can proceed is if we correctly define our terms.

This is exactly what occurred earlier in the thread when you correctly defined the term "A priori" for me.

I took your definition, learned from it, and moved on.

And I certainly never accused you of trolling.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 11:12:27 AM

You are saying any answer but the one I have provided.

No, I'm saying any answer.  You have not provided a reasonable explanation, just a vague hand-waiving.

Let me put it another way: You think you ave provided an answer.

A bunch of us are still asking for one.

So whatever you think you have provided did not come through clear enough.

Try again please?

The logical next step is not for me to try again, it is to accept that we have different assumptions for how the market works, and to move on.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 29, 2015, 11:16:13 AM

Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

Yes that's the point.  It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well.  If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

You are misusing the term "robustness."

Robustness means...

"A characteristic describing a model's, test's or system's ability to effectively perform while its variables or assumptions are altered. A robust concept can operate without failure under a variety of conditions."

If an theory provides reproducible results in myriad out of sample and out of period tests, it does not "seem" robust, it is robust.

So basically nothing can ever falsely appear robust?  So if I go back and find out that trading on every 7th tuesday provided fantastic market beating returns, you would claim that is a robust investment strategy?  It appears to be robust through back testing, ipso facto it is robust, despite having no logical reason for why it works?

I'm gonna have to disagree with you here.  I'm not even one who used robustness, that was mississippi mudstache, I was just pointing out that I disagree that the theory is robust.  I think it's possibly giving you false confidence that it is robust when it is in fact not, ie it seems robust.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 29, 2015, 11:17:49 AM
FrugalNacho's post aside, I'll even grant you it's robust so we can move on to a response:
It seems to be is an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well.  If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

Response?
Title: Re: Dual Momentum Investing
Post by: MDM on April 29, 2015, 11:25:02 AM
If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

I do believe in the theory that "every 7th tuesday" is the time to buy.  I also believe it is a robust theory, e.g. it also works for other days of the week and for different frequencies - even irregular ones.

Consequently I invest whenever I have the cash to do so.... ;)
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 29, 2015, 11:28:09 AM
I have answered the question in the exact same manner about 15 different times in this thread.

Again if my conception of how the market works does not jibe with yours, fair enough!

I have no problem with you asking for my understanding of why momentum exists, but go back and read the thread. How many times must I type the exact same thing?

By my count, you have answered the question "why should we expect dual momentum to continue to outperform in the future" exactly five times, each of which has been a vague, barely responsive answer along the lines of "the reason has something to do with humans' tendency to chase performance."

Here is the full text of the portion of each your posts which I consider responsive to the question asked:

There are multiple explanations for momentum. Some efficient market types even try to explain it as a risk story which has never made a bit of sense to me and just ends up seeming Panglossian.

I don't think that momentum has to do with human irrationality or stupidity, in a pejorative way. I think it has to do with the heuristics that govern human decision-making.  i'm talking recency, loss aversion, representativeness, etc. i.e. everything in Daniel Kahneman's thinking fast and slow.  These are useful techniques that we all use to process information quickly, but they are nonstatistical ways of thinking.

There is also some good data that momentum is perpetuated by the flow of capital in and out of funds. So as one strategy becomes successful based on regime change, money flows toward it in the short-term from other funds creating price momentum (and negative momentum from the donor funds!). And because money cannot flow instantaneously because of liquidity issues, this momentum lasts for a significant amount of time (anywhere from 3 to 12 months).

To me momentum is an expression of humanity as it exists, not as we think it exists.

We all believe ourselves to be rational, but we have irrational reactions to loss, and to prospective gain. We all chase performance (which is probably why there is such a strong predilection here for passive low cost investment. It is the SmartMoney bet!)

I've already given you my post facto attribution for why I believe momentum has worked and will continue to work.  Because human investors and institutions chase performance. 

I was asked for the story behind momentum/trendfollowing as I understand it and I gave it:

Human performance chasing and the flow of capital in and out of markets based on human performance chasing.

As to the logic of dual momentum, how many times must I re-articulate my "story?"

It has to do with the persistence human performance chasing, and the flows of capital in and out of funds based on past performance.

I don't really know how else to say it ARS.

There are about 15 heuristics in Kahneman's thinking fast and slow that explain our inexorable performance chasing tendencies.

Off the top of my head.

Recency bias (our consistent non statistical  overemphasis on the importance of recent events (ie winners/losers.)

Loss aversion (our drive to avoid loss at all cost ((which makes it hard to buy recent losers and sell recent winners.))

Representativeness. (Our need to attribute causality to that which reinforces our own non statistical biases.  ( this stock made a killing for me, proving I'm smart, which again makes me attached to its ongoing performance  which makes it hard for me to sell it. ))

Which are all subtle aspects in our cognitive make up which make it hard to buy recent losers and easy to buy recent winners.

And when you get to the institutional level, the effects are only amplified. Money flows towards recent winners, because if you are paying someone 2 and 20 to outperform the market they had better have proof of their recent outperformance.

I recognized this tendency in myself even when it came time to rebalance my buy and hold portfolio.

It is non statistical, and illogical, and powerful, and it shades almost every trade that people make,  which in combination makes price momentum. A tendency for recent price movement to be perpetuated.

It could be that I am exceptionally illogical or greedy or non statistical in my thinking, who knows?

But that's how I see the market. (At least after having become aware of the momentum effect.)

Performance chasing!

Beyond these vague descriptions that some rationale exists, and that it has something to do with human behavior and cognitive biases, you have not even bothered to attempt to answer the question.  Instead, you keep avoiding the question, and launching into arguments about why we should not even look for logical rationales in the first place (which I find absurd), or about the logical rationales that underpin alternative investment strategies (like passive indexing), or whether logical rationales are in fact what drive investors to adopt strategies like passive indexing--all of which is irrelevant to the topic at hand.

Hodedofme, who has clearly understood the question being asked, provided some better answers, which we went on to discuss, in the manner a forum is supposed to operate.

If you don't have any better explanations than what you stated above, just say so.  That's fine.  But stop ducking the question, or, worse yet, arguing that it is unfair for us to ask the most basic question that should be asked of any investment strategy:  why should we believe that it will continue to work?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 11:39:11 AM

FrugalNacho's post aside, I'll even grant you it's robust so we can move on to a response:
It seems to be is an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well.  If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

Response?

I have told you why I think it is robust.

Because humans have a fundamental tendency to chase performance (based on the above mentioned rigorously described and validated behavioral biases and heuristics) and this causes price momentum.

I can explain momentum satisfactorily for myself,but obviously not for you.

Admittedly If momentum didn't work I would not deploy the strategy, regardless of the elegance of the underlying theory. But it does work, and it works pervasively and persistently.

Let me turn that question around for you though.

If stocks had underperformed treasuries for the last 800 years, do you really think that you would be 100% equities, because of your convincing story?
Title: Re: Dual Momentum Investing
Post by: skyrefuge on April 29, 2015, 11:40:47 AM
Let me put it another way: You think you ave provided an answer.

A bunch of us are still asking for one.

So whatever you think you have provided did not come through clear enough.

For the record, mdmd's answer(s) (as collected by brooklynguy) pass the "reasonable" standard for me. The last 50 posts of "give us more of an answer than that!" have left me befuddled, since that's not really a way to carry on a discussion. Normally the discussion would proceed by pointing out why you *disagree* with that answer, not just continually saying "that answer wasn't really an answer".  So I guess put me in the Mississippi Mudstache category on this one.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 29, 2015, 11:59:01 AM
Let me put it another way: You think you ave provided an answer.

A bunch of us are still asking for one.

So whatever you think you have provided did not come through clear enough.

For the record, mdmd's answer(s) (as collected by brooklynguy) pass the "reasonable" standard for me. The last 50 posts of "give us more of an answer than that!" have left me befuddled, since that's not really a way to carry on a discussion. Normally the discussion would proceed by pointing out why you *disagree* with that answer, not just continually saying "that answer wasn't really an answer".  So I guess put me in the Mississippi Mudstache category on this one.

Fair enough.  I don't understand the answer well enough (it's way too vague) to actually be able to point out why I disagree with it (if I do).
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 12:16:16 PM

Let me put it another way: You think you ave provided an answer.

A bunch of us are still asking for one.

So whatever you think you have provided did not come through clear enough.

For the record, mdmd's answer(s) (as collected by brooklynguy) pass the "reasonable" standard for me. The last 50 posts of "give us more of an answer than that!" have left me befuddled, since that's not really a way to carry on a discussion. Normally the discussion would proceed by pointing out why you *disagree* with that answer, not just continually saying "that answer wasn't really an answer".  So I guess put me in the Mississippi Mudstache category on this one.

Thank you for this.

I (now) feel that I am (perhaps) not a character in Kafka's The Trial.

I was beginning to wonder.

Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 29, 2015, 12:19:04 PM
The last 50 posts of "give us more of an answer than that!" have left me befuddled, since that's not really a way to carry on a discussion. Normally the discussion would proceed by pointing out why you *disagree* with that answer, not just continually saying "that answer wasn't really an answer".

Fair enough, but I think the gears of normal discussion stopped turning because those collected answers had to be forcibly extracted during the larger back-and-forth of irrelevant side debates that constituted the bulk of the discussion in this thread (and which do not appear in the neat collection of responsive answers).

I don't understand the answer well enough (it's way too vague) to actually be able to point out why I disagree with it (if I do).

This is the issue I still have.  The reason that we should expect dual momentum to persist in a way that will allow that strategy (using the lookback period(s) that have been specified) to outperform the market, has not been articulated in a way that I can understand well enough to respond to, or to know whether I agree or disagree.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 29, 2015, 12:20:51 PM
I don't understand the answer well enough (it's way too vague) to actually be able to point out why I disagree with it (if I do).

This is the issue I still have.  The reason that we should expect dual momentum to persist in a way that will allow that strategy (using the lookback period(s) that have been specified) to outperform the market, has not been articulated in a way that I can understand well enough to respond to, or to know whether I agree or disagree.

Exactly.  Skyrefuge, if you understand it, maybe you can give us a coherent explanation of why it works and will continue to do so.  :)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 01:30:47 PM

The last 50 posts of "give us more of an answer than that!" have left me befuddled, since that's not really a way to carry on a discussion. Normally the discussion would proceed by pointing out why you *disagree* with that answer, not just continually saying "that answer wasn't really an answer".

Fair enough, but I think the gears of normal discussion stopped turning because those collected answers had to be forcibly extracted during the larger back-and-forth of irrelevant side debates that constituted the bulk of the discussion in this thread (and which do not appear in the neat collection of responsive answers).

I don't understand the answer well enough (it's way too vague) to actually be able to point out why I disagree with it (if I do).

This is the issue I still have.  The reason that we should expect dual momentum to persist in a way that will allow that strategy (using the lookback period(s) that have been specified) to outperform the market, has not been articulated in a way that I can understand well enough to respond to, or to know whether I agree or disagree.

There are 2 questions thatyou must answer for yourself to understand whether or not dual momentum will continue to work in the future.

1.  Will simple trendfollowing approaches continue to reproducibly mitigate drawdowns in the future?

And

Will the momentum effect persist into the future?

You know my answers already, and they are unconvincing to you. But here is how I have answered those questions

1.  Yes, because of structural factors in the economy which create reproducible durations of bear markets, trend following will continue to identify bear markets in the future, which will mitigate drawdowns.

And

2.  Yes, and it is a behavioral story not a risk story. Humans will continue to chase performance. This performance chasing behavior is fundamental to the way we make decisions, and human decision making is what drives markets.

(Kahneman's Thinking fast and slow, was very instrumental in me reaching this conclusion. It's a wonderful book and highly recommended)

Note that I make no claims about "beating the market." 

Whipsaws can happen randomly, and big flash crashes with rapid recoveries are very problematic for trendfollowing approaches.

In my view the probability of numerous more bear markets in my lifetime is greater than the probability of numerous black Monday's, but that is just an educated guess based on base rate probability.

Beating the market is not really the point, but if it does, all the better.



Title: Re: Dual Momentum Investing
Post by: Dodge on April 29, 2015, 01:44:59 PM
This discussion and the concept of Dual Momentum Investing sparked my interest. If it hasn't been share already, this Amazon review by yogiyoda (found a link through the Boglehead forums) helped me personally get a more balanced view of DM.

http://www.amazon.com/review/R1VH4QEKVTD8F9/ref=cm_cd_pg_pg1?ie=UTF8&asin=0071849440&cdForum=Fx11L2M74JQ9LV9&cdPage=1&cdThread=Tx1KVZK3EPZZIOM&store=books#wasThisHelpful

Very interesting!  Thanks for that!

YogiYoda from that link did an 800 year backtest (like CFiresim does).  Here are some quotes:

-------------------------------------------
I ran the 800 year back test methodology on the S&P 500 from 1960 to 2015. That's the most data I had at the time. It had significantly lower returns than buy and hold with very similar volatility. I also ran it for large-cap data from 1927 through 2015, again it had significantly lower returns with similar monthly volatility.
-------------------------------------------
-------------------------------------------
The 87 year back test shows that Absolute Momentum performed noticeably worse in the 47 years prior to the book's back test
-------------------------------------------
-------------------------------------------
However, your results do make me wonder whether the spectacular results from Dual Momentum in Gary Antonacci's book and on his website might partly be due to him finding, by trial and error, what particular set of rules worked best when back-testing historical data.
-------------------------------------------

Those in the thread who are basing your analysis solely on backtesting might want to check your data.

Do the proponents of this strategy have any comments on the above data?

Regarding the "performance chasing" theory, it's the same old story we've all seen for a thousand similar breakout/market-timing/trend...etc, strategies.

-------------------------------------
"The market is made up of humans, and by human nature we are afraid of loss performance chase.  This irrational behavior isn't based on fundamentals and won't last, therefore you should buy when the market looks GREAT and goes up to X!"

"The market is made up of humans, and by human nature we are afraid of loss performance chase.  This irrational behavior isn't based on fundamentals and won't last, therefore you should sell when the market looks GREAT and moves up to X!"
-------------------------------------

With X being the same value each time.  Since the same "performance chasing" analysis can reasonably lead you in both directions, the only way to know which direction to apply it, is by backtesting.  If you backtest and see that the majority of the time it goes up at X, then you go with the first story.  If you backtest and see that the majority of the time it goes down at X, then you go with the second story.  With this line of thinking, the  "performance chasing" justification is meaningless, as it will blindly follow the result of the backtest.  This is why you're meeting so much resistance with this type of answer.  It's an implicit admission that your entire strategy to beat the market is solely reliant on the results of a backtest.

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

And more justification for why Survivorship bias is the single greatest fallacy in investing (http://forum.mrmoneymustache.com/investor-alley/survivorship-bias-the-single-greatest-fallacy-in-investing-35417/msg627859/#msg627859).
Title: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 01:47:39 PM

Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

Yes that's the point.  It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well.  If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

You are misusing the term "robustness."

Robustness means...

"A characteristic describing a model's, test's or system's ability to effectively perform while its variables or assumptions are altered. A robust concept can operate without failure under a variety of conditions."

If an theory provides reproducible results in myriad out of sample and out of period tests, it does not "seem" robust, it is robust.

So basically nothing can ever falsely appear robust?  So if I go back and find out that trading on every 7th tuesday provided fantastic market beating returns, you would claim that is a robust investment strategy?  It appears to be robust through back testing, ipso facto it is robust, despite having no logical reason for why it works?

I'm gonna have to disagree with you here.  I'm not even one who used robustness, that was mississippi mudstache, I was just pointing out that I disagree that the theory is robust.  I think it's possibly giving you false confidence that it is robust when it is in fact not, ie it seems robust.

I think what you're asking is:  Just because a theory is robust does that prove that it is necessarily true?

And in my opinion the answer is:

No!  But the more robust a Theory is, The more likely it is to be true.
Title: Re: Dual Momentum Investing
Post by: sol on April 29, 2015, 01:48:51 PM
My understanding of the relevant parts of miles' answer to the why it should work question is that performance chasers exhibit herd mentality, and a herd mentality tends to amplify market movements that are essentially otherwise random.  This is purely a behavioral psychology answer.

I think this theory supports a short term momentum trading strategy, though it says nothing at all about market fundamentals and I think most of us are looking for a fundamentals kind of justification.  It also says nothing about long term growth patterns or which companies or sectors are likely to succeed, but how could it? Any strategy that deliberately ignores most of the information about the markets is necessarily going be agnostic about anything other than the single metric it follows.

It looks like the key disconnect here is between one camp that sees the future being born of logic and the other that sees the future being born of history.  I can mentally justify both approaches, I guess.  I'd like to believe that logic is more predictive than a random past, but I suspect there are enough patterns in history to argue it both ways.
Title: Re: Dual Momentum Investing
Post by: skyrefuge on April 29, 2015, 01:49:02 PM
Exactly.  Skyrefuge, if you understand it, maybe you can give us a coherent explanation of why it works and will continue to do so.  :)

I thought mdmd's first answer that brooklynguy quoted (http://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/msg636095/#msg636095) explained it sufficiently non-vaguely, but I guess I can try some more.

The main belief is that humans (in general) are overly-optimistic when they see something improving, and overly-pessimistic when they see something declining. Hopefully this isn't a shocking statement to anyone? If I was mdmd, after the 2nd or 3rd round of this, I would have actually linked to some research (likely from Kahneman) that explicitly reveals this human failing, but since it's such a baked-in part of Boglehead Investing 101 ("don't be like the masses, who buy high and sell low"), he probably figured a citation wasn't required. And since it's not my argument, I'm not going to look it up either.

If there were no delays or limits on human society's ability and interest to move stock prices, then seeing a 100% rise or fall in a millisecond would not be unexpected. But in fact, the US stock market has never risen or fallen 30% in a one day period. On the other hand, the market has never failed to rise by more than 30% in any 20-year period. These two combined suggest that there is some "stickiness" in the market that causes price movements to be spread out over a time-period longer than "instantaneous".

In my mind, some of this lack-of-instantaneousness comes from the fact that the "information" that drives market prices comes from the real world, and the real world is constrained by the laws of physics, which gives a fundamental speed limit to information, as well as a practical speed limit that's far lower. 100 customers parking, walking into a Best Buy, picking up an iPad, walking to the cashier, and paying eventually results in a "iPads are selling great!" bit of information, but that information is not created instantaneously.

So, unless the laws of physics change, or human behavior (which is likely built into our DNA and brains) changes, it seems reasonable that these non-instantaneous market price changes which we have observed in the past will continue in the future. And if a signal can be found that reliably indicates when a non-instantaneous directional price-movement has started, then that can be exploited for profit above market returns.

The challenge then is finding that signal. mdmd seems to believe it's not that difficult, and (given his belief in a range of lookback periods) does not have to be particularly precise in order to work. I get the impression he would admit that this portion of his system comes solely from backtesting.

But it doesn't have to. You could theoretically create a model that you would use to predict the average duration of a directional price movement. It would use inputs like average speed of delivery trucks, frequency of reporting by publicly-traded companies, duration of Congressional terms, vacation times of stockbrokers, time for a wheat crop to go from seed to harvest, and typing speed of participants posting on Internet investing forums. That way it could define a duration somewhere between the one-day and 20-year periods mentioned earlier, without relying on any backtesting.

That sounds like a giant pain in the ass, so in lieu of such a model, it's not shocking to me if a convincing-looking backtest is used in its stead.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 01:54:04 PM

This discussion and the concept of Dual Momentum Investing sparked my interest. If it hasn't been share already, this Amazon review by yogiyoda (found a link through the Boglehead forums) helped me personally get a more balanced view of DM.

http://www.amazon.com/review/R1VH4QEKVTD8F9/ref=cm_cd_pg_pg1?ie=UTF8&asin=0071849440&cdForum=Fx11L2M74JQ9LV9&cdPage=1&cdThread=Tx1KVZK3EPZZIOM&store=books#wasThisHelpful

Very interesting!  Thanks for that!

YogiYoda from that link did an 800 year backtest (like CFiresim does).  Here are some quotes:

-------------------------------------------
I ran the 800 year back test methodology on the S&P 500 from 1960 to 2015. That's the most data I had at the time. It had significantly lower returns than buy and hold with very similar volatility. I also ran it for large-cap data from 1927 through 2015, again it had significantly lower returns with similar monthly volatility.
-------------------------------------------
-------------------------------------------
The 87 year back test shows that Absolute Momentum performed noticeably worse in the 47 years prior to the book's back test
-------------------------------------------
-------------------------------------------
However, your results do make me wonder whether the spectacular results from Dual Momentum in Gary Antonacci's book and on his website might partly be due to him finding, by trial and error, what particular set of rules worked best when back-testing historical data.
-------------------------------------------

Those in the thread who are basing your analysis solely on backtesting might want to check your data.

Do the proponents of this strategy have any comments on the above data?

Regarding the "performance chasing" theory, it's the same old story we've all seen for a thousand similar breakout/market-timing/trend...etc, strategies.

-------------------------------------
"The market is made up of humans, and by human nature we are afraid of loss performance chase.  This irrational behavior isn't based on fundamentals and won't last, therefore you should buy when the market looks GREAT and goes up to X!"

"The market is made up of humans, and by human nature we are afraid of loss performance chase.  This irrational behavior isn't based on fundamentals and won't last, therefore you should sell when the market looks GREAT and moves up to X!"
-------------------------------------

With X being the same value each time.  Since the same "performance chasing" analysis can reasonably lead you in both directions, the only way to know which direction to apply it, is by backtesting.  If you backtest and see that the majority of the time it goes up at X, then you go with the first story.  If you backtest and see that the majority of the time it goes down at X, then you go with the second story.  With this line of thinking, the  "performance chasing" justification is meaningless, as it will blindly follow the result of the backtest.  This is why you're meeting so much resistance with this type of answer.  It's an implicit admission that your entire strategy to beat the market is solely reliant on the results of a backtest.

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

And more justification for why Survivorship bias is the single greatest fallacy in investing (http://forum.mrmoneymustache.com/investor-alley/survivorship-bias-the-single-greatest-fallacy-in-investing-35417/msg627859/#msg627859).

There is no data to comment on. Only the claim of data.

I would love to see this data transparently published.  The more data the better.

When it is published, we can learn from it and comment on it intelligently.

I appreciate that Antonacci publishes his data and methods in a peer reviewed fashion unlike your referenced source.
Title: Re: Dual Momentum Investing
Post by: smilla on April 29, 2015, 02:16:22 PM
It looks like the key disconnect here is between one camp that sees the future being born of logic and the other that sees the future being born of history. 

I see the disconnect as more, one camp sees the future being born of logic, and the other sees it being born of human behaviour, which is often illogical. 

I expect both camps are right, just not 100% right. 

(Thank you, frugalnacho & 691...  for your earlier responses to my questions, very helpful.)   
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 29, 2015, 02:24:12 PM
I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

It looks like the key disconnect here is between one camp that sees the future being born of logic and the other that sees the future being born of history.  I can mentally justify both approaches, I guess.  I'd like to believe that logic is more predictive than a random past, but I suspect there are enough patterns in history to argue it both ways.

But, as is now being fleshed out, I think both camps agree that the future is born of logic.  We can use history to find patterns that may be predictive of the future, but only if there is some underlying logic to explain the pattern.  No-one adopted the view that a 7th-Tuesday-type strategy that happened to backtest perfectly could be expected to be predictive of the future (and therefore be actionable).  What's ironic (if ironic is the right word), though, is that the logic behind dual momentum is the human animal's tendency to fail to exercise logical reasoning.

You could theoretically create a model that you would use to predict the average duration of a directional price movement. It would use inputs like average speed of delivery trucks, frequency of reporting by publicly-traded companies, duration of Congressional terms, vacation times of stockbrokers, time for a wheat crop to go from seed to harvest, and typing speed of participants posting on Internet investing forums. That way it could define a duration somewhere between the one-day and 20-year periods mentioned earlier, without relying on any backtesting.

That sounds like a giant pain in the ass, so in lieu of such a model, it's not shocking to me if a convincing-looking backtest is used in its stead.

Ok, but in our rapidly changing world, where the myriad factors you identified (and the nearly infinite number you did not identify) that contribute to the non-instantaneousness of the market's incorporation of price-moving information are not static, why should we expect the same lookback period that worked in the past to continue to work in the future?  And, since these factors were not static across history, why did the same lookback period work across all periods in the past (if that is indeed what the data say)?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 02:38:08 PM

My understanding of the relevant parts of miles' answer to the why it should work question is that performance chasers exhibit herd mentality, and a herd mentality tends to amplify market movements that are essentially otherwise random.  This is purely a behavioral psychology answer.

I think this theory supports a short term momentum trading strategy, though it says nothing at all about market fundamentals and I think most of us are looking for a fundamentals kind of justification.  It also says nothing about long term growth patterns or which companies or sectors are likely to succeed, but how could it? Any strategy that deliberately ignores most of the information about the markets is necessarily going be agnostic about anything other than the single metric it follows.

It looks like the key disconnect here is between one camp that sees the future being born of logic and the other that sees the future being born of history.  I can mentally justify both approaches, I guess.  I'd like to believe that logic is more predictive than a random past, but I suspect there are enough patterns in history to argue it both ways.

I think this is a fair description of the impasse in broad strokes Sol.

Some quibbles with your characterization of my model though.

1.  There is no "herd mentality" in my mental model of price momentum, simply a predictable shading of the of a particular probability of decisions being made on an individual level which in aggregate creates price trends. (Not discounting that herd mentality exists, or that it effects momentum, it's just not part of my mental construct.

2. I would define the 2 camps as the "theoretical" vs the "empirical", but would point out that both indexers and DM investors use both theoretical and empirical data to instruct their strategies.
Title: Re: Dual Momentum Investing
Post by: waltworks on April 29, 2015, 02:46:48 PM
Paging Hari Seldon...

-W
Title: Re: Dual Momentum Investing
Post by: Dodge on April 29, 2015, 03:13:02 PM
If stocks had underperformed treasuries for the last 800 years, do you really think that you would be 100% equities, because of your convincing story?

If government-guaranteed treasuries promised 20% yearly returns, I'm sure many of us would be 100% treasuries.  Shoot, if they promised 7-8%, I'm sure many of us would be 100% treasuries.  Indeed, back when interest rates were high, one of the first Extreme Early Retirement books recommended this.

But this is not related to the topic at hand, because it's a question of risk.  If 100% treasuries guaranteed a 4%, or even a 6% withdrawal rate, why bother with anything else?  Of course, the example is flawed, as if treasuries promised 8% or 20%, the stock market premium would naturally rise to be above that number and inflation would probably be out of control, but that's another topic.

Here are two relevant questions along these lines:

1.  If the authors of these books/studies all admitted to a flaw in their calculations, published new books/papers saying they got the Dual Momentum effect completely backwards, and said you should follow the same steps, but BUY when you would normally SELL, and SELL when you would normally BUY, would you still follow the strategy?

2.  If instead the authors could go back in time, and correct the mistake before publishing their first books/papers, with all the graphs, charts, and "performance chasing" justification looking exactly the same, do you think you'd still agree with the strategy?

You still have the 200 years of data, but now it says you should do the opposite.  If you can admit to yourself that you'd still follow the strategy, then you're agreeing the "performance chasing" justification doesn't matter, and your analysis is solely reliant on the results of a backtest.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 29, 2015, 03:37:40 PM
What will we know about markets in 500 years? That there was a lot of stuff we thought we knew were true, but we only used 100 years of data. After enough years passed, we realized that it wasn't true after all.

From an old trend following trader I know:

Your system has beaten buy and hold both in risk adjusted temrs and absolute terms by the looks of it!  "Has" and "will " are of course very different words.


I am afraid that I increasingly tend to look at the matter as a philosophical one in which, as with so much of our world, definitive answers are not at present (and may never be) possible.
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 29, 2015, 04:08:40 PM
This discussion and the concept of Dual Momentum Investing sparked my interest. If it hasn't been share already, this Amazon review by yogiyoda (found a link through the Boglehead forums) helped me personally get a more balanced view of DM.

http://www.amazon.com/review/R1VH4QEKVTD8F9/ref=cm_cd_pg_pg1?ie=UTF8&asin=0071849440&cdForum=Fx11L2M74JQ9LV9&cdPage=1&cdThread=Tx1KVZK3EPZZIOM&store=books#wasThisHelpful

Very interesting!  Thanks for that!

YogiYoda from that link did an 800 year backtest (like CFiresim does).  Here are some quotes:

-------------------------------------------
I ran the 800 year back test methodology on the S&P 500 from 1960 to 2015. That's the most data I had at the time. It had significantly lower returns than buy and hold with very similar volatility. I also ran it for large-cap data from 1927 through 2015, again it had significantly lower returns with similar monthly volatility.
-------------------------------------------
-------------------------------------------
The 87 year back test shows that Absolute Momentum performed noticeably worse in the 47 years prior to the book's back test
-------------------------------------------
-------------------------------------------
However, your results do make me wonder whether the spectacular results from Dual Momentum in Gary Antonacci's book and on his website might partly be due to him finding, by trial and error, what particular set of rules worked best when back-testing historical data.
-------------------------------------------

Those in the thread who are basing your analysis solely on backtesting might want to check your data.

Do the proponents of this strategy have any comments on the above data?

Regarding the "performance chasing" theory, it's the same old story we've all seen for a thousand similar breakout/market-timing/trend...etc, strategies.

-------------------------------------
"The market is made up of humans, and by human nature we are afraid of loss performance chase.  This irrational behavior isn't based on fundamentals and won't last, therefore you should buy when the market looks GREAT and goes up to X!"

"The market is made up of humans, and by human nature we are afraid of loss performance chase.  This irrational behavior isn't based on fundamentals and won't last, therefore you should sell when the market looks GREAT and moves up to X!"
-------------------------------------

With X being the same value each time.  Since the same "performance chasing" analysis can reasonably lead you in both directions, the only way to know which direction to apply it, is by backtesting.  If you backtest and see that the majority of the time it goes up at X, then you go with the first story.  If you backtest and see that the majority of the time it goes down at X, then you go with the second story.  With this line of thinking, the  "performance chasing" justification is meaningless, as it will blindly follow the result of the backtest.  This is why you're meeting so much resistance with this type of answer.  It's an implicit admission that your entire strategy to beat the market is solely reliant on the results of a backtest.

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

And more justification for why Survivorship bias is the single greatest fallacy in investing (http://forum.mrmoneymustache.com/investor-alley/survivorship-bias-the-single-greatest-fallacy-in-investing-35417/msg627859/#msg627859).

Dodge, all you had to do was click on the link provided and read the comments to yogiyoda's review...

From Gary himself:

yogiyoda,

Max Henke contacted me and suggested I might want to help clear up your confusion about absolute momentum that led to your alarmist headline. I'm happy to try to do that. First, as I wrote in my last 2 blog posts, I used a 10-month look back there because the public is used to seeing 10-month moving averages, and I wanted to match that time frame. I also wanted to demonstrate that momentum is robust and works well over a range of look back periods. As I pointed out to you by email, the difference in results between 10 and 12-month absolute momentum was negligible over my 87 year back test. During that time, the Sharpe ratio of 10-month absolute momentum applied to the US stock market was .58 with a maximum drawdown of -41%. With 12-month absolute momentum, the Sharpe ratio was .57 with a maximum drawdown of -44%. I think it is misleading when you say that 12-month absolute momentum underperforms. When you look at the buy-and-hold results from holding the U.S. stock market during this time, you can see a Sharpe ratio of .42 and a maximum drawdown of -84%, which are considerably worse than absolute momentum with either look back period. (I also calculated absolute momentum results from 1964 through 2014 to coincide with other data on the French website. Both 10 and 12-month absolute momentum gave exactly the same Sharpe ratio of .50 and maximum drawdown of -24%, compared to a buy-and-hold Sharpe ratio of .38 with a maximum drawdown of -50%). The important point here is that on both a risked-adjusted return basis and a drawdown minimization basis, absolute momentum greatly outperformed buy-and-hold, whatever your time frame. And the further back in time you go, the greater the reduction in maximum drawdown from using absolute momentum.

Your main criticism seems to be that absolute momentum with both a 10 and 12-month look back period adds a potentially large short term risk from whipsaw losses. Your reason for saying this is that there were no such losses during the past 40 years and possibly only one during the past 87 years. Therefore, the risk must be hidden and readers ought to know that.

Just to clarify things, the pre-1940 loss you noticed came from a drop in the market while absolute momentum was still in equities and did not involve a whipsaw loss created by getting out of and then back into stocks at higher prices. In fact, all the losses using absolute momentum came from market performance while absolute momentum was still in equities, and many times subsequent stock market losses were avoided. Overall, you were far better off getting out of stocks with absolute momentum rather than staying in stocks with buy-and-hold. On reason absolute momentum has worked so well is that it is designed to keep you out of bear markets in the first place, and stock market drawdowns greater than 10% are many times more likely to occur in bear markets than in bull markets.

Ironically, the large whipsaw losses you fear could have occurred had I used a shorter look back period that would have led to exiting stocks near temporary lows and then reentering at higher prices. Not only would there have been more whipsaw losses then, but the losses would have been more extreme (absolute momentum with a 5-month look back gives the same -84% maximum drawdown as buy-and-hold). Your concern is understandable, but your logic is backwards. Slow moving trend following filters like 10 or 12-period absolute momentum are meant precisely to help keep one from getting whipsawed in and out of positions.

As it is now, your review reminds me of the story in my book about Andrew Lo. His research some years ago showed that tactical allocation and technical analysis definitely had some merit. One of Lo's colleagues with a strong prejudice against such things told Lo that his data must be wrong. It looks like your belief that slow moving trend following methods must inevitably lead to large whipsaw losses has you saying that 87 years without such losses isn't a long enough back test period because such losses haven't occurred during that amount of time. If reality doesn't confirm your beliefs, then reality must be wrong. Maybe you need to suspend your beliefs until you see how absolute momentum really works by testing it yourself and by reading the research papers on it that are referenced in my book.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on April 29, 2015, 04:17:42 PM
I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

We all just get caught up in the momentum.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 04:17:54 PM

If stocks had underperformed treasuries for the last 800 years, do you really think that you would be 100% equities, because of your convincing story?

If government-guaranteed treasuries promised 20% yearly returns, I'm sure many of us would be 100% treasuries.  Shoot, if they promised 7-8%, I'm sure many of us would be 100% treasuries.  Indeed, back when interest rates were high, one of the first Extreme Early Retirement books recommended this.

But this is not related to the topic at hand, because it's a question of risk.  If 100% treasuries guaranteed a 4%, or even a 6% withdrawal rate, why bother with anything else?  Of course, the example is flawed, as if treasuries promised 8% or 20%, the stock market premium would naturally rise to be above that number and inflation would probably be out of control, but that's another topic.

Here are two relevant questions along these lines:

1.  If the authors of these books/studies all admitted to a flaw in their calculations, published new books/papers saying they got the Dual Momentum effect completely backwards, and said you should follow the same steps, but BUY when you would normally SELL, and SELL when you would normally BUY, would you still follow the strategy?

2.  If instead the authors could go back in time, and correct the mistake before publishing their first books/papers, with all the graphs, charts, and "performance chasing" justification looking exactly the same, do you think you'd still agree with the strategy?

You still have the 200 years of data, but now it says you should do the opposite.  If you can admit to yourself that you'd still follow the strategy, then you're agreeing the "performance chasing" justification doesn't matter, and your analysis is solely reliant on the results of a backtest.

Dodge feel free to go back and read the context of my quote. You completely missed the point.

Here is my view in plain English: Reality (ie the past) matters. If a hypothetical reality was opposite to our current reality, then our conclusions in that reality would be different.

It's not a question of what authors say. It is a question of what the data says. Ie what actually happens. 

My strategy would change with reality. I care about past performance and statistical examinations of robustness. You claim not to, (though I suspect you do.)

This aspect of the discussion goes back to whether or not only a priori theories provide an adequate foundation to rest an investment strategy upon, (independent of a posteriori investigation) an argument put forth by ARS, and you and others.

My stance is that of course a strategy should make sense, but what is most important is its future probability of working, which is best tested by its past, out of sample, and forward performance since its first description.



Title: Re: Dual Momentum Investing
Post by: hodedofome on April 29, 2015, 04:19:16 PM
Performance for up to the past 30 years for a few diversified trend following managed futures funds (posting this because everyone seems to be too chicken to sign up for a free account to view this):

(http://s7.postimg.org/qlws345fv/IASG.jpg)

Title: Re: Dual Momentum Investing
Post by: Dodge on April 29, 2015, 04:40:11 PM

If stocks had underperformed treasuries for the last 800 years, do you really think that you would be 100% equities, because of your convincing story?

If government-guaranteed treasuries promised 20% yearly returns, I'm sure many of us would be 100% treasuries.  Shoot, if they promised 7-8%, I'm sure many of us would be 100% treasuries.  Indeed, back when interest rates were high, one of the first Extreme Early Retirement books recommended this.

But this is not related to the topic at hand, because it's a question of risk.  If 100% treasuries guaranteed a 4%, or even a 6% withdrawal rate, why bother with anything else?  Of course, the example is flawed, as if treasuries promised 8% or 20%, the stock market premium would naturally rise to be above that number and inflation would probably be out of control, but that's another topic.

Here are two relevant questions along these lines:

1.  If the authors of these books/studies all admitted to a flaw in their calculations, published new books/papers saying they got the Dual Momentum effect completely backwards, and said you should follow the same steps, but BUY when you would normally SELL, and SELL when you would normally BUY, would you still follow the strategy?

2.  If instead the authors could go back in time, and correct the mistake before publishing their first books/papers, with all the graphs, charts, and "performance chasing" justification looking exactly the same, do you think you'd still agree with the strategy?

You still have the 200 years of data, but now it says you should do the opposite.  If you can admit to yourself that you'd still follow the strategy, then you're agreeing the "performance chasing" justification doesn't matter, and your analysis is solely reliant on the results of a backtest.

My strategy would change with reality.

Your admission makes it clear, you've fallen victim to Survivorship Bias (http://forum.mrmoneymustache.com/investor-alley/survivorship-bias-the-single-greatest-fallacy-in-investing-35417/).

A Random Walk Down Wall Street (http://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393340740/ref=dp_ob_title_bk) has a relevant example.  Take a large number of people, and ask them to flip a coin.  If they flip heads they win, tails and they're eliminated from the game.  After the first flip, about half the people will be eliminated.  Then ask them to flip again, and again, and again.  After 10 flips, only a select few people will be left.  Are these people "lucky"?  Are they "skilled".  Would anything be gained by spending time studying their coin flipping strategy?

In other words, considering the large initial sample size, studying any one particular backtested strategy, and trying to peel out the "why" behind its results, is an effort in futility.  As we can see here, the stated "why" (performance chasing) applies equally well to opposite actions.  There's nothing left for me to discuss in this thread.  Good luck!

To any newbies who got this far in the thread, this is your signal to move along, nothing to see here.
Title: Re: Dual Momentum Investing
Post by: arebelspy on April 29, 2015, 05:24:41 PM
I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

We all just get caught up in the momentum.

(http://i.kinja-img.com/gawker-media/image/upload/s--C-IOsvQX--/c_fit,fl_progressive,q_80,w_320/gkolrbjkhaa4ncalmkji.gif)
Title: Re: Dual Momentum Investing
Post by: hodedofome on April 29, 2015, 05:33:57 PM


If stocks had underperformed treasuries for the last 800 years, do you really think that you would be 100% equities, because of your convincing story?

If government-guaranteed treasuries promised 20% yearly returns, I'm sure many of us would be 100% treasuries.  Shoot, if they promised 7-8%, I'm sure many of us would be 100% treasuries.  Indeed, back when interest rates were high, one of the first Extreme Early Retirement books recommended this.

But this is not related to the topic at hand, because it's a question of risk.  If 100% treasuries guaranteed a 4%, or even a 6% withdrawal rate, why bother with anything else?  Of course, the example is flawed, as if treasuries promised 8% or 20%, the stock market premium would naturally rise to be above that number and inflation would probably be out of control, but that's another topic.

Here are two relevant questions along these lines:

1.  If the authors of these books/studies all admitted to a flaw in their calculations, published new books/papers saying they got the Dual Momentum effect completely backwards, and said you should follow the same steps, but BUY when you would normally SELL, and SELL when you would normally BUY, would you still follow the strategy?

2.  If instead the authors could go back in time, and correct the mistake before publishing their first books/papers, with all the graphs, charts, and "performance chasing" justification looking exactly the same, do you think you'd still agree with the strategy?

You still have the 200 years of data, but now it says you should do the opposite.  If you can admit to yourself that you'd still follow the strategy, then you're agreeing the "performance chasing" justification doesn't matter, and your analysis is solely reliant on the results of a backtest.

My strategy would change with reality.

Your admission makes it clear, you've fallen victim to Survivorship Bias (http://forum.mrmoneymustache.com/investor-alley/survivorship-bias-the-single-greatest-fallacy-in-investing-35417/).

A Random Walk Down Wall Street (http://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393340740/ref=dp_ob_title_bk) has a relevant example.  Take a large number of people, and ask them to flip a coin.  If they flip heads they win, tails and they're eliminated from the game.  After the first flip, about half the people will be eliminated.  Then ask them to flip again, and again, and again.  After 10 flips, only a select few people will be left.  Are these people "lucky"?  Are they "skilled".  Would anything be gained by spending time studying their coin flipping strategy?

In other words, considering the large initial sample size, studying any one particular backtested strategy, and trying to peel out the "why" behind its results, is an effort in futility.  As we can see here, the stated "why" (performance chasing) applies equally well to opposite actions.  There's nothing left for me to discuss in this thread.  Good luck!

To any newbies who got this far in the thread, this is your signal to move along, nothing to see here.

No offense but somehow I get the feeling you'll be back to argue some more.


Sent from my iPhone using Tapatalk
Title: Re: Dual Momentum Investing
Post by: forummm on April 29, 2015, 07:11:26 PM
I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

We all just get caught up in the momentum.

Absolutely.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 29, 2015, 07:37:42 PM
I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

We all just get caught up in the momentum.

Ha!  Now it makes sense -- like Dodge's unintentional meta thread on survivorship bias in action (http://forum.mrmoneymustache.com/investor-alley/survivorship-bias-the-single-greatest-fallacy-in-investing-35417/msg629536/#msg629536), this thread accidentally-on-purpose (or purposely-by-accident?) devolved into an increasingly fractious debate between two rapidly diverging camps in order to illustrate the power of momentum!
Title: Re: Dual Momentum Investing
Post by: ferox on April 29, 2015, 09:14:27 PM
I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

We all just get caught up in the momentum.

So, how many posts would I need in my look back period in order to determine if I should post more (or less)?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 29, 2015, 09:50:14 PM
Doesn't really matter. (Between 3 and 12)
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 30, 2015, 07:13:57 AM
I'm glad the mood has lightened in here (before, you could have cut the tension with a falling knife), but hopefully I'm not the only one who still has any appetite for continuing the discussion.

Can anyone offer any explanation for why we should expect the specific lookback period(s) that worked in the past to continue to work in the future?  I read the London School of Economics-based materials that Miles linked to in post # 261, but as far as I can tell they don't address this question.  In fact, consistent with what has been observed by some of the folks in this thread, one of the authors stated:

Quote
Fair value is robust to the choice of inputs. Actually, you can use a blunt instrument and be relatively successful in fair value, but momentum is highly sensitive to execution. You need to look back on the holding period just right. Historic data flatters momentum. Momentum in stocks tends to have a period of about 6 months or 18 months; therefore, the annual data always flatters momentum because it is so sensitive to returns. The Sharpe ratio of momentum is a function of the look-back period. Get it wrong, and you get negative returns.

So fair value investors win overall. In fact, momentum investors are always buying after the price has gone up and selling after it has gone down. They are destined collectively to fail, and the fair value investors pick up what they lose.

(emphasis added)
Title: Re: Dual Momentum Investing
Post by: forummm on April 30, 2015, 08:05:41 AM
I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

We all just get caught up in the momentum.

So, how many posts would I need in my look back period in order to determine if I should post more (or less)?

Doesn't really matter. (Between 3 and 12)

But you have to compare it to the risk-free thread.
http://forum.mrmoneymustache.com/off-topic/pictures-of-your-teeth/
Title: Re: Dual Momentum Investing
Post by: ScroogeMcDutch on April 30, 2015, 09:43:15 AM
I have been lurking mostly in this thread (or completely, can't remember) but the DM philosophy resonates with me. It is a sophistication on top of the buy & hold strategy and would love more discussion on it. Due to tax consequences and different tax regimes here in the Netherlands, for any privately owned securities avoiding a big drawdown is extremely important and a standard buy&hold doesn't really fit that well. As such I am considering such a strategy for my privately owned securities.

Below I point out a couple of my takes on the subject, and I can be massively wrong on them of course. I am just a learning investor and trying to make sense of contradicting views on a complicated subject.

I like B&H for it's simplicity and a bold belief in the broad stroked economy, but I also believe it's major pitfall - behavioral aspects - are the same thing that fuel the DM's edge over B&H in terms of avoiding a large drawdown. I see B&H proponents on other parts of the forum warn novice investors for their risk tolerance, and tell them they may just react differently to a large fall in the market than they think they do now (after a major bull market). This irrational (or unintelligent according to Benjamin Graham) is the reason individual investors tend to compared to the market.

Essentially B&H investors is a special case of the absolute momentum strategy, specifying a lookback period of infinite (or at least 20+ years). Stocks have historically shown to have the best results, and as such, we extrapolate that to the future and pick stocks as the asset class of choice for returns. A risk reducing method of introducing bonds is then added, as historically bonds are loosely negatively correlated with stock performance and historically has shown to reduce risk and volatility at the expense of relatively little performance. B&H expects a reversion to the mean for many aspects of the markets, but doesn't attempt to explain or posit why it will do this. From a theoretical point of view, it can be argued that stocks provide the best return at the expense of the highest risk. At the same time, this is not true for all stocks, just as it isn't true for all bonds that they have a lower risk/return compared to stocks.

The DM school is more about figuring out when the shoeshine boy is talking about buying stocks. It attempts to find an edge in human behavioral psychology and the performance of the financial markets. When are we deluding our collective selfs on financial market performance? It won't catch the exact tipping point, but it will catch the changes in mindset and behaviour at a relatively early stage. The explanation for the what and why would have to be found in psychology, which in and of itself is not an exact science. Neither is economics, and as such, standard scientific methods are difficult to justify as the reason a particular strategy should or should not work alone.

Basically, in summary:

B&H - investment strategy that relies solely on the return to the mean for all financial markets
DM/Technical analysis - investment strategy that relies solely on the behavioural psychological aspects of the markets
Fundamental Analysis - investment strategy that relies on parameters relative between securities and compared to the mean

B&H works as it is simple and the easiest strategy to stick to. As such it is suggested by Buffett and Bogle as the go-to strategy to match the market for the individual investor with a message to not try and strive for different results. That takes behavioural aspects into account and it doesn't even begin to suggest that it is the optimal theoretical strategy - only the most effective one for the most people. If anyone asks me what to do, this is also what I tell them to do, if they can spare the amount of money invested. (and people in the Netherlands are extremely risk averse, so this is already a paradigm shift for most).

DM obviously has a difficulty suggesting which lookback period to use and which asset classes to consider. The more asset classes, the more trading and switching occurs. Depending on the lookback period, the historically observed maximum drawdown also changes. One can always question whether or not a strategy will work in the future compared to history, and in the end, there is only one saying "Only time will tell". It makes sense that there is an extended period of time for major players to be selling their positions to the shoeshine boys and that during this period there is not a major appreciation or decline in price. It also makes sense you need particular period of time, and some leeway to avoid acting on noise (e.g. the 10% correction in October 2014) and at the same time to be able to act on signal (e.g. the 50%+ correction in 2008). In order to determine the right variables, it makes sense to look at the past, rather than approaching it theoretically. As long as the concepts on which the strategy is built, can be found as concepts in other parts of science as well.

But that's just my 2 cents ;-)




Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on April 30, 2015, 09:48:06 AM
^^^ very well said, Mr. McDutch
Title: Re: Dual Momentum Investing
Post by: Financial.Velociraptor on April 30, 2015, 10:26:41 AM
Essentially B&H investors is a special case of the absolute momentum strategy, specifying a lookback period of infinite (or at least 20+ years).

Thanks for this.  I hadn't thought of B/H in those terms and it brought me a lot of clarity as to why the DM fan boys feel as they do.  Compelling argument.
Title: Re: Dual Momentum Investing
Post by: skyrefuge on April 30, 2015, 10:37:54 AM
Ok, but in our rapidly changing world, where the myriad factors you identified (and the nearly infinite number you did not identify) that contribute to the non-instantaneousness of the market's incorporation of price-moving information are not static, why should we expect the same lookback period that worked in the past to continue to work in the future?

We wouldn't necessarily expect the same lookback period that worked in the past to continue to work in the future. That's why our model has inputs. The output (the lookback period) can change as the inputs change.

And, since these factors were not static across history, why did the same lookback period work across all periods in the past (if that is indeed what the data say)?

Perhaps the model is relatively insensitive to changes in its inputs, so the output value truly remained the same over history; even though the inputs varied within a range, that was never enough to bump the output to another value. Maybe the output will change dramatically next year, and if it does, mdmd is fucked, since he's using backtesting rather than this non-existent model; he'll never know that his lookback period should have changed until it's too late.

Or, maybe the advantage created by DM is so great that even a poorly-fitted, static lookback period is still sufficient to generate outsized returns. Remember, the "guess" doesn't have to be timed right on every market swing for DM to be successful, it just has to be timed right on "enough" of them. The game of NFL football has changed a lot over the past 50 years, and while Tom Brady might not have been as successful if he played in 1965 instead of 2015, I bet he still would have been effective enough to be able to keep a job as an NFL quarterback.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 30, 2015, 11:03:03 AM

Essentially B&H investors is a special case of the absolute momentum strategy, specifying a lookback period of infinite (or at least 20+ years). Stocks have historically shown to have the best results, and as such, we extrapolate that to the future and pick stocks as the asset class of choice for returns.

At the risk of reopening the whole "a priori / a posteriori" debate, I think you have articulated an elegant way of describing the argument Miles advocated for earlier that all the buy and hold index investors in the world picked their strategy because, and only because, they looked to the past and saw that it worked.

But, again, I don't think this is true, even if we assume, for the sake of argument, that it is history's "indexing worked" lesson that first put that strategy on the radar of every indexer in the world.  Instead, I think at least some B&H indexing proponents (including the strategy's founder) evaluated the logic of the strategy (which, of course, history tells us has worked in the past) and found it compelling.  And, even if that were not true, the fact remains that there is an underlying logic behind the strategy capable of being described.

Your argument is equivalent to saying that we expect the sun to rise tomorrow solely because we know it has done so every day in the past, and not because we expect the same physical forces that caused it to do so in the past (as evidenced by its uninterrupted track record of doing so every morning for the entire existence of the Earth) to continue to operate tomorrow.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 30, 2015, 11:25:15 AM
The preliterate caveman who predicted that the sun would rise everyday for the next thousand years was everybit as accurate in his future predictions about the sun rising as the modern astrophysicist who understands why.

I'm not arguing that there is no value in understanding physics, (or that only empiricism works) I am merely pointing out that physics gives us no great advantages when it comes to predicting sunrises.

Bogle had a theory, Miljken had a theory, Joe Schmoe had a theory.  Theories are like assholes, everyones got one.

In my view Bogle's great insight was his theory that the market is a zero sum game and so costs matter.  And the reason we all believe that his idea had merit now is because indexing demonstrably works.  This is just another example of Dodge's oft repeated old saw about survivorship bias.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 30, 2015, 11:34:40 AM
Ok, but in our rapidly changing world, where the myriad factors you identified (and the nearly infinite number you did not identify) that contribute to the non-instantaneousness of the market's incorporation of price-moving information are not static, why should we expect the same lookback period that worked in the past to continue to work in the future?

We wouldn't necessarily expect the same lookback period that worked in the past to continue to work in the future. That's why our model has inputs. The output (the lookback period) can change as the inputs change.

And, since these factors were not static across history, why did the same lookback period work across all periods in the past (if that is indeed what the data say)?

Perhaps the model is relatively insensitive to changes in its inputs, so the output value truly remained the same over history; even though the inputs varied within a range, that was never enough to bump the output to another value. Maybe the output will change dramatically next year, and if it does, mdmd is fucked, since he's using backtesting rather than this non-existent model; he'll never know that his lookback period should have changed until it's too late.

Or, maybe the advantage created by DM is so great that even a poorly-fitted, static lookback period is still sufficient to generate outsized returns. Remember, the "guess" doesn't have to be timed right on every market swing for DM to be successful, it just has to be timed right on "enough" of them. The game of NFL football has changed a lot over the past 50 years, and while Tom Brady might not have been as successful if he played in 1965 instead of 2015, I bet he still would have been effective enough to be able to keep a job as an NFL quarterback.

I would state it a little differently.

The market has already changed so profoundly over the last 200 years, technology, going off the gold standard, the rise of indexing, etc. etc. and yet the minimal duration and velocity of bear markets hasn't really changed at all (the fundamental observation upon which trendfollowing relies).  Why is that?  And why do you think it is probable for it to change in the future?

I attempt to answer my own question in my blog post "looking under stones."   My chief concerns being the rise of algorithmic (ie non human) trading, and indexing.

But in the end my feeling is that probability favors trendfollowing's future success.  I could be wrong of course.  But so could indexers who overweight equities....
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 30, 2015, 12:40:36 PM
The preliterate caveman who predicted that the sun would rise everyday for the next thousand years was everybit as accurate in his future predictions about the sun rising as the modern astrophysicist who understands why.

I'm not arguing that there is no value in understanding physics, (or that only empiricism works) I am merely pointing out that physics gives us no great advantages when it comes to predicting sunrises.

This is all true, and is entirely consistent with what I said.  My point was only that the occurrence of an event in the past does not, and cannot, in and of itself, imply that the event will repeat itself in the future.  In Dodge's coin flipping example, the one man out of a trillion who flipped 10,000 heads in a row is just as likely as anyone else to flip tails on his next coin toss.  We all, I think, agree on this point, which is why none of us would follow an every-7th-Tuesday type of strategy.

We wouldn't necessarily expect the same lookback period that worked in the past to continue to work in the future. That's why our model has inputs. The output (the lookback period) can change as the inputs change.

Right, but that's if we're using a model, which does not use "lookbacks," but generates "predictions."  In other words, the model, based on the various inputs, spits out an "output" in the form of a prediction of the duration of a directional price movement.

Quote
Perhaps the model is relatively insensitive to changes in its inputs, so the output value truly remained the same over history; even though the inputs varied within a range, that was never enough to bump the output to another value. Maybe the output will change dramatically next year, and if it does, mdmd is fucked, since he's using backtesting rather than this non-existent model; he'll never know that his lookback period should have changed until it's too late.

Or, maybe the advantage created by DM is so great that even a poorly-fitted, static lookback period is still sufficient to generate outsized returns. Remember, the "guess" doesn't have to be timed right on every market swing for DM to be successful, it just has to be timed right on "enough" of them. The game of NFL football has changed a lot over the past 50 years, and while Tom Brady might not have been as successful if he played in 1965 instead of 2015, I bet he still would have been effective enough to be able to keep a job as an NFL quarterback.

As you said, it sounds like the DM strategy, instead of building a predictive model, is using a static "lookback period" (or a range of lookback periods), borne entirely out a of backtesting quest to find the one(s) that worked, as a proxy for a model.  Do we have any reason to believe these static lookback periods will continue to serve as sufficiently reliable signals for the strategy to continue to work in the future?  I understand the notion that out-of-sample testing over a history that already includes profound market changes (if, indeed, that's what the data say) gives us good reason to suspect that such a reason exists (i.e., that this isn't just a 7th-Tuesday strategy) -- so what could that reason be?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on April 30, 2015, 12:47:47 PM
The coin flipping analogy is ham handed.  It conveniently ignores the results of out of sample and post description performance (ie robustness,) not to mention that  it was already discussed pages ago in Sol's "advice from a lottery winner" argument.  No need to dive back into this one as I think the argument has been made already on both sides.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 30, 2015, 12:55:22 PM
Again, I'm not comparing dual momentum to the coin-tossing example, or the every-7th-Tuesday example.  I'm agreeing with you that favorable results of out of sample testing are good reason to believe that a strategy is not merely a 7th-Tuesday strategy.  And I'm asking, if that's what the data say about DM, then why?  (Perhaps no-one knows the reason, but a reason must exist, or else it would merely be a 7th-Tuesday strategy.)

It sounds like you have asked yourself the same question and are working on a blog post to lay out your answer.
Title: Re: Dual Momentum Investing
Post by: ScroogeMcDutch on April 30, 2015, 03:25:01 PM
Thanks for the kind reception of my post. I only began showing interest in investing after reading a lot of MMM and realizing that it was not necessarily the scary ghost I believed it was.

The 'why' behind DM would have to be found in sociology or mass behavioral psychology. And for that I again I point to the index proponents here that warn new investors (like myself) for taking on too much risk, without having experienced even a minor drawdown. "It's easy to see in hindsight that 2009 was a great investment year" is a quote I hear a lot. And also of people who were reluctant and hesitant to invest, even though they had a b&h strategy before 2009. "You have not seen a prolonged bear market" was another.

Why would such claims work to warn people of taking on too much risk, and why would they not work in favor of a strategy aimed at exploiting that?


Essentially B&H investors is a special case of the absolute momentum strategy, specifying a lookback period of infinite (or at least 20+ years). Stocks have historically shown to have the best results, and as such, we extrapolate that to the future and pick stocks as the asset class of choice for returns.

At the risk of reopening the whole "a priori / a posteriori" debate, I think you have articulated an elegant way of describing the argument Miles advocated for earlier that all the buy and hold index investors in the world picked their strategy because, and only because, they looked to the past and saw that it worked.

But, again, I don't think this is true, even if we assume, for the sake of argument, that it is history's "indexing worked" lesson that first put that strategy on the radar of every indexer in the world.  Instead, I think at least some B&H indexing proponents (including the strategy's founder) evaluated the logic of the strategy (which, of course, history tells us has worked in the past) and found it compelling.  And, even if that were not true, the fact remains that there is an underlying logic behind the strategy capable of being described.

Your argument is equivalent to saying that we expect the sun to rise tomorrow solely because we know it has done so every day in the past, and not because we expect the same physical forces that caused it to do so in the past (as evidenced by its uninterrupted track record of doing so every morning for the entire existence of the Earth) to continue to operate tomorrow.

I may be completely deluded here (and I'm not the best at actual argumentation) and I really want to understand more of the underlying theories, but why would a broad index of stocks (or any liquid asset) grow much faster than inflation? Shouldn't bankruptcies keep things in check? Where is this continual higher growth than inflation coming from? Is it just because some people/parties hold so incredibly many stocks and will keep on holding (e.g. Bill Gates, Buffett) that the price for which they're being traded is only the tip of the trading iceberg (as we measure stock value on price last traded, not on intrinsic value only)? Compounding also works on a larger scale and at some point stocks would represent basically all the value in the world?

I fully understand that any trading strategy will have to make up for the costs incurred by the trades and beat B&H indexing in some way. It just seems that B&H indexing can be more logically sound and proven in hard sciences, and as such perceived as accurate, where a DM behavioral type of trading is practically impossible to prove theoretically, but yet can be more effective*. I compare it a bit with the models we've had for traditional physics and relativistic. Are the formulas we learn in high school about speed, mass and kinetic energy wrong? About our perception of time? They're not, but Einstein figured out that they weren't entirely accurate and were only valid under certain circumstances. At higher speeds, other forces come into play and screw over our traditional formulas. Yet, in 99% of the cases where we want to figure out how much energy we'll need to propel an object of a certain mass to a certain speed, we're going to be using our high school formulas, because they're effective enough. Maybe the model for DM just assumes the price of the index is formed due to collective human behaviour, and B&H doesn't take that into account. Compared to physics, this is backward, as DM is a more complex model/theory than B&H, but the principles apply?

* As a side-track, I have been doing a lot of study into myer-briggs personality types. Folks over at personalityhacker.com renamed some of the difficult terms underneath the types, and basically distinguish between two rational decision making processes: Effectiveness and Accuracy. Something that is effective doesn't have to be accurate (for example, the sun comes up every day). Something that's accurate, doesn't have to be effective (for example, all the physics models that talk about rotating mass, inertia, you name it, to come to the conclusion that the earth spins around it's axis every 24 hours, and as such 24 hours since the last sunrise, we'll see another, given that the sun didn't explode). One is complicated and more accurate, yet doesn't make it more effective.
Title: Re: Dual Momentum Investing
Post by: Leisured on May 01, 2015, 01:21:46 AM
If momentum analysis does tell you when the market has stopped rising and may fall, then selling share index futures, or buying puts on individual large companies will make you money. This is separate from long term investing, so any profits on futures or puts offset the paper losses coming from buy and hold.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 01, 2015, 01:47:40 AM

If momentum analysis does tell you when the market has stopped rising and may fall, then selling share index futures, or buying puts on individual large companies will make you money. This is separate from long term investing, so any profits on futures or puts offset the paper losses coming from buy and hold.

DM (more specifically absolute momentum) doesn't tell you when the market has stopped rising and may fall. It tells you when the market has already started falling significantly.

The longer the Lookback period is then the later you get this signal and the more specific the signal is for diagnosing bear markets (and the the less sensitive). (And the converse is true for shorter Lookback periods)

Whether or not this signal would give you an advantage in terms of selling futures or buying puts is a question whose answer I have no idea about, but it would be interesting to see a formal testing of your hypothesis.
Title: Re: Dual Momentum Investing
Post by: PathtoFIRE on May 01, 2015, 08:13:40 AM
So did any DMers trade out their SP500/US market position for international today?

milesdividendmd and others, I am curious about one thing (maybe the book answers, but my library doesn't have a copy and I put in a request to purchase 2 months ago but no go so far). If I understand it, one of the major benefits to this strategy over buy/hold is getting out of equities when short-term treasuries are showing a superior return for the past 3-, 6-, 12-month lookback, i.e. the absolute momentum part. Why not just use that signal only, and ignore the relative momentum part. Keep a 70/30 US/international mix, and then the aggregate return for this dips below Tsys, get into bonds?
Title: Re: Dual Momentum Investing
Post by: ChaseJuggler on May 01, 2015, 08:32:18 AM
So did any DMers trade out their SP500/US market position for international today?

My numbers show them neck and neck for a 6 month lookback period. So I went with holding domestic since it's a) no trading required and b) lower expense ratio.

It was an exciting race though! I was kind of hoping to get to do something active with it. Oh well, maybe next month =)
Title: Re: Dual Momentum Investing
Post by: boarder42 on May 01, 2015, 08:33:04 AM
So did any DMers trade out their SP500/US market position for international today?

milesdividendmd and others, I am curious about one thing (maybe the book answers, but my library doesn't have a copy and I put in a request to purchase 2 months ago but no go so far). If I understand it, one of the major benefits to this strategy over buy/hold is getting out of equities when short-term treasuries are showing a superior return for the past 3-, 6-, 12-month lookback, i.e. the absolute momentum part. Why not just use that signal only, and ignore the relative momentum part. Keep a 70/30 US/international mix, and then the aggregate return for this dips below Tsys, get into bonds?

i switched in my roth ... the reason being that relative and absolute individually have both been shown to outperform the balanced buy and hold.  and when combined they do even better. 
Title: Re: Dual Momentum Investing
Post by: boarder42 on May 01, 2015, 08:34:28 AM
So did any DMers trade out their SP500/US market position for international today?

My numbers show them neck and neck for a 6 month lookback period. So I went with holding domestic since it's a) no trading required and b) lower expense ratio.

It was an exciting race though! I was kind of hoping to get to do something active with it. Oh well, maybe next month =)

on a 6 month lookback they arent close to neck and neck the international large caps beat the s&p by over 1% in the last 6months
Title: Re: Dual Momentum Investing
Post by: FIPurpose on May 01, 2015, 08:35:31 AM
So did any DMers trade out their SP500/US market position for international today?

milesdividendmd and others, I am curious about one thing (maybe the book answers, but my library doesn't have a copy and I put in a request to purchase 2 months ago but no go so far). If I understand it, one of the major benefits to this strategy over buy/hold is getting out of equities when short-term treasuries are showing a superior return for the past 3-, 6-, 12-month lookback, i.e. the absolute momentum part. Why not just use that signal only, and ignore the relative momentum part. Keep a 70/30 US/international mix, and then the aggregate return for this dips below Tsys, get into bonds?

So the part of my portfolio that I set aside for this I did end up moving to an international index. It may depend on which exact funds you choose and your exact day. But the international index I chose outperformed S&P by about 2%.
Title: Re: Dual Momentum Investing
Post by: boarder42 on May 01, 2015, 08:39:14 AM
yes 2% better
Title: Re: Dual Momentum Investing
Post by: PathtoFIRE on May 01, 2015, 09:17:53 AM
the reason being that relative and absolute individually have both been shown to outperform the balanced buy and hold.  and when combined they do even better.

Got it. So in multiple places on this thread, MDMD has mentioned that the safety nature of the strategy appeals to him, and I agree, that's what really lit my interest. I would almost rather forgo trading among classes, and just stay at a comfortable balance (70US/30international), and watch for a signal to exit to bonds. I know the backtests show it to be inferior, but it feels a little less like gambling. Ah fuck it, who am I kidding, even just using absolute momentum feels a bit like gambling/market timing. So then I say no, I won't do it, I'll just stay buy/hold. But then I think, well it's just my 401k portfolio I'm talking about, and that's only 31% of my total investments, I should get over myself and try a little market timing. Then I think, well why stop there, the wife's TSP looks ripe for this method too. And then I'm back to where I started, feeling like I'm missing out if I don't take this seriously. I've basically been going through this cycle nearly every week for the past 2 months. It's getting tiring.
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on May 01, 2015, 09:22:31 AM
the reason being that relative and absolute individually have both been shown to outperform the balanced buy and hold.  and when combined they do even better.

Got it. So in multiple places on this thread, MDMD has mentioned that the safety nature of the strategy appeals to him, and I agree, that's what really lit my interest. I would almost rather forgo trading among classes, and just stay at a comfortable balance (70US/30international), and watch for a signal to exit to bonds. I know the backtests show it to be inferior, but it feels a little less like gambling. Ah fuck it, who am I kidding, even just using absolute momentum feels a bit like gambling/market timing. So then I say no, I won't do it, I'll just stay buy/hold. But then I think, well it's just my 401k portfolio I'm talking about, and that's only 31% of my total investments, I should get over myself and try a little market timing. Then I think, well why stop there, the wife's TSP looks ripe for this method too. And then I'm back to where I started, feeling like I'm missing out if I don't take this seriously. I've basically been going through this cycle nearly every week for the past 2 months. It's getting tiring.

I would recommend going with a "happy medium" and enacting the strategy with one of your tax sheltered accounts until you are convinced- one way or another- of the strategy's effectiveness.
Title: Re: Dual Momentum Investing
Post by: sol on May 01, 2015, 09:30:07 AM
absolute momentum feels a bit like gambling/market timing.

It feels like market timing because is market timing, pure and simple.  There is no debate about that.

I'm sort of disappointed that the upshot of this thread, on this forum, is that so many people here are actually considering trying to time the market.  Good luck with that, noobs.

Or maybe do a little research to be reminded why this is a terrible idea.  Google "market timing" and the read the first 10 links that come up, and then kick yourself for ever thinking this was a good idea.  You'll feel like someone who just narrowly escaped a cult.
Title: Re: Dual Momentum Investing
Post by: Chuck on May 01, 2015, 09:39:09 AM
the reason being that relative and absolute individually have both been shown to outperform the balanced buy and hold.  and when combined they do even better.

Got it. So in multiple places on this thread, MDMD has mentioned that the safety nature of the strategy appeals to him, and I agree, that's what really lit my interest. I would almost rather forgo trading among classes, and just stay at a comfortable balance (70US/30international), and watch for a signal to exit to bonds. I know the backtests show it to be inferior, but it feels a little less like gambling. Ah fuck it, who am I kidding, even just using absolute momentum feels a bit like gambling/market timing. So then I say no, I won't do it, I'll just stay buy/hold. But then I think, well it's just my 401k portfolio I'm talking about, and that's only 31% of my total investments, I should get over myself and try a little market timing. Then I think, well why stop there, the wife's TSP looks ripe for this method too. And then I'm back to where I started, feeling like I'm missing out if I don't take this seriously. I've basically been going through this cycle nearly every week for the past 2 months. It's getting tiring.

I would recommend going with a "happy medium" and enacting the strategy with one of your tax sheltered accounts until you are convinced- one way or another- of the strategy's effectiveness.
This isn't a very good idea. By the time that effectiveness is proven, decades will have passed. That's a huge time investment, and a very poor one if the method doesn't pan out.

Back testing is all that it took to show me this was a bad idea. Changing variables (3/4/5/6 months) in a minor way has MASSIVE effects on total returns. That doesn't point to a sound foundation to this strategy. It's a sign that this strategy is built to perfectly perform to past returns, not future performance. For instance, absolute momentum with a 6 month lookback underperforms back to '83. However, a 3 month lookback wildly OVERPERFORMS. Why? The timing is a bit better by sheer luck.

I want none with a side of nope.
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on May 01, 2015, 09:41:49 AM
absolute momentum feels a bit like gambling/market timing.

It feels like market timing because is market timing, pure and simple.  There is no debate about that.

I'm sort of disappointed that the upshot of this thread, on this forum, is that so many people here are actually considering trying to time the market.  Good luck with that, noobs.

Or maybe do a little research to be reminded why this is a terrible idea.  Google "market timing" and the read the first 10 links that come up, and then kick yourself for ever thinking this was a good idea.  You'll feel like someone who just narrowly escaped a cult.

I would submit that "market timing" is making allocation decisions based on a subjective guess on future market behavior. In constrast, this type of strategy changes allocation based on an objective, non-emotional measure of short term past market behavior. As has been noted previously I believe, Buy and Hold can be considered a sort of momentum strategy that uses a much greater "look back" period (years vs months). My opinion.
Title: Re: Dual Momentum Investing
Post by: Chuck on May 01, 2015, 09:43:26 AM

I would submit that "market timing" is making allocation decisions based on a subjective guess on future market behavior. In constrast, this type of strategy changes allocation based on an objective, non-emotional measure of short term past market behavior. As has been noted previously I believe, Buy and Hold can be considered a sort of momentum strategy that uses a much greater "look back" period (years vs months). My opinion.
Arbitrary timing and methodical timing are both market timing. One is based on your gut. The other is based on someone else's.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on May 01, 2015, 10:19:22 AM
Arbitrary timing and methodical timing are both market timing. One is based on your gut. The other is based on someone else's.

Yup.  There's no reason a strategy's trading signal needs to be subjective in order for that strategy to constitute market timing.  The signal can be the market's movement over a specified lookback period (like absolute momentum), the investor's (or the investor's advisor's) gut feeling about market direction (a traditional market timing technique used by a large subset of the investing population), or the investor's interpretation of the messages perceived to be contained in chicken entrails (the "haruspicy method," which I just made up but no doubt is used by some (much smaller) subset of the investing population).  Even DM's strongest proponents don't disagree that it constitutes market timing; they're just arguing that it is a market timing technique that actually works.
Title: Re: Dual Momentum Investing
Post by: Cheddar Stacker on May 01, 2015, 10:22:51 AM
I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

We all just get caught up in the momentum.

Absolutely.

Dualy noted.

Threads like this one are fun to read sometimes. Other times, including this one, make me realize just how smart some people are, which then makes me realize by comparison how simplistic I am when it comes to investing. I just don't care to understand all these little nuances that are often discussed. That reason alone is enough for me to be solidly in the "index" camp. Call it lazy if you want, but my brain does not have the capacity to "trump" all the great investing minds out there and come up with a strategy that beats theirs, or the general market. I'll take my chances being average in this department.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on May 01, 2015, 10:40:20 AM
I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

We all just get caught up in the momentum.

Absolutely.

Dualy noted.

Threads like this one are fun to read sometimes. Other times, including this one, make me realize just how smart some people are, which then makes me realize by comparison how simplistic I am when it comes to investing. I just don't care to understand all these little nuances that are often discussed. That reason alone is enough for me to be solidly in the "index" camp. Call it lazy if you want, but my brain does not have the capacity to "trump" all the great investing minds out there and come up with a strategy that beats theirs, or the general market. I'll take my chances being average in this department.

(http://i.imgur.com/5xm3h.png)
Title: Re: Dual Momentum Investing
Post by: RobertMa on May 01, 2015, 12:32:41 PM
absolute momentum feels a bit like gambling/market timing.

It feels like market timing because is market timing, pure and simple.  There is no debate about that.

I'm sort of disappointed that the upshot of this thread, on this forum, is that so many people here are actually considering trying to time the market.  Good luck with that, noobs.

Or maybe do a little research to be reminded why this is a terrible idea.  Google "market timing" and the read the first 10 links that come up, and then kick yourself for ever thinking this was a good idea.  You'll feel like someone who just narrowly escaped a cult.

I for one have enjoyed this thread and I appreciate Miles for bringing this to my attention. My Roth is my usual fun money testbed while my other larger accounts boringly index. To me at least, this strategy seems to have potential and my Roth is in international developed today.

The above smacks of trying to enforce a set of Sacred Beliefs, which is typically antithetical to intellectual progress. Human thought didn't stop whenever Bogle printed his last book of scripture. And I assure you that not all those who experiment with something different are "noobs."
Title: Re: Dual Momentum Investing
Post by: hodedofome on May 01, 2015, 12:46:57 PM
In retirement accounts I switched to VXUS and in my trading account I bought 1/2 TLT 1/2 XIV and 5% of GVAL


Sent from my iPhone using Tapatalk
Title: Re: Dual Momentum Investing
Post by: sol on May 01, 2015, 01:01:05 PM
In retirement accounts I switched to VXUS and in my trading account I bought 1/2 TLT 1/2 XIV and 5% of GVAL

Awesome.  After all the talk above about how a theory has to be falsifiable to be scientific, this is the sort of test I was hoping for.  For all of you who have made this or similar trades, what's your evaluation period over which you will compare to buy and hold?

The only way to evaluate this strategy is to use it going forward, and the only way to know if that works is for someone to post their trades here for us to watch.  The past few market timing threads haven't worked out so well for the timers, as the market just keep going up.

Best of luck to you all.  I genuinely hope we all get rich.
Title: Re: Dual Momentum Investing
Post by: forummm on May 01, 2015, 02:04:31 PM
the reason being that relative and absolute individually have both been shown to outperform the balanced buy and hold.  and when combined they do even better.

Got it. So in multiple places on this thread, MDMD has mentioned that the safety nature of the strategy appeals to him, and I agree, that's what really lit my interest. I would almost rather forgo trading among classes, and just stay at a comfortable balance (70US/30international), and watch for a signal to exit to bonds. I know the backtests show it to be inferior, but it feels a little less like gambling. Ah fuck it, who am I kidding, even just using absolute momentum feels a bit like gambling/market timing. So then I say no, I won't do it, I'll just stay buy/hold. But then I think, well it's just my 401k portfolio I'm talking about, and that's only 31% of my total investments, I should get over myself and try a little market timing. Then I think, well why stop there, the wife's TSP looks ripe for this method too. And then I'm back to where I started, feeling like I'm missing out if I don't take this seriously. I've basically been going through this cycle nearly every week for the past 2 months. It's getting tiring.

I would recommend going with a "happy medium" and enacting the strategy with one of your tax sheltered accounts until you are convinced- one way or another- of the strategy's effectiveness.
This isn't a very good idea. By the time that effectiveness is proven, decades will have passed. That's a huge time investment, and a very poor one if the method doesn't pan out.

Back testing is all that it took to show me this was a bad idea. Changing variables (3/4/5/6 months) in a minor way has MASSIVE effects on total returns. That doesn't point to a sound foundation to this strategy. It's a sign that this strategy is built to perfectly perform to past returns, not future performance. For instance, absolute momentum with a 6 month lookback underperforms back to '83. However, a 3 month lookback wildly OVERPERFORMS. Why? The timing is a bit better by sheer luck.

I want none with a side of nope.

This kind of sensitivity to inputs is what I was attempting to examine with the simple backtests I did. But I got shouted down as being "not DM". I haven't had time to do more with the analysis. Some of the links proponents posted showed a pretty significant variability depending on the number of months, just as you say. Hence my comments about the choice of lookback period being prone to overfitting (which again was met with contrary statements).

A few days ago I brought up the topic of how some arbitrary and fixed lookback period was going to routinely beat the people looking at more detailed (and sometimes proprietary) data, especially since some studies showed that you need to be right on timing 70% or 80% of the time to profit at all from martket timing. So far I haven't heard any response to that question.
Title: Dual Momentum Investing
Post by: hodedofome on May 01, 2015, 03:42:27 PM
Forummm I may respond to your question in the future but it requires a long post and I don't have the time or inclination right now. I'll try to get to it sometime.


Sent from my iPhone using Tapatalk
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 01, 2015, 04:55:37 PM

So did any DMers trade out their SP500/US market position for international today?

milesdividendmd and others, I am curious about one thing (maybe the book answers, but my library doesn't have a copy and I put in a request to purchase 2 months ago but no go so far). If I understand it, one of the major benefits to this strategy over buy/hold is getting out of equities when short-term treasuries are showing a superior return for the past 3-, 6-, 12-month lookback, i.e. the absolute momentum part. Why not just use that signal only, and ignore the relative momentum part. Keep a 70/30 US/international mix, and then the aggregate return for this dips below Tsys, get into bonds?

I traded from VIIIX TO FSPNX today based on a 6 month Lookback.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 01, 2015, 05:01:55 PM

the reason being that relative and absolute individually have both been shown to outperform the balanced buy and hold.  and when combined they do even better.

Got it. So in multiple places on this thread, MDMD has mentioned that the safety nature of the strategy appeals to him, and I agree, that's what really lit my interest. I would almost rather forgo trading among classes, and just stay at a comfortable balance (70US/30international), and watch for a signal to exit to bonds. I know the backtests show it to be inferior, but it feels a little less like gambling. Ah fuck it, who am I kidding, even just using absolute momentum feels a bit like gambling/market timing. So then I say no, I won't do it, I'll just stay buy/hold. But then I think, well it's just my 401k portfolio I'm talking about, and that's only 31% of my total investments, I should get over myself and try a little market timing. Then I think, well why stop there, the wife's TSP looks ripe for this method too. And then I'm back to where I started, feeling like I'm missing out if I don't take this seriously. I've basically been going through this cycle nearly every week for the past 2 months. It's getting tiring.

My advice would be not to change a thing until you are 100% sure that you want to dip your feet into something new.

Do your due diligence.

Buying and holding is as solid an option as there is with a long track record of success. No need to rush, very little to gain from flip flopping back and forth between strategies.
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on May 01, 2015, 05:15:23 PM
I may be completely deluded here (and I'm not the best at actual argumentation) and I really want to understand more of the underlying theories, but why would a broad index of stocks (or any liquid asset) grow much faster than inflation? Shouldn't bankruptcies keep things in check? Where is this continual higher growth than inflation coming from? Is it just because some people/parties hold so incredibly many stocks and will keep on holding (e.g. Bill Gates, Buffett) that the price for which they're being traded is only the tip of the trading iceberg (as we measure stock value on price last traded, not on intrinsic value only)? Compounding also works on a larger scale and at some point stocks would represent basically all the value in the world?

The growth in a stock index comes from growth in the economy.  As the economy grows, corporate profits grow, which makes people willing to pay more for company stocks.  And growth in the economy comes from growth in either (1) population, or (2) per capita consumption rate, or (3) both.  B&H indexers are assuming that the economy will grow indefinitely, and that continued indefinite growth in market capitalization will follow.  But a quick look at index performance in countries where the population is no longer growing should give indexers pause.  See: Japan since the late 1980s bubble popped, France and Britain since the 2000 bubble popped.  Germany's market seems to have found a way to continue growing.  Although I haven't really looked into it, my guess would be that they found a way to tap the export markets (i.e., sell to economies that are still growing).
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on May 01, 2015, 05:18:20 PM
In retirement accounts I switched to VXUS and in my trading account I bought 1/2 TLT 1/2 XIV and 5% of GVAL

Awesome.  After all the talk above about how a theory has to be falsifiable to be scientific, this is the sort of test I was hoping for.  For all of you who have made this or similar trades, what's your evaluation period over which you will compare to buy and hold?

The only way to evaluate this strategy is to use it going forward, and the only way to know if that works is for someone to post their trades here for us to watch.  The past few market timing threads haven't worked out so well for the timers, as the market just keep going up.

Best of luck to you all.  I genuinely hope we all get rich.

It'll be 30 years before we know whether it worked.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 01, 2015, 05:19:06 PM

absolute momentum feels a bit like gambling/market timing.

It feels like market timing because is market timing, pure and simple.  There is no debate about that.

I'm sort of disappointed that the upshot of this thread, on this forum, is that so many people here are actually considering trying to time the market.  Good luck with that, noobs.

Or maybe do a little research to be reminded why this is a terrible idea.  Google "market timing" and the read the first 10 links that come up, and then kick yourself for ever thinking this was a good idea.  You'll feel like someone who just narrowly escaped a cult.

It's market timing. No question.

But I am not sure what is gained by this sort of judgemental message?

Defend your strategy. Poke holes in mine. That is interesting, helpful and constructive.

But dismissing another's' strategy because it shares a label with other bad strategies makes as muck sense as equating indexing with gold bugerry since both are "buy and hold."
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 01, 2015, 05:21:16 PM

the reason being that relative and absolute individually have both been shown to outperform the balanced buy and hold.  and when combined they do even better.

Got it. So in multiple places on this thread, MDMD has mentioned that the safety nature of the strategy appeals to him, and I agree, that's what really lit my interest. I would almost rather forgo trading among classes, and just stay at a comfortable balance (70US/30international), and watch for a signal to exit to bonds. I know the backtests show it to be inferior, but it feels a little less like gambling. Ah fuck it, who am I kidding, even just using absolute momentum feels a bit like gambling/market timing. So then I say no, I won't do it, I'll just stay buy/hold. But then I think, well it's just my 401k portfolio I'm talking about, and that's only 31% of my total investments, I should get over myself and try a little market timing. Then I think, well why stop there, the wife's TSP looks ripe for this method too. And then I'm back to where I started, feeling like I'm missing out if I don't take this seriously. I've basically been going through this cycle nearly every week for the past 2 months. It's getting tiring.

I would recommend going with a "happy medium" and enacting the strategy with one of your tax sheltered accounts until you are convinced- one way or another- of the strategy's effectiveness.
This isn't a very good idea. By the time that effectiveness is proven, decades will have passed. That's a huge time investment, and a very poor one if the method doesn't pan out.

Back testing is all that it took to show me this was a bad idea. Changing variables (3/4/5/6 months) in a minor way has MASSIVE effects on total returns. That doesn't point to a sound foundation to this strategy. It's a sign that this strategy is built to perfectly perform to past returns, not future performance. For instance, absolute momentum with a 6 month lookback underperforms back to '83. However, a 3 month lookback wildly OVERPERFORMS. Why? The timing is a bit better by sheer luck.

I want none with a side of nope.

Interesting take. Why not share your backtesting?  You might teach us (or yourself) something.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 01, 2015, 05:31:20 PM

I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

We all just get caught up in the momentum.

Absolutely.

Dualy noted.

Threads like this one are fun to read sometimes. Other times, including this one, make me realize just how smart some people are, which then makes me realize by comparison how simplistic I am when it comes to investing. I just don't care to understand all these little nuances that are often discussed. That reason alone is enough for me to be solidly in the "index" camp. Call it lazy if you want, but my brain does not have the capacity to "trump" all the great investing minds out there and come up with a strategy that beats theirs, or the general market. I'll take my chances being average in this department.

Nothing average about indexing, and you are plenty smart Cheddar.

Sticking to buy and hold and rebalancing with discipline isn't easy, I know.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 01, 2015, 05:39:33 PM

the reason being that relative and absolute individually have both been shown to outperform the balanced buy and hold.  and when combined they do even better.

Got it. So in multiple places on this thread, MDMD has mentioned that the safety nature of the strategy appeals to him, and I agree, that's what really lit my interest. I would almost rather forgo trading among classes, and just stay at a comfortable balance (70US/30international), and watch for a signal to exit to bonds. I know the backtests show it to be inferior, but it feels a little less like gambling. Ah fuck it, who am I kidding, even just using absolute momentum feels a bit like gambling/market timing. So then I say no, I won't do it, I'll just stay buy/hold. But then I think, well it's just my 401k portfolio I'm talking about, and that's only 31% of my total investments, I should get over myself and try a little market timing. Then I think, well why stop there, the wife's TSP looks ripe for this method too. And then I'm back to where I started, feeling like I'm missing out if I don't take this seriously. I've basically been going through this cycle nearly every week for the past 2 months. It's getting tiring.

I would recommend going with a "happy medium" and enacting the strategy with one of your tax sheltered accounts until you are convinced- one way or another- of the strategy's effectiveness.
This isn't a very good idea. By the time that effectiveness is proven, decades will have passed. That's a huge time investment, and a very poor one if the method doesn't pan out.

Back testing is all that it took to show me this was a bad idea. Changing variables (3/4/5/6 months) in a minor way has MASSIVE effects on total returns. That doesn't point to a sound foundation to this strategy. It's a sign that this strategy is built to perfectly perform to past returns, not future performance. For instance, absolute momentum with a 6 month lookback underperforms back to '83. However, a 3 month lookback wildly OVERPERFORMS. Why? The timing is a bit better by sheer luck.

I want none with a side of nope.

This kind of sensitivity to inputs is what I was attempting to examine with the simple backtests I did. But I got shouted down as being "not DM". I haven't had time to do more with the analysis. Some of the links proponents posted showed a pretty significant variability depending on the number of months, just as you say. Hence my comments about the choice of lookback period being prone to overfitting (which again was met with contrary statements).

A few days ago I brought up the topic of how some arbitrary and fixed lookback period was going to routinely beat the people looking at more detailed (and sometimes proprietary) data, especially since some studies showed that you need to be right on timing 70% or 80% of the time to profit at all from martket timing. So far I haven't heard any response to that question.

Including 2 imperfectly correlated assets and  cash/short term treasuries with a specific Lookback period (between 3 and 12 months) determining allocation is dual momentum.

What you previously called sensitivity analysis was quite simply not a test of dual momentum. It was not a question of "shouting you down."

Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 01, 2015, 05:45:57 PM

In retirement accounts I switched to VXUS and in my trading account I bought 1/2 TLT 1/2 XIV and 5% of GVAL

Awesome.  After all the talk above about how a theory has to be falsifiable to be scientific, this is the sort of test I was hoping for.  For all of you who have made this or similar trades, what's your evaluation period over which you will compare to buy and hold?

The only way to evaluate this strategy is to use it going forward, and the only way to know if that works is for someone to post their trades here for us to watch.  The past few market timing threads haven't worked out so well for the timers, as the market just keep going up.

Best of luck to you all.  I genuinely hope we all get rich.

Follow along Sol. I'm 100% FSPNX.

The real world comparison is a 75/25 stock/bond portfolio with 40% equities being foreign/emerging markets, and 7% REITS. (What I had before I switched over seven months ago.)

You can also follow along this guy too who publishes his DM allocation each month.

http://www.scottsinvestments.com/2013/06/11/dual-etf-momentum-portfolio-june-update-backtests/
Title: Dual Momentum Investing
Post by: hodedofome on May 01, 2015, 08:20:17 PM
Instead of writing out an original reply to parameter values and back tests, I'll just post some pictures of The Way of the Turtle by Curtis Faith. I highly recommend the book as it dives deep into human biases and the good, bad and the ugly of systematic trading systems, especially those used by managed futures trend following funds.
(http://images.tapatalk-cdn.com/15/05/01/b5e5533c016d3b517db5c3959218a8d7.jpg)
(http://images.tapatalk-cdn.com/15/05/01/7668751efbda58d094a7a126ea62b1a4.jpg)
(http://images.tapatalk-cdn.com/15/05/01/8710955648f2b12fe276bdaf38e4fdfe.jpg)
(http://images.tapatalk-cdn.com/15/05/01/7f953cb6322948f5e4e3c53cd490feea.jpg)
(http://images.tapatalk-cdn.com/15/05/01/7ec8115a96a91d209aae8ae707ea6543.jpg)
(http://images.tapatalk-cdn.com/15/05/01/d6d12a8f845190c53a9242dbcac50d0c.jpg)
(http://images.tapatalk-cdn.com/15/05/01/980008c23904d10b09bb74b79b42b882.jpg)
(http://images.tapatalk-cdn.com/15/05/01/7f18656439e1f5fef849b969afaab859.jpg)
(http://images.tapatalk-cdn.com/15/05/01/3c2d4cc09b76f30a501e7b6b878d59e4.jpg)

There's a lot more in the book but this is a decent primer.


Sent from my iPhone using Tapatalk
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 02, 2015, 12:13:30 AM
Interesting passages Hoded.

New book on my list. A lot of overlap with Taleb's Anti-fragile it seems, though more limited in scope.
Title: Re: Dual Momentum Investing
Post by: ScroogeMcDutch on May 02, 2015, 03:50:26 AM
absolute momentum feels a bit like gambling/market timing.

It feels like market timing because is market timing, pure and simple.  There is no debate about that.

I'm sort of disappointed that the upshot of this thread, on this forum, is that so many people here are actually considering trying to time the market.  Good luck with that, noobs.

Or maybe do a little research to be reminded why this is a terrible idea.  Google "market timing" and the read the first 10 links that come up, and then kick yourself for ever thinking this was a good idea.  You'll feel like someone who just narrowly escaped a cult.

I would have to be convinced by both rigorous backtesting done by myself (as in, that the lookback period or trading frequency hardly have an effect on the results) and convinced by a theoretical (but not necessarily proven) basis for the strategy.

In and of itself, there is something intellectually dissatisfying about B&H. At the same time it's easy, and provides better results than 90% of the alternatives at a much better results/time spent ratio. That said, I'm pretty sure there's more under the sun and I'm curious to the different theories. As of yet, I am firmly in B&H territory, partly due to lack of time to experiment with own backtesting and asset classes.

I may be completely deluded here (and I'm not the best at actual argumentation) and I really want to understand more of the underlying theories, but why would a broad index of stocks (or any liquid asset) grow much faster than inflation? Shouldn't bankruptcies keep things in check? Where is this continual higher growth than inflation coming from? Is it just because some people/parties hold so incredibly many stocks and will keep on holding (e.g. Bill Gates, Buffett) that the price for which they're being traded is only the tip of the trading iceberg (as we measure stock value on price last traded, not on intrinsic value only)? Compounding also works on a larger scale and at some point stocks would represent basically all the value in the world?

The growth in a stock index comes from growth in the economy.  As the economy grows, corporate profits grow, which makes people willing to pay more for company stocks.  And growth in the economy comes from growth in either (1) population, or (2) per capita consumption rate, or (3) both.  B&H indexers are assuming that the economy will grow indefinitely, and that continued indefinite growth in market capitalization will follow.  But a quick look at index performance in countries where the population is no longer growing should give indexers pause.  See: Japan since the late 1980s bubble popped, France and Britain since the 2000 bubble popped.  Germany's market seems to have found a way to continue growing.  Although I haven't really looked into it, my guess would be that they found a way to tap the export markets (i.e., sell to economies that are still growing).

Thank you for the explanation. Basically this would mean the stagnant countries (i.e. almost all western countries) bank their economic growth mainly on the overseas growth markets and their ability to capture that growth. It still seems to me we should run into compounding problems here as well, or that inflation should start increasing seriously at some point in the near future (10 years).
Title: Re: Dual Momentum Investing
Post by: forummm on May 02, 2015, 06:21:37 AM
Reading hodedofome's giant book pictures, it struck me during the "diversity and simplicity" portion that it sounded a lot like it was describing buy-and-hold indexing. As such, the book seems to say it's not dependent on particular market conditions. I think that's a big part of what attracts people to BH. Not saying that some other approach can't be robust with lots of diversity and simplicity.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on May 02, 2015, 07:21:04 AM
Hoded, I like the ecology analogy.  It provides a nice framework for describing the apparent contradiction in the DM strategy that folks have been zeroing in on.  On the one hand, the data say that the strategy has thrived across all the various markets and time periods in which it has been examined.  This suggests that the strategy is highly environment-independent--like an unspecialized, generalist species, it is able to survive under a wide a variety of conditions (to use the terminology we've been using in this thread, it is "robust").  However, because the strategy's success is entirely dependent on the predictive stength of the specific lookback period employed, it should be highly environment-specific--it wouldn't take a meteor impact or seismic climate change to kill the strategy; a subtle change in temperature would be enough, as long as it caused directional price movements to no longer follow the precise pattern needed for the specific lookback period being used to be reliable.  So how can this contradiction be explained?
Title: Re: Dual Momentum Investing
Post by: hodedofome on May 02, 2015, 09:19:31 AM
I was afraid the detractors would take the passages I posted and make a judgement based on limited information, possibly taken out of context.

I think I've finally realized my frustration with some on this thread. Some are quick to judge something, but really have not much idea about how or why it works. They lack context. I would say, before you make a judgement about an active strategy, read all you can about it first, then judge. If you are basing your info from only stuff posted in this thread, I'd say your info is incomplete. At the minimum, read:

 (http://images.tapatalk-cdn.com/15/05/02/5605222eee279e2811535e4e351d3667.jpg)

I'll add in there Trend Following by Michael Covel and Market Wizards by Jack Schwager.

Then come back with all your reasons for why it can't work. You'll have a good context for what real trend following/momentum is and where it fits in the world. You'll also see where dual momentum as described by Gary fits in the trend following world.


Sent from my iPhone using Tapatalk
Title: Re: Dual Momentum Investing
Post by: gluskap on May 02, 2015, 09:31:28 AM
I made a long post and the battery on my iPad died so I lost it doh. Just wanted to add that as a fairly new investor this thread was really interesting. I think the question we should focus on is not so much why it works but rather does it actually work.

When predicting if the sun will rise tomorrow if we look at all of known past history and see that it does, it doesn't really matter if we understand the physics of why it works or whether we are just an ignorant caveman. Of course there could be some catastrophic event such as the sun blowing up or whatnot but for the most part betting that the sun will rise tomorrow is a good bet.

One of the basic rules of investing is that past performance is not indicative of future success. But I argue that this is true because most people only look at the recent past. Just because a fund did well in the last year or last 5-10 years doesn't mean it will continue to do well next year. However if the fund or strategy did well for the last hundred years of data, that would be much more convincing regardless if we truly understood why it did well.

Miles dividends MD did give a reason for why DM works...perhaps it isn't fleshed out and to the level of detail that some would prefer but that's because the idea is new and it's not fully understood exactly why it works. But that reason shouldn't be ignored as if it didn't exist. Someone asked if you would invest in a strategy of buying every 7th Tuesday if it worked. And my answer would depend on how much back testing they did. Most of these active strategies don't work because people cherry pick certain periods of time such as the last 20-30 years and find some random pattern that seems to work. But if someone truly went back hundreds of years and the data did fit, even if I didn't understand why it worked I would still have to give it some serious consideration if it was truly shown that it did indeed work. Maybe with more testing an actual real reason not currently known would be discovered later that logically explained why it works. If you look at some of the modern theories of physics some of it sounds just as strange as an every 7th Tuesday cycle but as long as the data truly fits, it's rational to accept that hypothesis until proven untrue.

So what I want to see is more back tests that show whether it truly works or not. I think the funds used and the look back period are both important things to consider when doing these back tests. Most of the evidence shown against DM so far, didn't choose the correct funds and thus was not really DM or didn't provide enough details about the time period tested and the look back period to decide if the criticism was valid or not.

I think it's fair to say that even if this theory does work, it's possible that it might change due to changes in human behavior. An example might be that with increased technology and the faster dissemination of information, the optimal look back period of 9 months might shorten to 3 months or whatever the case in the future. However I think this is possible of B&H strategy too. Just because it's worked well so far there could be a black swan event like the fall of US govt or some bigger crash than black Monday that wipes out all investor confidence. This is a small chance though and most are willing to take that risk. So why not accept that there are certain risks to DM as well but that they might be acceptable and still be a very valid investing strategy?

I think the biggest risk of DM is the whipsaw as previously mentioned. The market has a downward correction and if your look back period is too short then you get a false signal to sell and then the market rebounds and you buy in at higher prices. Or the opposite effect where your look back period is too long and you pull out of a bear market too late or enter a bull market too slow. But this risks can be mitigated by diversifying your look back periods as miles already suggested. But this is too complex and too much trading for me.

Someone asked why doesn't everybody do this if it works and is so easy? And I'd argue that it's hard to execute. There will be periods of underperformance and human nature is hard to follow the course. I mean there are plenty of people that still don't index invest. Human nature just isn't rational which is more reason for DM. I will still probably stick mostly to index investing cuz I am lazy but I might try to test this strategy out in my smaller Roth IRA.

Again this strategy doesn't have to work perfectly to make money. A well balance 80/20 stock/bond portfolio will underperform pure stocks but there is less volatility. I think there might be some years that DM might underperform buy and hold but it seems to lower volatility and max drawdown which is a big advantage.

So let's focus more on whether this strategy really works or not and let's see more back tests.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on May 02, 2015, 09:58:04 AM
I was afraid the detractors would take the passages I posted and make a judgement based on limited information, possibly taken out of context.

I assume this refers to my post, but I wasn't passing judgment on the strategy based on the passages you posted -- I was using them to reframe the same question that has been asked of the strategy but not yet answered.  Is reading all the literature a prerequisite to participation in this thread?  I want to understand if there are reasons to believe in the merit of the strategy before I take the time to read seven volumes dedicated to it, not after.

Is the apparent contradiction I identified really a contradiction?  If so, how can it be explained?

I'm not asking these questions rhetorically assuming the answers disprove DM's validity.  And I'm not offering reasons why it doesn't work.  I'm asking questions about why it does work, if it does.  I'm asking because I'm interested and want to understand. 
Title: Re: Dual Momentum Investing
Post by: forummm on May 02, 2015, 10:03:29 AM
I was afraid the detractors would take the passages I posted and make a judgement based on limited information, possibly taken out of context.

I think I've finally realized my frustration with some on this thread. Some are quick to judge something, but really have not much idea about how or why it works. They lack context. I would say, before you make a judgement about an active strategy, read all you can about it first, then judge. If you are basing your info from only stuff posted in this thread, I'd say your info is incomplete. At the minimum, read:

<<<<
trend following with managed futures by Greyserman
way of the turtle by Faith
dual momentum investing by Antonacci
following the trend by Clenow
the ivy portfolio by Faber
>>>>
I'll add in there Trend Following by Michael Covel and Market Wizards by Jack Schwager.

Then come back with all your reasons for why it can't work. You'll have a good context for what real trend following/momentum is and where it fits in the world. You'll also see where dual momentum as described by Gary fits in the trend following world.

Thanks for the recommendations. I added them to my reading list. It will be interesting to learn more about these ideas. It seems like it takes more than a giant thread to dig through them and to try to understand why they behaved as they did in the past, and whether it's reasonable to bet that they will continue to behave that way going forward.

I didn't intend my post in response to your excerpts to be reflecting judgment on the content. Just an observation of how the language makes it sound a lot like they are trying to achieve the benefits of indexing (while reducing some of the downsides). In fact, it occurred to me that the popularity of indexing actually makes this kind of trend following approach much more feasible to implement. Without it, you'd have a lot of extra risks and transaction costs and it would be much more challenging to calculate the performance to see what action you wanted to take.

Aside: I think it's funny that one of the books is "by Faith".
Title: Re: Dual Momentum Investing
Post by: forummm on May 02, 2015, 10:10:45 AM
I think the question we should focus on is not so much why it works but rather does it actually work.

...

So what I want to see is more back tests that show whether it truly works or not. I think the funds used and the look back period are both important things to consider when doing these back tests. Most of the evidence shown against DM so far, didn't choose the correct funds and thus was not really DM or didn't provide enough details about the time period tested and the look back period to decide if the criticism was valid or not.

...

So let's focus more on whether this strategy really works or not and let's see more back tests.

I think it will be hard to back test this in ways other than using the author's own analysis and just trusting it. It was hard for Shiller to come up with all his data just for the US S&P 500 (or equivalent) and 10-yr Treasury rates. I've thought about different analysis designs from data I'm aware of and I think some on this thread would object to them. I also have a lot of work in my day job so I haven't had time to really dig into this more. I think the reason the backtests shown here (and approved of as being sufficiently DM) are limited to the last 20 years is because that's the analysis that was easy for people to do. Someone would have to put in some effort to do something more substantial than that.
Title: Re: Dual Momentum Investing
Post by: hodedofome on May 02, 2015, 08:24:47 PM
I decided to backtest MDMD's strategy of using different slices of his portfolio for each lookback period, instead of averaging out the lookback periods like I've seen some do. So this test takes VTSMX (Vanguard US Total Stock Market), VGTSX (Vanguard Int'l Total Stock Market) and VBMFX (Vanguard Total Bond Index) and does 25% each for 3 month, 6 month, 9 month and 12 month lookback periods. So each lookback period is it's own 'slice' of the portfolio. This should prevent at least some of the curve fitting that some might have an issue with a specific lookback period. You just decide to take them all. Unfortunately ETFReplay will only allow you to do backtests to 2003.

(http://s24.postimg.org/6m271otf9/backtest.jpg)

(http://s24.postimg.org/7cux7gvsl/backtest2.jpg)

Link to the entire test showing holdings for each monthly period https://drive.google.com/file/d/0BzyyTlvGE-T2UXFwMk05N2FPZmM/view?usp=sharing
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 03, 2015, 12:59:56 AM
A new post on the why's of Dual momentum (and their irrelevance in the end.)

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

Enjoy!
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on May 03, 2015, 04:33:51 AM
A new post on the why's of Dual momentum (and their irrelevance in the end.)

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

Enjoy!

Thanks for that, Miles.  I've been thinking for a while that there is more to the momentum story than just trader/investor psychology.  You expressed my thoughts exactly with this:

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

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

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

Ultimately, asset prices reflect the earnings that those assets are generating (recognizing, of course, the existence of short-term anomalies like the late '90s tech bubble and the '87 crash, which are attributable largely to investor/trader psychology).  Earnings are tied to the economy, which generally moves in long, broad trends.  Hence the apparent inability of traders to arbitrage away momentum.  So perhaps the theories of momentum and the efficient market are compatible after all.

But I think your article under-emphasizes the importance of the story behind any investment strategy.  No, we would not invest in a good story if it was not validated by back-testing.  But we also (most of us, anyway) wouldn't invest in a system that back-tests well but has no rational explanation (see the 7th Tuesday strategy that was discussed ad nauseum up-thread).
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 03, 2015, 11:54:38 AM
Fair point about my under emphasizing the importance of story.

In the end stories are very important. Not because they are determinative, but because they help us to individually stick with an approach through thick and thin.

To me empiricism is a more useful tool for determining probabilities, but weighing probabilities won't help us at all if we can't stick to our own systems. (The biggest risk in any approach.)

As I have mentioned many times in this thread, the momentum and trend following stories jibe with my way of seeing the world.

I'm just suspicious of myself, that the convincing aspect of the story has followed the empirical observation that these approaches work. Not the other way around.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on May 06, 2015, 03:17:55 PM
I think the question we should focus on is not so much why it works but rather does it actually work.

...

So what I want to see is more back tests that show whether it truly works or not. I think the funds used and the look back period are both important things to consider when doing these back tests. Most of the evidence shown against DM so far, didn't choose the correct funds and thus was not really DM or didn't provide enough details about the time period tested and the look back period to decide if the criticism was valid or not.

...

So let's focus more on whether this strategy really works or not and let's see more back tests.

I think it will be hard to back test this in ways other than using the author's own analysis and just trusting it. It was hard for Shiller to come up with all his data just for the US S&P 500 (or equivalent) and 10-yr Treasury rates. I've thought about different analysis designs from data I'm aware of and I think some on this thread would object to them. I also have a lot of work in my day job so I haven't had time to really dig into this more. I think the reason the backtests shown here (and approved of as being sufficiently DM) are limited to the last 20 years is because that's the analysis that was easy for people to do. Someone would have to put in some effort to do something more substantial than that.

Speaking of Shiller's data, I decided to do a simple absolute momentum backtest using his S&P500 data-set. 

Basically I look back 6 months and if the S&P500 return is positive, I take put the money in the S&P500.  If the last 6 months of the S&P500 is negative, I keep the value in cash (no appreciation at all).  I then started the backtest at the beginning of every decade starting in January 1880 (Shiller's data starts in 1871).

The spreadsheet is attached.  Let me know if anyone sees any errors.

The results show this absolute momentum strategy beats the S&P500 in 12 of the 14 decades.  The outperformance is more than 50% over 10 years in 5 of the 14 decades.  In two of the decades (the 1990s and 2010s so far), this strategy has underperformed the S&P500.  In the 90's it underperformed with a 130% gain for AM vs. 218% gain for the S&P500 and in the 2010s so far it has underpeformed by with a 37% gain vs. 72% gain for the S&P500.

The decade by decade chart shows that this strategy is good at limiting downside risk but does so at the expense of bull market gains.  Overall this is pretty damn impressive IMHO.  Like MDMD said, this can be considered a cowards strategy as the real performance advantage is getting a sell signal to avoid typical bear markets.  Will bear markets continue to be "typical"?  Who knows, 12 out of 14 ain't bad.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 06, 2015, 05:48:54 PM
Thanks for sharing this.

In my view, the data does speak for itself. absolute momentum reproducibly diminishes drawdowns, (as do moving average approaches by the way.)

In my view absolute momentum is the main event of dual momentum. But relative momentum is very complementary in that it tends to boost returns during bull markets, which addresses trend following approaches major weakness.


Title: Re: Dual Momentum Investing
Post by: forummm on May 06, 2015, 08:03:45 PM
I think the question we should focus on is not so much why it works but rather does it actually work.

...

So what I want to see is more back tests that show whether it truly works or not. I think the funds used and the look back period are both important things to consider when doing these back tests. Most of the evidence shown against DM so far, didn't choose the correct funds and thus was not really DM or didn't provide enough details about the time period tested and the look back period to decide if the criticism was valid or not.

...

So let's focus more on whether this strategy really works or not and let's see more back tests.

I think it will be hard to back test this in ways other than using the author's own analysis and just trusting it. It was hard for Shiller to come up with all his data just for the US S&P 500 (or equivalent) and 10-yr Treasury rates. I've thought about different analysis designs from data I'm aware of and I think some on this thread would object to them. I also have a lot of work in my day job so I haven't had time to really dig into this more. I think the reason the backtests shown here (and approved of as being sufficiently DM) are limited to the last 20 years is because that's the analysis that was easy for people to do. Someone would have to put in some effort to do something more substantial than that.

Speaking of Shiller's data, I decided to do a simple absolute momentum backtest using his S&P500 data-set. 

Basically I look back 6 months and if the S&P500 return is positive, I take put the money in the S&P500.  If the last 6 months of the S&P500 is negative, I keep the value in cash (no appreciation at all).  I then started the backtest at the beginning of every decade starting in January 1880 (Shiller's data starts in 1871).

The spreadsheet is attached.  Let me know if anyone sees any errors.

The results show this absolute momentum strategy beats the S&P500 in 12 of the 14 decades.  The outperformance is more than 50% over 10 years in 5 of the 14 decades.  In two of the decades (the 1990s and 2010s so far), this strategy has underperformed the S&P500.  In the 90's it underperformed with a 130% gain for AM vs. 218% gain for the S&P500 and in the 2010s so far it has underpeformed by with a 37% gain vs. 72% gain for the S&P500.

The decade by decade chart shows that this strategy is good at limiting downside risk but does so at the expense of bull market gains.  Overall this is pretty damn impressive IMHO.  Like MDMD said, this can be considered a cowards strategy as the real performance advantage is getting a sell signal to avoid typical bear markets.  Will bear markets continue to be "typical"?  Who knows, 12 out of 14 ain't bad.

Thanks for doing this! I was actually going to do almost the same thing but haven't had time. I thought about using the Treasury rates as the yield during the cash months. Looks like you didn't do that, but also didn't include any transaction costs. So if you put your cash into treasuries, perhaps that would more than cover the transaction costs. I'll dig into this more over time.
Title: Re: Dual Momentum Investing
Post by: hodedofome on May 06, 2015, 08:22:17 PM
Market Wizards is a good book to read about trend following, especially the Larry Hite interview. In regards to why he thinks trend following works:

"I knew that if you traded across the board (meaning trading multiple/diverse/uncorrelated markets), controlled your risk, and went with the trend, it just had to work. I could see it absolutely clearly."

If you can't visualize having a diverse group of uncorrelated markets, buying the ones that are going up, and selling the ones that are going down, and seeing how that could work in the long run, then I just can't convince you otherwise.

More good quotes:

"It is incredible how rich you can get by not being perfect. We are not looking for the optimum method, we are looking for the hardiest method."

I'm summarizing a longer passage here but the rules Larry lives by as a money manager is:

1) Manage risk first. Risk is a no-fooling-around game

2) Always follow the trends and never deviate from our methods

3) Diversify - we trade as many markets as possible and we use lots of different systems ranging from short term to long term. Some of these systems may not be that good by themselves, but we really don't care. That is not what they are there for

4) Track volatility. When the volatility of a market becomes so great that it adversely skews the expected risk/return ratio, we will stop trading that market
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on May 07, 2015, 10:05:48 AM
Thanks for doing this! I was actually going to do almost the same thing but haven't had time. I thought about using the Treasury rates as the yield during the cash months. Looks like you didn't do that, but also didn't include any transaction costs. So if you put your cash into treasuries, perhaps that would more than cover the transaction costs. I'll dig into this more over time.

I considered using Shiller's "Long Interest Rate GS10" as the safe alternative at first but then realized it would be much more complicated to account for changes in bond value with changing interest rates.  Obviously you can do better than sit in cash, but his shows even using absolute momentum and sitting in cash at times can produce very good results.
Title: Re: Dual Momentum Investing
Post by: Financial.Velociraptor on May 07, 2015, 10:12:32 AM
CAPE is a weird bunny.  You use an intermediate length of time to smooth P/E but Shiller et.al. never defined how many years constituted a cycle.  So people have sort of latched on to 10 years because it is a round number.  Trouble is, things look ugly if you use the standard 10 year CAPE on the US right now but things are rosy if you assume 5 years rounds out a cycle.

It is supposed to be an objective measure but its application is very subjective.
Title: Re: Dual Momentum Investing
Post by: forummm on May 07, 2015, 10:50:32 AM
Market Wizards is a good book to read about trend following, especially the Larry Hite interview. In regards to why he thinks trend following works:

"I knew that if you traded across the board (meaning trading multiple/diverse/uncorrelated markets), controlled your risk, and went with the trend, it just had to work. I could see it absolutely clearly."

If you can't visualize having a diverse group of uncorrelated markets, buying the ones that are going up, and selling the ones that are going down, and seeing how that could work in the long run, then I just can't convince you otherwise.

It sounds a little like belief in a religion. You have to have faith. Logic doesn't really come into play. You've seen evidence in the past that could tell you that God exists and you're living your life like it's so.

4) Track volatility. When the volatility of a market becomes so great that it adversely skews the expected risk/return ratio, we will stop trading that market[/i]

Does stop trading mean get out? And not "stay put"?
Title: Re: Dual Momentum Investing
Post by: forummm on May 07, 2015, 10:51:43 AM
Thanks for doing this! I was actually going to do almost the same thing but haven't had time. I thought about using the Treasury rates as the yield during the cash months. Looks like you didn't do that, but also didn't include any transaction costs. So if you put your cash into treasuries, perhaps that would more than cover the transaction costs. I'll dig into this more over time.

I considered using Shiller's "Long Interest Rate GS10" as the safe alternative at first but then realized it would be much more complicated to account for changes in bond value with changing interest rates.  Obviously you can do better than sit in cash, but his shows even using absolute momentum and sitting in cash at times can produce very good results.

Yes, I had the same thought. It kept me from having a better idea and doing it.
Title: Re: Dual Momentum Investing
Post by: forummm on May 07, 2015, 10:55:15 AM
CAPE is a weird bunny.  You use an intermediate length of time to smooth P/E but Shiller et.al. never defined how many years constituted a cycle.  So people have sort of latched on to 10 years because it is a round number.  Trouble is, things look ugly if you use the standard 10 year CAPE on the US right now but things are rosy if you assume 5 years rounds out a cycle.

It is supposed to be an objective measure but its application is very subjective.

PEs are still pretty high historically. VTSAX is 21.4. VFIAX is 19.8. I think historical is around 15-16.
Title: Re: Dual Momentum Investing
Post by: hodedofome on May 07, 2015, 11:20:49 AM
It sounds a little like belief in a religion. You have to have faith. Logic doesn't really come into play. You've seen evidence in the past that could tell you that God exists and you're living your life like it's so.

The same could be said for buy and hold. No matter what strategy you choose, you are expecting the future to be somewhat like the past. It is only the 'true believers' that are disciplined enough to follow a strategy for the rest of their lives, and that includes the guys who bought and held equities for the past 100+ years. At any moment their strategy could have stopped working for good. All of us have to decide what we truly believe about the markets, and then devise a strategy around those beliefs.

4) Track volatility. When the volatility of a market becomes so great that it adversely skews the expected risk/return ratio, we will stop trading that market[/i]

Does stop trading mean get out? And not "stay put"?

This is specific to their strategy, but yes they have volatility limits on individual markets. If a market gets too volatile, they will get out completely. Even if the volatility is in the same direction as their position.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on May 07, 2015, 01:07:40 PM
I think the question we should focus on is not so much why it works but rather does it actually work.

...

So what I want to see is more back tests that show whether it truly works or not. I think the funds used and the look back period are both important things to consider when doing these back tests. Most of the evidence shown against DM so far, didn't choose the correct funds and thus was not really DM or didn't provide enough details about the time period tested and the look back period to decide if the criticism was valid or not.

...

So let's focus more on whether this strategy really works or not and let's see more back tests.

I think it will be hard to back test this in ways other than using the author's own analysis and just trusting it. It was hard for Shiller to come up with all his data just for the US S&P 500 (or equivalent) and 10-yr Treasury rates. I've thought about different analysis designs from data I'm aware of and I think some on this thread would object to them. I also have a lot of work in my day job so I haven't had time to really dig into this more. I think the reason the backtests shown here (and approved of as being sufficiently DM) are limited to the last 20 years is because that's the analysis that was easy for people to do. Someone would have to put in some effort to do something more substantial than that.

Speaking of Shiller's data, I decided to do a simple absolute momentum backtest using his S&P500 data-set. 

Basically I look back 6 months and if the S&P500 return is positive, I take put the money in the S&P500.  If the last 6 months of the S&P500 is negative, I keep the value in cash (no appreciation at all).  I then started the backtest at the beginning of every decade starting in January 1880 (Shiller's data starts in 1871).

The spreadsheet is attached.  Let me know if anyone sees any errors.

The results show this absolute momentum strategy beats the S&P500 in 12 of the 14 decades.  The outperformance is more than 50% over 10 years in 5 of the 14 decades.  In two of the decades (the 1990s and 2010s so far), this strategy has underperformed the S&P500.  In the 90's it underperformed with a 130% gain for AM vs. 218% gain for the S&P500 and in the 2010s so far it has underpeformed by with a 37% gain vs. 72% gain for the S&P500.

The decade by decade chart shows that this strategy is good at limiting downside risk but does so at the expense of bull market gains.  Overall this is pretty damn impressive IMHO.  Like MDMD said, this can be considered a cowards strategy as the real performance advantage is getting a sell signal to avoid typical bear markets.  Will bear markets continue to be "typical"?  Who knows, 12 out of 14 ain't bad.

I realized I missed a very important factor in this spreadsheet: DIVIDENDS!!!

Adding them in makes this picture look very different.  AM only beats B&H in the 1910s, 1930s, 1970s, and 2000s (e.g., when the stock market was absolutely awful!).

In bull markets AM significantly lags B&H.  For example, $100 invested in 1990 grows to $405 in the S&P500  in 1999 and only $230 with AM. 

Probably not coincidental that the 2000s happened to be the best decade for AM EVER.  Great time to write a book after killing an awful stock market in the 2000s.

It's starting to look like an expensive hedging strategy.  No free lunch here.
Title: Re: Dual Momentum Investing
Post by: skyrefuge on May 07, 2015, 02:57:45 PM
I realized I missed a very important factor in this spreadsheet: DIVIDENDS!!!

For the record, while you now have dividends in your returns, it looks like you still aren't including dividends for your decision points. It doesn't have a huge effect, but it's still an important point.  If you made your decisions based on 6-month total-return rather than price differential, it looks like the AM strategy spends 17% more time in stocks, which increases its averaged annualized return from 5.4% to 5.5%. 1880s are also added as a decade that beats all-stock, but for some of the stock-beating decades, the margin of victory is actually decreased (i.e., to the extent that included dividends made you stay in stocks, that was a "bad" decision).
Title: Re: Dual Momentum Investing
Post by: forummm on May 07, 2015, 05:53:59 PM
If you include the dividends in decision making, over the ~130 year time period (instead of starting over each decade), which wins?
Title: Re: Dual Momentum Investing
Post by: skyrefuge on May 07, 2015, 09:39:31 PM
If you include the dividends in decision making, over the ~130 year time period (instead of starting over each decade), which wins?

Absolute Momentum: $90,254
Stocks Only: $1,247,873

And no, I didn't forget a digit in the AM number.

EDIT: I discovered that the above figure for AM is incorrect. See this post (http://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/msg655310/#msg655310) for my, uh, "correction"?
Title: Re: Dual Momentum Investing
Post by: sol on May 07, 2015, 10:25:47 PM
Absolute Momentum: $90,254
Stocks Only: $1,247,873

And no, I didn't forget a digit in the AM number.

I'm not sure how any of these comparisons matter.  If it's not AM or DM, then there will be some other technical trading metric that outperforms an index investor.  With enough random strategies, some of them are guaranteed to outperform over any finite time period.

If you're using sky's comparison above to convince yourself that buy and hold is superior to technical trading because buy and hold has offered better returns, then you've already tacitly accepted the argument made by miles and others that performance chasing a winning strategy is the best way to invest.  As soon as you find some technical trading scheme that outperforms the index over your chosen time period, you should then logically adopt that instead.

And I'm not drinking that kool aid.  I recognize and accept that there will always be some arbitrarily complex method of timing the market that would have provided superior returns in the past, but that does not tell me anything about how that strategy will perform in the future.
Title: Re: Dual Momentum Investing
Post by: arebelspy on May 07, 2015, 11:07:15 PM
Absolute Momentum: $90,254
Stocks Only: $1,247,873

And no, I didn't forget a digit in the AM number.

I'm not sure how any of these comparisons matter.  If it's not AM or DM, then there will be some other technical trading metric that outperforms an index investor.  With enough random strategies, some of them are guaranteed to outperform over any finite time period.

If you're using sky's comparison above to convince yourself that buy and hold is superior to technical trading because buy and hold has offered better returns, then you've already tacitly accepted the argument made by miles and others that performance chasing a winning strategy is the best way to invest.  As soon as you find some technical trading scheme that outperforms the index over your chosen time period, you should then logically adopt that instead.

And I'm not drinking that kool aid.  I recognize and accept that there will always be some arbitrarily complex method of timing the market that would have provided superior returns in the past, but that does not tell me anything about how that strategy will perform in the future.

(http://i.kinja-img.com/gawker-media/image/upload/s--EoZF5ry2--/ejnqstxfgfnjxfppfk3e.gif)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 08, 2015, 01:13:02 AM
If you include the dividends in decision making, over the ~130 year time period (instead of starting over each decade), which wins?

Absolute Momentum: $90,254
Stocks Only: $1,247,873

And no, I didn't forget a digit in the AM number.

Please share your work.  It's impossible to understand your results if you just throw up numbers like this. 

I'm extremely dubious of your claim based on total returns data going back to 1950, using 10 month MA:

https://www.portfoliovisualizer.com/test-market-timing-model?s=y&outOfMarketAssetType=1&timingPeriods[0]=5&timingWeights[0]=100&volatilityWindowSizeInDays=0&timingWeights[2]=0&riskControl=false&endYear=2014&volatilityPeriodWeight=0&movingAverageType=1&windowSize=10&riskWindowSizeInDays=0&timingUnits[0]=2&timingUnits[2]=2&timingModel=1&volatilityWindowSize=0&startYear=1950&assetsToHold=1&timingWeights[1]=0&windowSizeInDays=105&s=y&volatilityPeriodUnit=1&multipleTimingPeriods=false&timingUnits[1]=2&riskWindowSize=10&rebalancePeriod=1

I suspect your calculations are seriously flawed, (but have no way of checking your work.)

Absolute momentum should have similar returns (sometimes better, sometimes worse depending on the decade) with markedly diminished drawdowns, when using total returns both for lookback and for returns calculation.  AKA similar CAGR with a far superior Sharp/Sortino.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 08, 2015, 01:17:37 AM
Absolute Momentum: $90,254
Stocks Only: $1,247,873

And no, I didn't forget a digit in the AM number.

I'm not sure how any of these comparisons matter.  If it's not AM or DM, then there will be some other technical trading metric that outperforms an index investor.  With enough random strategies, some of them are guaranteed to outperform over any finite time period.

If you're using sky's comparison above to convince yourself that buy and hold is superior to technical trading because buy and hold has offered better returns, then you've already tacitly accepted the argument made by miles and others that performance chasing a winning strategy is the best way to invest.  As soon as you find some technical trading scheme that outperforms the index over your chosen time period, you should then logically adopt that instead.

And I'm not drinking that kool aid.  I recognize and accept that there will always be some arbitrarily complex method of timing the market that would have provided superior returns in the past, but that does not tell me anything about how that strategy will perform in the future.

This statement proves that in the end it is just a matter of faith.  And you are a true believer.

If the most important factor for investing success is sticking to your guns through thick and thin, (and I think that it is,)  then your complete disinterest in performance speaks very positively for your chances of doing very well indeed.  (Not ironically intended.)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 08, 2015, 01:28:22 AM
I think the question we should focus on is not so much why it works but rather does it actually work.

...

So what I want to see is more back tests that show whether it truly works or not. I think the funds used and the look back period are both important things to consider when doing these back tests. Most of the evidence shown against DM so far, didn't choose the correct funds and thus was not really DM or didn't provide enough details about the time period tested and the look back period to decide if the criticism was valid or not.

...

So let's focus more on whether this strategy really works or not and let's see more back tests.

I think it will be hard to back test this in ways other than using the author's own analysis and just trusting it. It was hard for Shiller to come up with all his data just for the US S&P 500 (or equivalent) and 10-yr Treasury rates. I've thought about different analysis designs from data I'm aware of and I think some on this thread would object to them. I also have a lot of work in my day job so I haven't had time to really dig into this more. I think the reason the backtests shown here (and approved of as being sufficiently DM) are limited to the last 20 years is because that's the analysis that was easy for people to do. Someone would have to put in some effort to do something more substantial than that.

Speaking of Shiller's data, I decided to do a simple absolute momentum backtest using his S&P500 data-set. 

Basically I look back 6 months and if the S&P500 return is positive, I take put the money in the S&P500.  If the last 6 months of the S&P500 is negative, I keep the value in cash (no appreciation at all).  I then started the backtest at the beginning of every decade starting in January 1880 (Shiller's data starts in 1871).

The spreadsheet is attached.  Let me know if anyone sees any errors.

The results show this absolute momentum strategy beats the S&P500 in 12 of the 14 decades.  The outperformance is more than 50% over 10 years in 5 of the 14 decades.  In two of the decades (the 1990s and 2010s so far), this strategy has underperformed the S&P500.  In the 90's it underperformed with a 130% gain for AM vs. 218% gain for the S&P500 and in the 2010s so far it has underpeformed by with a 37% gain vs. 72% gain for the S&P500.

The decade by decade chart shows that this strategy is good at limiting downside risk but does so at the expense of bull market gains.  Overall this is pretty damn impressive IMHO.  Like MDMD said, this can be considered a cowards strategy as the real performance advantage is getting a sell signal to avoid typical bear markets.  Will bear markets continue to be "typical"?  Who knows, 12 out of 14 ain't bad.

I realized I missed a very important factor in this spreadsheet: DIVIDENDS!!!

Adding them in makes this picture look very different.  AM only beats B&H in the 1910s, 1930s, 1970s, and 2000s (e.g., when the stock market was absolutely awful!).

In bull markets AM significantly lags B&H.  For example, $100 invested in 1990 grows to $405 in the S&P500  in 1999 and only $230 with AM. 

Probably not coincidental that the 2000s happened to be the best decade for AM EVER.  Great time to write a book after killing an awful stock market in the 2000s.

It's starting to look like an expensive hedging strategy.  No free lunch here.

For some reason your spreadsheet contains no interpretable data for me.  (perhaps its an apple thing?)

But in the body of your response please include a full-ish analysis including standard deviation, max drawdown, sharp/sortino ratios, in the sharing of your findings.

A priori, I would not expect absolute momentum to outperform in any decade without a significant bear market.  The goal of AM is absolutely not to beat a 100% stock buy and hold portfolio in terms of CAGR.  It is to decrease the downside risk (period full stop.)

Put another way, on a risk/reward basis, what percentage of bonds would you have to hold in order to decrease S&P drawdowns to the level of an AM portfolio?  What would your total returns be with such a portfolio?

Relative momentum increases upside without diminishing drawdowns or volatility.  this is why DM is so attractive, increased upside, decreased downside.
Title: Re: Dual Momentum Investing
Post by: skyrefuge on May 08, 2015, 08:52:38 AM
Please share your work.  It's impossible to understand your results if you just throw up numbers like this. 

It's not my work, it's sirdoug007's work, which he showed. All I did was change it to use total returns for the lookback decision. That change actually improved AM. Without it, AM ended with $77,836.

I also tried 3, 9, and 12-month lookback periods, and those were all worse for AM than the original 6-month.

But yeah, there certainly could be stuff in there that's completely wrong, so please, review away! I uploaded the spreadsheet as a Google Doc (https://docs.google.com/spreadsheets/d/1o9J8wDbqhEi9C3QnNesmpAMLzlrIRN-oyVFhStYtMbM/edit?usp=sharing), maybe that will work better for you? (only the 'Data' sheet seemed to upload, but that's the important one).

In my view, the data does speak for itself.
I'm extremely dubious of your claim

More proof that this is a matter of faith!

I'm guessing the "extreme-ness" of the final result is mostly just an effect of exponential-growth over really long time periods. The CAGRs aren't shockingly different (4.9% vs. 6.8%), but that percentage difference is enough to result in a huge nominal difference when persisting over 144 years.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 08, 2015, 10:25:00 AM

Please share your work.  It's impossible to understand your results if you just throw up numbers like this. 

It's not my work, it's sirdoug007's work, which he showed. All I did was change it to use total returns for the lookback decision. That change actually improved AM. Without it, AM ended with $77,836.

I also tried 3, 9, and 12-month lookback periods, and those were all worse for AM than the original 6-month.

But yeah, there certainly could be stuff in there that's completely wrong, so please, review away! I uploaded the spreadsheet as a Google Doc (https://docs.google.com/spreadsheets/d/1o9J8wDbqhEi9C3QnNesmpAMLzlrIRN-oyVFhStYtMbM/edit?usp=sharing), maybe that will work better for you? (only the 'Data' sheet seemed to upload, but that's the important one).

In my view, the data does speak for itself.
I'm extremely dubious of your claim

More proof that this is a matter of faith!

I'm guessing the "extreme-ness" of the final result is mostly just an effect of exponential-growth over really long time periods. The CAGRs aren't shockingly different (4.9% vs. 6.8%), but that percentage difference is enough to result in a huge nominal difference when persisting over 144 years.

Faith (or bias) is a factor, of course, with me and everyone else.

But my suspicion has to do largely with the disagreement of this data with the excellent total return data that is present for trendfollowing approaches (including DM) over long time frames.

It would be useful to do an apples to apples comparison of total returns data with disparate results. Don't you agree.
Title: Re: Dual Momentum Investing
Post by: forummm on May 08, 2015, 10:26:04 AM
Absolute Momentum: $90,254
Stocks Only: $1,247,873

And no, I didn't forget a digit in the AM number.

I'm not sure how any of these comparisons matter.  If it's not AM or DM, then there will be some other technical trading metric that outperforms an index investor.  With enough random strategies, some of them are guaranteed to outperform over any finite time period.

If you're using sky's comparison above to convince yourself that buy and hold is superior to technical trading because buy and hold has offered better returns, then you've already tacitly accepted the argument made by miles and others that performance chasing a winning strategy is the best way to invest.  As soon as you find some technical trading scheme that outperforms the index over your chosen time period, you should then logically adopt that instead.

And I'm not drinking that kool aid.  I recognize and accept that there will always be some arbitrarily complex method of timing the market that would have provided superior returns in the past, but that does not tell me anything about how that strategy will perform in the future.

Other than to buy my house, I've never taken a penny out of the market. I have been 100% stock, 100% index funds, since 2000 when I started investing. I haven't been convinced by momentum. But I'm an academic to my core and am fascinated by the various strategies people have devised and find it very interesting to see why people like them, why they may have worked, why they may not have worked, why they may not have worked but people seem to think they have, how things have possibly changed, and what that might mean for the future. I want to be prepared for whatever might come. And I just find this all very interesting. I like making spreadsheets and thinking this stuff through. And I am very open to doing something different with my money in the future. But I would need some pretty good evidence before I did that.

I'm enjoying this conversation and all the others that we've had on this forum. It's a pretty great place where we can explore ideas together and think them through. And there are some great people here who have really interesting ideas and think about things in ways that I've learned from. It's great that we can all collaborate and have this discussion together. I don't know anyone in my non-Internet life that I could talk to about any of this stuff.

So, thanks everyone!
Title: Re: Dual Momentum Investing
Post by: forummm on May 08, 2015, 10:30:01 AM
If you include the dividends in decision making, over the ~130 year time period (instead of starting over each decade), which wins?

Absolute Momentum: $90,254
Stocks Only: $1,247,873

And no, I didn't forget a digit in the AM number.

Please share your work.  It's impossible to understand your results if you just throw up numbers like this. 

I'm extremely dubious of your claim based on total returns data going back to 1950, using 10 month MA:

https://www.portfoliovisualizer.com/test-market-timing-model?s=y&outOfMarketAssetType=1&timingPeriods[0]=5&timingWeights[0]=100&volatilityWindowSizeInDays=0&timingWeights[2]=0&riskControl=false&endYear=2014&volatilityPeriodWeight=0&movingAverageType=1&windowSize=10&riskWindowSizeInDays=0&timingUnits[0]=2&timingUnits[2]=2&timingModel=1&volatilityWindowSize=0&startYear=1950&assetsToHold=1&timingWeights[1]=0&windowSizeInDays=105&s=y&volatilityPeriodUnit=1&multipleTimingPeriods=false&timingUnits[1]=2&riskWindowSize=10&rebalancePeriod=1

I suspect your calculations are seriously flawed, (but have no way of checking your work.)

Absolute momentum should have similar returns (sometimes better, sometimes worse depending on the decade) with markedly diminished drawdowns, when using total returns both for lookback and for returns calculation.  AKA similar CAGR with a far superior Sharp/Sortino.

When I posted Portfolio Visualizer examples in this thread before, I was told that it wasn't possible to look at momentum the way you were defining it.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on May 08, 2015, 10:36:27 AM
So, thanks everyone!

Hear, hear!

Tensions in this thread may have risen and fallen faster than prices in the stock market we're discussing, but the return on investment for participants and readers alike have been terrific.

Thank you all!
Title: Re: Dual Momentum Investing
Post by: forummm on May 08, 2015, 10:38:44 AM
So, thanks everyone!

Hear, hear!

Tensions in this thread may have risen and fallen faster than prices in the stock market we're discussing, but the return on investment for participants and readers alike have been terrific.

Thank you all!

Judging from my arbitrary post lookback period, I'm buying this thread. Does that mean I have to allocate 100% of my posts here?
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on May 08, 2015, 11:07:32 AM
For some reason your spreadsheet contains no interpretable data for me.  (perhaps its an apple thing?)

But in the body of your response please include a full-ish analysis including standard deviation, max drawdown, sharp/sortino ratios, in the sharing of your findings.

A priori, I would not expect absolute momentum to outperform in any decade without a significant bear market.  The goal of AM is absolutely not to beat a 100% stock buy and hold portfolio in terms of CAGR.  It is to decrease the downside risk (period full stop.)

Put another way, on a risk/reward basis, what percentage of bonds would you have to hold in order to decrease S&P drawdowns to the level of an AM portfolio?  What would your total returns be with such a portfolio?

Relative momentum increases upside without diminishing drawdowns or volatility.  this is why DM is so attractive, increased upside, decreased downside.

Honestly I have no idea how to or inclination to figure out max drawdowns and sharpe/sortino ratios in excel.  Download the spreadsheet and you can do the math.

I see what you are saying about AM only helping in bear markets.  No bear market = no benefit.  And intuitively AM gets crushed in serious bull markets like the 20s, 50s, and 90s.

Looking at rolling 1 yr periods, the average return for AM is 5.67% and for the S&P500 it's 8.57%.  Standard deviation is 13.32% for AM and 19.59% for stocks.  Not sure how to go about figuring out an equivalent stock/bond mix for that return/standard deviation.

Attached is a chart of AM vs. stocks plotted since 7/1871.
Title: Re: Dual Momentum Investing
Post by: hodedofome on May 08, 2015, 11:16:41 AM
You should not expect to ever outperform buy and hold using trend following/momentum on only 1 market.  At best you'll lower volatility and drawdowns but the total return will most likely suffer. You need to use multiple, uncorrelated markets to really see a benefit on the return side.


Sent from my iPhone using Tapatalk
Title: Re: Dual Momentum Investing
Post by: skyrefuge on May 08, 2015, 02:52:17 PM
If you include the dividends in decision making, over the ~130 year time period (instead of starting over each decade), which wins?

Absolute Momentum: $90,254
Stocks Only: $1,247,873

And no, I didn't forget a digit in the AM number.

Ok, nevermind, the spreadsheet had a major error. When calculating the growth, dividends were being included for Stocks Only, but they were mistakenly being left out for AM. When I include dividends for AM as well:

Absolute Momentum: $3,350,259
Stocks Only: $1,247,873

When I look at only 1950-2014:

Absolute Momentum: $14,459
Stocks Only: $10,895

When I look at only 1950-2014, change the lookback method from "simple 6-month total return" to "10-month rolling average based on price index", start with $10k instead of $100, and switch to nominal values instead of real values (in an attempt to match the portfoliovizualizer.com methodology):

Absolute Momentum: $8,160,627.77 (compared to PV's $10,721,680)
Stocks Only: $10,602,478.35 (compared to PV's $10,468,979)

And, all-of-the-previous except using real values rather than nominal:

Absolute Momentum: $1,795,613.77
Stocks Only: $1,089,485.08

So, I'm still  not very confident that I have everything correct. It's nice to see that one of my values when using PV's method was pretty close, but then the AM value wasn't. And then I'm not sure why the "winner" would flip when switching from nominal to real values.

I think the upshot is: spreadsheets Я hard!
Title: Re: Dual Momentum Investing
Post by: brooklynguy on May 08, 2015, 03:07:55 PM
Ok, nevermind, the spreadsheet had a major error.

This makes a lot more sense - given that the AM strategy is the product of a data mining quest for a (historically) high-performing strategy, the data had better say that it actually worked well in the past!

Quote
And then I'm not sure why the "winner" would flip when switching from nominal to real values.

I had the same question when I saw your results before I got to this paragraph, and I don't think there is any possible explanation for how they could be flipped, so there must still be an error somewhere.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 08, 2015, 03:15:38 PM
If you include the dividends in decision making, over the ~130 year time period (instead of starting over each decade), which wins?

Absolute Momentum: $90,254
Stocks Only: $1,247,873

And no, I didn't forget a digit in the AM number.

Ok, nevermind, the spreadsheet had a major error. When calculating the growth, dividends were being included for Stocks Only, but they were mistakenly being left out for AM. When I include dividends for AM as well:

Absolute Momentum: $3,350,259
Stocks Only: $1,247,873

When I look at only 1950-2014:

Absolute Momentum: $14,459
Stocks Only: $10,895

When I look at only 1950-2014, change the lookback method from "simple 6-month total return" to "10-month rolling average based on price index", start with $10k instead of $100, and switch to nominal values instead of real values (in an attempt to match the portfoliovizualizer.com methodology):

Absolute Momentum: $8,160,627.77 (compared to PV's $10,721,680)
Stocks Only: $10,602,478.35 (compared to PV's $10,468,979)

And, all-of-the-previous except using real values rather than nominal:

Absolute Momentum: $1,795,613.77
Stocks Only: $1,089,485.08

So, I'm still  not very confident that I have everything correct. It's nice to see that one of my values when using PV's method was pretty close, but then the AM value wasn't. And then I'm not sure why the "winner" would flip when switching from nominal to real values.

I think the upshot is: spreadsheets Я hard!

Score one for the biases of data based faith!
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 08, 2015, 03:23:57 PM
If you include the dividends in decision making, over the ~130 year time period (instead of starting over each decade), which wins?

Absolute Momentum: $90,254
Stocks Only: $1,247,873

And no, I didn't forget a digit in the AM number.

Please share your work.  It's impossible to understand your results if you just throw up numbers like this. 

I'm extremely dubious of your claim based on total returns data going back to 1950, using 10 month MA:

https://www.portfoliovisualizer.com/test-market-timing-model?s=y&outOfMarketAssetType=1&timingPeriods[0]=5&timingWeights[0]=100&volatilityWindowSizeInDays=0&timingWeights[2]=0&riskControl=false&endYear=2014&volatilityPeriodWeight=0&movingAverageType=1&windowSize=10&riskWindowSizeInDays=0&timingUnits[0]=2&timingUnits[2]=2&timingModel=1&volatilityWindowSize=0&startYear=1950&assetsToHold=1&timingWeights[1]=0&windowSizeInDays=105&s=y&volatilityPeriodUnit=1&multipleTimingPeriods=false&timingUnits[1]=2&riskWindowSize=10&rebalancePeriod=1

I suspect your calculations are seriously flawed, (but have no way of checking your work.)

Absolute momentum should have similar returns (sometimes better, sometimes worse depending on the decade) with markedly diminished drawdowns, when using total returns both for lookback and for returns calculation.  AKA similar CAGR with a far superior Sharp/Sortino.

When I posted Portfolio Visualizer examples in this thread before, I was told that it wasn't possible to look at momentum the way you were defining it.

Forummm, for the last time, do you really not understand the prior criticism of your "testing" of DM?

It had nothing to do with using portfolio visualizer and everything to do with the fact that you were not in fact testing dual momentum.  You were backtesting index fund relative momentum.

Also note that the above PV example is a backtest of a 10 month moving average approach to the S&P 500, not dual momentum.

Details matter, and the prior criticisms were in no way personal (and in every way accurate.)
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on May 08, 2015, 03:25:31 PM
I think the upshot is: spreadsheets Я hard!

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

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

Attached is the corrected chart and spreadsheet.
Title: Re: Dual Momentum Investing
Post by: forummm on May 08, 2015, 06:20:06 PM
If you include the dividends in decision making, over the ~130 year time period (instead of starting over each decade), which wins?

Absolute Momentum: $90,254
Stocks Only: $1,247,873

And no, I didn't forget a digit in the AM number.

Please share your work.  It's impossible to understand your results if you just throw up numbers like this. 

I'm extremely dubious of your claim based on total returns data going back to 1950, using 10 month MA:

https://www.portfoliovisualizer.com/test-market-timing-model?s=y&outOfMarketAssetType=1&timingPeriods[0]=5&timingWeights[0]=100&volatilityWindowSizeInDays=0&timingWeights[2]=0&riskControl=false&endYear=2014&volatilityPeriodWeight=0&movingAverageType=1&windowSize=10&riskWindowSizeInDays=0&timingUnits[0]=2&timingUnits[2]=2&timingModel=1&volatilityWindowSize=0&startYear=1950&assetsToHold=1&timingWeights[1]=0&windowSizeInDays=105&s=y&volatilityPeriodUnit=1&multipleTimingPeriods=false&timingUnits[1]=2&riskWindowSize=10&rebalancePeriod=1

I suspect your calculations are seriously flawed, (but have no way of checking your work.)

Absolute momentum should have similar returns (sometimes better, sometimes worse depending on the decade) with markedly diminished drawdowns, when using total returns both for lookback and for returns calculation.  AKA similar CAGR with a far superior Sharp/Sortino.

When I posted Portfolio Visualizer examples in this thread before, I was told that it wasn't possible to look at momentum the way you were defining it.

Forummm, for the last time, do you really not understand the prior criticism of your "testing" of DM?

It had nothing to do with using portfolio visualizer and everything to do with the fact that you were not in fact testing dual momentum.  You were backtesting index fund relative momentum.

Also note that the above PV example is a backtest of a 10 month moving average approach to the S&P 500, not dual momentum.

Details matter, and the prior criticisms were in no way personal (and in every way accurate.)

No, someone asked 'is it possible to use PV to backtest this' and the response was no. Not about my specific attempts. Not a big deal.
Title: Re: Dual Momentum Investing
Post by: hodedofome on May 13, 2015, 05:05:30 PM
Posting this here because it's a good summary if the advantages/disadvantages of momentum investing http://abnormalreturns.com/2015/05/11/qa-with-wes-gray-on-value-and-momentum-part-one/


Sent from my iPhone using Tapatalk
Title: Re: Dual Momentum Investing
Post by: forummm on May 14, 2015, 07:59:19 PM
I think the upshot is: spreadsheets Я hard!

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

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

Attached is the corrected chart and spreadsheet.

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

With this spreadsheet, the maximum drawdowns are 50.9% (AM 1933) and 76.8% (B&H 1932). The Stdevs are 14% (AM) and 18% (B&H).
Title: Re: Dual Momentum Investing
Post by: hodedofome on May 14, 2015, 09:34:43 PM
No, someone asked 'is it possible to use PV to backtest this' and the response was no. Not about my specific attempts. Not a big deal.

It's because Portfolio Visualizer uses a moving average to determine the trend of the asset and not past returns. DM as defined by Gary (we're talking about his implementation of DM in this thread, but you are free to use whatever you want to determine the trend) uses past returns to determine if an asset is going up or down. So PV would need to give you this option in order for it to be accurate.
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on May 15, 2015, 04:25:59 AM
No, someone asked 'is it possible to use PV to backtest this' and the response was no. Not about my specific attempts. Not a big deal.

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

PV's market timing module includes a relative strength model that lets you "Invest in best performing assets out of a ranked list of assets based on recent relative performance."  You can use a moving average as a risk control, but you don't have to select one.  Seems like this lets you replicate DM exactly, provided you include short term treasuries as one of your assets.  Am I missing something?
Title: Re: Dual Momentum Investing
Post by: hodedofome on May 15, 2015, 08:19:57 AM
PV's market timing module includes a relative strength model that lets you "Invest in best performing assets out of a ranked list of assets based on recent relative performance."  You can use a moving average as a risk control, but you don't have to select one.  Seems like this lets you replicate DM exactly, provided you include short term treasuries as one of your assets.  Am I missing something?

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

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

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

vs a 100% VTSMX of:

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

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

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

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

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

It just so happened that in this time period the performance was about the same. However, I've seen noticeable differences in other tests with other asset classes and other time periods. The idea is the same though. Pick the best performing asset classes that are actually in an uptrend. It's up to you how you define what is an uptrend and what is performing the best.
Title: Re: Dual Momentum Investing
Post by: forummm on May 15, 2015, 08:43:48 AM
I think the upshot is: spreadsheets Я hard!

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

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

Attached is the corrected chart and spreadsheet.

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

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

I changed the spreadsheet to use the nominal (instead of real) 6mo total returns as the price signal (as I imagine people would do in practice--and was stated to be the practice many times on this thread). The result is that AM and B&H each "win" 7 of the 14 decades. The final tallies in real terms are pretty close ($1.8M vs $1.2M--which over 140+ years of compounding is almost nothing). The drawdowns and StDevs are essentially the same.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on May 15, 2015, 02:42:07 PM
Can you share this revised version?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 16, 2015, 12:55:24 AM

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

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

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

You're not missing anything!

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

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

I have a list of the oldest passive funds that I have found for multiple asset classes of anyone's interested.
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on May 16, 2015, 04:46:18 AM
PV's market timing module includes a relative strength model that lets you "Invest in best performing assets out of a ranked list of assets based on recent relative performance."  You can use a moving average as a risk control, but you don't have to select one.  Seems like this lets you replicate DM exactly, provided you include short term treasuries as one of your assets.  Am I missing something?

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

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

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

vs a 100% VTSMX of:

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

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

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

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

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

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

But I'm talking about using PV's relative strength model WITHOUT a moving average.  In this form, the model bases the asset switching solely on recent relative performance.  I.e., leave the "risk control" input set to "no moving average."
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on May 16, 2015, 04:47:40 AM

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

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

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

You're not missing anything!

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

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

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

I'd be interested in that list.  Thanks for offering to share it.
Title: Re: Dual Momentum Investing
Post by: hodedofome on May 16, 2015, 04:56:27 AM


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

Yes, that was the first test I did on my post, no risk control. Depending on the assets you use and the period in time we're talking about, it may make no difference. The problem arises when all your assets, including your 'safe' one, goes down together. That's why some recommend using dual momentum, not just relative momentum.
Title: Re: Dual Momentum Investing
Post by: forummm on May 16, 2015, 09:33:33 AM
Can you share this revised version?

The switch to nominal is just for the signaling (column L). I left the tallies in real terms.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 16, 2015, 11:16:11 AM


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

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

Right Hoded,

But including SHY in your assets makes a relative strength timing model identical to a DM timing model.
Title: Re: Dual Momentum Investing
Post by: hodedofome on May 16, 2015, 12:04:11 PM
Sure, if you use SHY it should be the same.


Sent from my iPhone using Tapatalk
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 16, 2015, 01:53:02 PM


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

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

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

You're not missing anything!

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

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

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

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

Sure thing. Here it is

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

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

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

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

VTSMX TOTAL US 93
VGTSX TOTAL INT 98ikn
VWEHX. HIGH YIELD 85
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on May 16, 2015, 03:23:45 PM


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

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

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

You're not missing anything!

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

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

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

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

Sure thing. Here it is

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

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

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

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

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

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

https://investor.vanguard.com/mutual-funds/vanguard-mutual-funds-list (https://investor.vanguard.com/mutual-funds/vanguard-mutual-funds-list)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 17, 2015, 10:25:56 AM
I would steer away from using actively managed funds in my analysis.

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

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

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

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

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

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

Question to anyone: All the "smart" talk I hear (Buffett, Bogle, people here) says "don't sell when the market goes down". That's exactly what DM does right? MDMD says it's the biggest feature for him. Why are Buffett and Bogle wrong here?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 18, 2015, 07:48:57 PM

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

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

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

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

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

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

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

Absolute returns increase with choosing more concentrated momentum positions. So the "top one" portfolio will generally outperform the "top 2" portfolio, though with greater volatility.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 18, 2015, 07:53:14 PM

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

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

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

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

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

So clearly there's more than one way to be smart and make money.
Title: Re: Dual Momentum Investing
Post by: bdbrooks on May 18, 2015, 10:01:05 PM
I'm pretty sure all the equities mentioned here did terribly in 2008. So you're still going to 100% bonds of some variety.

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

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

To my earlier post, anything from alpha architect doesn't have fees taken out of their backtest. So you should reduce returns around .5%-1% (not really an issue when they outperform sp500 by 6%). Also their strategies work much better within tax advantaged accounts. 
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on May 18, 2015, 11:06:43 PM
BD,

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

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

AZ

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

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

Yes, the technique uses exactly that. The hope is that the "momentum" continues for a long time after you make your trades. By definition you will be selling below the peaks and buying above the bottoms. But the hope is that you avoid many of the losses on the way to the bottom of the valleys.
Title: Re: Dual Momentum Investing
Post by: forummm on June 21, 2015, 10:13:06 AM
As I understand this strategy, the secret sauce is entirely in the timing of how you ride the waves of market cycles. You ride early losses down until your signal tells you to get out, and then you miss early appreciation until your signal tells you to buy back in. In between you hope to catch the long upswings and avoid the prolonged downturns. Sounds about right?

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

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

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

FYI: When you include your comments inside the quote tags, people are less likely to see it and more likely to be confused/irritated and not read your stuff.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 08, 2015, 09:15:59 PM
A relatively balanced (and anodyne) review of DM....

http://awealthofcommonsense.com/my-thoughts-on-gary-antonaccis-dual-momentum/
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on July 09, 2015, 04:00:49 AM
Question for those of you who are implementing DM.  The S&P 500 has been moving mostly sideways since November of last year.  Have you been getting whip-sawed?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 09, 2015, 08:22:05 AM
No whipsaws yet on a 6 month look back.
Title: Re: Dual Momentum Investing
Post by: Zamboni on July 09, 2015, 11:25:27 AM
miles, i've been slowly making my way through Antonacci's book. Thank you for posting the link to the book review, which seems to be a nice summary. Still working on getting all of my ducks in a row to implement it with some portion of my portfolio, but want to maximize my understanding of it before jumping in.
Title: Re: Dual Momentum Investing
Post by: hodedofome on July 09, 2015, 01:54:48 PM
No whipsaws yet on a 6 month look back.

I've had a few this year on mine. Pretty crummy year for my retirement accounts so far. All part of the game though.
Title: Dual Momentum Investing
Post by: milesdividendmd on July 09, 2015, 09:44:05 PM
miles, i've been slowly making my way through Antonacci's book. Thank you for posting the link to the book review, which seems to be a nice summary. Still working on getting all of my ducks in a row to implement it with some portion of my portfolio, but want to maximize my understanding of it before jumping in.

Zamboni,

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

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

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

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

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

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

Ultimately I feel like cheddar stacker, I'm not yet intelligent or knowledgeable enough to be seriously tempted to take on a more time/energy/thought consuming strategy that may lead to slightly more gains in my investment horizon.  When I could easily keep stacking money up in indexes  expecting to gain purchasing power when I start withdrawing at some point in the next 15- 30 years.  But then again I do enjoy learning more and maybe after more research I will implement this strategy in one of my tax advantaged bucks as a form of diversification. 
Title: Re: Dual Momentum Investing
Post by: FIPurpose on July 11, 2015, 09:45:07 AM
It would take a well timed whipsaw to throw DM off. Any whipsaws that are so quick that they happen in between your trading days do not affect DM. I thought the recent movements might force me to make a trade but even the drop in late June did not drop enough to change my investments. I think this is because foreign and US markets are moving pretty close together at the moment, and Bonds have been lousy for the last year.

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

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

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

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

Great comment!

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

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

Some general observations about market movements

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

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

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

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

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

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

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

The difference is that although the 4% rule is derived from examining the past, it is merely an observation of the maximum withdrawal rate that resulted in success under history's worst case scenarios, not a pattern that must persist into the future in order to remain successful.  It will work as long as the future is no worse than the worst of the past (an acknowledged assumption underlying the idea that strict adherence to the 4% rule will not fail).  In my view, that is a safer assumption than betting that the precise lookback periods or range of lookback periods of a data-mined historically-successful DM trading strategy will continue to be successful in the future (especially given that no one has been able to come up with any explanation for why we should believe that that specific pattern will continue into the future).
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 11, 2015, 01:17:17 PM
First for the critics.  I understand doubting a market timing strategy and being suspicious of data mining but disregarding thorough back testing as if knowledge of past market performance should not factor in our expectation of future market performance is crazy.  The whole 4% SWR, a crucial concept for FIRE, is completely distilled from back testing, is it not?

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

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

This statement is just maddeningly wrong:

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

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

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

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




Title: Re: Dual Momentum Investing
Post by: brooklynguy on July 11, 2015, 01:35:36 PM
There is really no point in engaging on this point again, but I'm only human, I cant resist.

This statement is just maddeningly wrong:

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

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

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

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

I didn't mean that there is no explanation for why the momentum phenomenon exists, only for why the precise lookback period or range of lookback periods that worked in the past will still work in the future.  I fully agree that compelling reasons exist and have been described in this thread and in your blog posts for why trends in the market emerge and gain momentum.  But I don't recall seeing any explanation for the specific choice of lookback period(s) beyond "those are the ones that the data has shown to have worked in the past."
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on July 11, 2015, 02:21:34 PM
There is really no point in engaging on this point again, but I'm only human, I cant resist.

This statement is just maddeningly wrong:

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

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

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

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

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

Kind of like the 4% SWR, eh?

Sorry, I couldn't resist. ;)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 11, 2015, 02:46:39 PM
That's been covered too Brooklyn.

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

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

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

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

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

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

Title: Re: Dual Momentum Investing
Post by: forummm on July 11, 2015, 03:29:52 PM
(http://4.bp.blogspot.com/-GqYTHELO2Xc/TuWGiPiQp9I/AAAAAAAABns/oWI66Gozuks/s400/new%2Bcan%2Bof%2Bworms.gif)
Title: Dual Momentum Investing
Post by: milesdividendmd on July 11, 2015, 03:48:55 PM
Momentum is a factor that exists for timeframes between 3 and 12 months so the look back should axiomatically exist within this timeframe. And all look back periods within this window have in fact worked in the past.

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

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

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

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

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

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

If you think the market is a perfectly efficient entity that is comprised of rational actors, then that is the fundamental point of our disagreement and we should just leave it at that.
Title: Re: Dual Momentum Investing
Post by: sol on July 11, 2015, 05:00:44 PM
Just don't claim that there haven't been any explanations given, when they have been given ad nauseum.

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

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

Title: Dual Momentum Investing
Post by: milesdividendmd on July 11, 2015, 05:16:31 PM
Just don't claim that there haven't been any explanations given, when they have been given ad nauseum.

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

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

Sol,

This is a stretch.

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

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

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

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

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

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

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

But I am glad you raised the point, because before you wrote it it had never occurred to me. So it was....interesting.
Title: Re: Dual Momentum Investing
Post by: forummm on July 11, 2015, 06:14:35 PM
I'm not sure the momentum trader needs people to follow momentum strategies as articulated here. I think they profit from people behaving irrationally. Now, this irrational behavior does look like a momentum strategy. But the momentum trader needs this irrational action to happen *after* the momentum trader has acted. They need people to irrationally bid up prices once the momentum trader has bought in, and they need people to irrationally panic and sell once the momentum trader has exited. Historically, the momentum trader has lost to the index when times were more rational, and has beaten the index when people were acting irrationally (both bubbles and panics).

So the self-interested momentum trader would evangelize about a lookback period of N+1 or N+6 or whatever, when they are an N period trader.
Title: Re: Dual Momentum Investing
Post by: sol on July 11, 2015, 06:59:12 PM
I think they profit from people behaving irrationally. Now, this irrational behavior does look like a momentum strategy. But the momentum trader needs this irrational action to happen *after* the momentum trader has acted. They need people to irrationally bid up prices once the momentum trader has bought in, and they need people to irrationally panic and sell once the momentum trader has exited. Historically, the momentum trader has lost to the index when times were more rational, and has beaten the index when people were acting irrationally (both bubbles and panics).

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

Title: Dual Momentum Investing
Post by: milesdividendmd on July 11, 2015, 07:25:18 PM
Sol,

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

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

AZ
Title: Re: Dual Momentum Investing
Post by: brooklynguy on July 11, 2015, 08:06:11 PM
Right, so the explanation doesn't satisfy you. Fair enough. Many different roads to paradise and all that.

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

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

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

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

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

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

I'm also not sure what argument you think I'm making in reliance on the EMH.  I'm not really making any argument, just questioning whether any logical explanations exist to believe that the specific lookback window that worked in the past will persist into the future.  As I said earlier, I agree that compelling reasons have been offered for the existence of momentum in price movements, and in general I usually find myself on the side of debates arguing against strong versions of the EMH (which is why I formed my fictitious eponymous corporation (http://forum.mrmoneymustache.com/investor-alley/before-the-crash-increasing-cash-holdings/msg636266/#msg636266)).

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

I can't tell if sol is being serious or just wrapping his commentary in his trademark deliberately inflammatory rhetoric, but the DM strategy relies on the persistence of a historical pattern into the future, so of course it would be strengthened by self-reinforcing popularity (as opposed to a change in market movement patterns that eliminates the momentum anomaly).
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 11, 2015, 11:30:27 PM

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

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

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

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

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

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

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

I'm also not sure what argument you think I'm making in reliance on the EMH.  I'm not really making any argument, just questioning whether any logical explanations exist to believe that the specific lookback window that worked in the past will persist into the future.  As I said earlier, I agree that compelling reasons have been offered for the existence of momentum in price movements, and in general I usually find myself on the side of debates arguing against strong versions of the EMH (which is why I formed my fictitious eponymous corporation (http://forum.mrmoneymustache.com/investor-alley/before-the-crash-increasing-cash-holdings/msg636266/#msg636266)).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Yes, it would work equally well for "overweighting" equities, but not for any specific equity investing strategy (so, as sol said, it doesn't benefit indexers to persuade other investors to become indexers).  Once someone has made the threshold decision to invest in whatever asset class (or sub-class) the index covers, indexers are benefitted just the same as if the person invested in the entire index.  But hopefully sol will weigh in with additional thoughts, because I'm curious if he's really arguing that your advocacy for DM is knowingly motivated by a desire to increase personal gain, or merely that that's a subconscious bias existing in the background, or something else.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 12, 2015, 10:33:53 AM

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

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

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

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

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

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

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

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

I'm just pointing out that your explanation for Sol's argument fails to differentiate itself from advocating simple indexing.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on July 12, 2015, 11:27:44 AM
No. if you are overweight equities, the only thing that will help you in terms of other investors behavior is if they invest in EQUITIES.  And If you have in the default MMM forum approved total market lazy portfolio approach, any equities will do. Gold?  Not helpful.  Commodities? Not helpful.  Junk bonds? Not helpful. You get the point

That's exactly what I said.  If your portfolio consists entirely of an equity index fund, you will be benefited by other investors investing in any equities covered by that index, whether they are following an index strategy or some active strategy (so, again, as sol said, it doesn't benefit indexers to persuade other investors to become indexers if they're already investing in the asset class (or sub-class) covered by the applicable index anyway (but, to your point, it would benefit indexers to persuade other investors to tilt their portfolio towards those assets if they're not already doing so, or to persuade non-investors to become investors who invest in those assets)).

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

The difference is that in the case of dual momentum, it benefits users of that strategy for others to adopt the same specific strategy, while the same is not true for users of an indexing strategy (even though it does benefit indexers for other investors to invest in the asset class (or sub-class) covered by their index). [EDIT:  That is, it doesn't benefit users of an index strategy for other investors to adopt the same specific strategy any more so than it would for those other investors to adopt a different strategy (i.e., an active investing strategy) that also involves investing in assets covered by the applicable index.]
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 12, 2015, 12:02:21 PM
We are all making active choices with our portfolio. Yours is to overweight equities (and perhaps domestic equities) relative to the actual world economy.

If other people overweight equities passively as you advocate, or by any means it benefits you.

Its actually a different story for DM. If I advocate for someone else to utilise DM (which by the way I don't) and they use a different look back period from me that could just as easily harm as help me.

For you and sol it's much more predictable. Anyone who adopts your strategy, benefits you (trivially).
Title: Re: Dual Momentum Investing
Post by: bdbrooks on July 12, 2015, 02:23:01 PM
I think it's important to realize how market price is determined. It is only based off what people are willing to buy it for and what people are willing to sell it for. Hypothetically, if all MMM readers piled into a small stock it would drive the price up, but then it would normalize to a reasonable level based on the fundamentals. So if you weren't buying or selling until 2025 and all of a sudden 10 trillion dollars of cash started buying up equities in 2015, it wouldn't affect you because prices would normalize well before you ever started to sell it.

As far as DM there is much more of an affect on the market than convincing people to index because DM involves more trading than indexing. Even if you have to rebalance in a buy and hold strategy, it involves trading less dollars than if once a year you trade 100% of your account (I think Miles said it averaged 1.3 trades a year and that would be an average turnover of 130%). These trades will have a much bigger impact on the market than indexing. I think that DM is a better strategy than indexing, but trying to say that tons of people following a DM strategy will have similar affect as convincing tons of people to index is just silly.

The thing that most people don't realize that owners that aren't going to sell or buy are actually having no impact on the market (this is a positive for indexing). It is solely based off the bids, offers, and the market orders. These all involve people wanting to buy/sell either right now or at a given price. So even if the market goes up or down for a while if you aren't going to buy/sell 1) those fluctuations won't affect you and 2) you won't impact the market.
Title: Dual Momentum Investing
Post by: milesdividendmd on July 12, 2015, 02:42:39 PM
BD

A couple of points.

DM with a 12 month look back trades < 1/year.

Indexers buy and sell to increase their stakes, rebalance, and liquidate, so they also effect and are effected by the market.

The question is smaller than the one you entertain about whether or not "tons of people" DMing vs indexing would effect the market more.

Markets are effected in proportion to trading volume pure and simple.

The question is whether there is any more self interest in defending DM vs advocating for a buy and hold equity strategy, as Sol implied.

Obviously I find This contention to be uniquely unconvincing, overly dramatic, and poorly defended but I don't ascribe any malice to those who advocate buy and hold.

The desire to justify ones own decisions is a pervasive human tendency.

Sadly a less pervasive but more insidious tendency is to ascribe selfish intentions to others who make decisions different from your own, and to presume ones own ethical purity.
Title: Re: Dual Momentum Investing
Post by: bdbrooks on July 12, 2015, 03:20:44 PM
BD

A couple of points.

DM with a 12 month look back trades < 1/year.

Indexers buy and sell to increase their stakes, rebalance, and liquidate, so they also effect and are effected by the market.

The question is smaller than the one you entertain about whether or not "tons of people" DMing vs indexing would effect the market more.

Markets are effected in proportion to trading volume pure and simple.

The question is whether there is any more self interest in defending DM vs advocating for a buy and hold equity strategy, as Sol implied.

Obviously I find This contention to be uniquely unconvincing, overly dramatic, and poorly defended but I don't ascribe any malice to those who advocate buy and hold.

The desire to justify ones own decisions is a pervasive human tendency.

Sadly a less pervasive but more insidious tendency is to ascribe selfish intentions to others who make decisions different from your own, and to presume ones own ethical purity.

I'm sorry. I could have been more clear. Even though I think that DM has greater market impact than buy and hold, I think it is more likely to hurt DM than help it (note that I said said an advantage of indexing is less market impact). 

Sol, here is where you are wrong. If DM calls for people to sell CBA buy ABC on the first of the month, then CBA will likely be selling lower and ABC would be selling higher. You would be selling for less and buying for more. A few days later and the ABC and CBA will likely gravitate closer to where they started. The more volume following DM will at a minimum start to diminish risk adjusted returns. I think it is a strong enough and robust enough strategy that it will persist, but I would expect a little more volatility and whipsaw a than in the past. It is completely unfair to say Miles is being self serving by trying to get more people to pile in to help himself (first based on no evidence that it would help him and secondly it think it is pretty clear that he is genuinely trying to inform people about something he believes will work).

Miles, as you said, "Markets are effected in proportion to trading volume pure and simple." Indexing is probably the best way to not affect the market. If you invest in only 1 index then you don't even have rebalancing. If you have multiple funds then you will have to rebalance but that usually won't affect more than 10% of the portfolio. That means you could go 10 years before getting the same volume as 1 DM trade. I understand that you don't actually have to trade that often, but they do happen and when they do, they are much more significant than a buy and hold rebalance. It would take a truly massive amount of volume following DM to have a significant market impact (probably in the neighborhood of a trillion dollars not hundreds of millions or billions).
Title: Re: Dual Momentum Investing
Post by: sol on July 12, 2015, 04:15:07 PM
But hopefully sol will weigh in with additional thoughts, because I'm curious if he's really arguing that your advocacy for DM is knowingly motivated by a desire to increase personal gain, or merely that that's a subconscious bias existing in the background, or something else.

Don't get too excited.  I'm not really interested in quoting miles back to miles, even if he now denies he ever said the things he said.  He can go reread his own posts from the early pages of this thread, where he discusses the positive feedback mechanism of momentum strategies, and how crowding impacts the strategy's future returns, and maybe he'll see for himself.

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.

DM traders profit by joining the extreme wings of the market makers, either the hardcore bulls or the hardcore bears.  They want other people to believe as they do, in both directions, so that their trading decisions become more profitable by other people subsequently following suit.  Indexers only want the market to go up, so the similarity to DM traders is only half reflected, and it's worse than that because DM traders are sector rotating in such away to increase volatility between sectors even when the overall market is steady.

DM strategies are no threat to indexers, so I don't really care what miles or others do.  My returns will not be significantly impacted by their decisions.  My only motivation for participating in this thread is the same one I feel in all threads about market timing, to discourage new readers from being misled into making decisions that will cost them money. 

But looking at the poster history in this thread, all I see is die-hard DM advocates posting over and over again, and a couple of die-hard indexers occasionally responding to them, and then giving up.  I'm giving up.  I don't think this thread has enough of an audience outside of entrenched participants to be worth my time sprinkling in the occasional warnings about the dangers of market timing.  I'm not here to talk to the DM proponents; they don't value my opinions anyway.  Since it doesn't appear anyone else is present anymore, I'll bow out.

Happy trading, everyone.  I hope we all get rich.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 12, 2015, 06:06:32 PM

But hopefully sol will weigh in with additional thoughts, because I'm curious if he's really arguing that your advocacy for DM is knowingly motivated by a desire to increase personal gain, or merely that that's a subconscious bias existing in the background, or something else.

Don't get too excited.  I'm not really interested in quoting miles back to miles, even if he now denies he ever said the things he said.  He can go reread his own posts from the early pages of this thread, where he discusses the positive feedback mechanism of momentum strategies, and how crowding impacts the strategy's future returns, and maybe he'll see for himself.

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.

DM traders profit by joining the extreme wings of the market makers, either the hardcore bulls or the hardcore bears.  They want other people to believe as they do, in both directions, so that their trading decisions become more profitable by other people subsequently following suit.  Indexers only want the market to go up, so the similarity to DM traders is only half reflected, and it's worse than that because DM traders are sector rotating in such away to increase volatility between sectors even when the overall market is steady.

DM strategies are no threat to indexers, so I don't really care what miles or others do.  My returns will not be significantly impacted by their decisions.  My only motivation for participating in this thread is the same one I feel in all threads about market timing, to discourage new readers from being misled into making decisions that will cost them money. 

But looking at the poster history in this thread, all I see is die-hard DM advocates posting over and over again, and a couple of die-hard indexers occasionally responding to them, and then giving up.  I'm giving up.  I don't think this thread has enough of an audience outside of entrenched participants to be worth my time sprinkling in the occasional warnings about the dangers of market timing.  I'm not here to talk to the DM proponents; they don't value my opinions anyway.  Since it doesn't appear anyone else is present anymore, I'll bow out.

Happy trading, everyone.  I hope we all get rich.

Sol,

Are you not interested in quoting me back to myself or simply unable to find a quote that supports your prior poorly considered assertions?

You made a claim that you can't back up. In order to support your claim you would have to prove the following.

1.  That DM investors materially benefit from others adopting their strategy.

And

2.  That they benefit in a manner that is distinct from other investors benefitting from others adopting their strategy.

You of course have provided zero evidence or even a credible argument for either.

So what's your next move?

You keep on digging.

You come up with a hair brained theory that momentum investors are responsible for financial instability!

Then you claim you are posting for the benefit of the poor new readers who might be swayed away from the safety of your orthodoxy.

What a guy!

So explain this: how is making sloppy unsupported arguments going to convince other people to come to your way of seeing things?

Title: Re: Dual Momentum Investing
Post by: arebelspy on July 13, 2015, 11:49:46 AM
I think the frustrating thing about trying to discuss things with you miles is that you don't argue fairly.

You won't ever admit someone else made a good point.  You won't directly answer questions, but you sidetrack to questions not asked.  You move the goalposts when people answer your concerns.  You switch positions, without being willing to defend what you've said previously (or deny you've said them, and then when quoted back claim it's out of context, or try to shift what you meant by it).

Surely things can come out of context, or be misspoken, but a genuine person would say "Oh, I said that wrong, you are correct that I said that, but what I meant was XYZ" rather than "No, that doesn't mean that" when it's clear to everyone that it did; you seem unwilling to admit an error, ever.

Sometimes I think it's a language issue, other times I think you're being deliberately obtuse.  Maybe it's a mixture of both.

It's maddening trying to actually have a real debate with you, because the goal of a debate should be mutual understanding and learning from the other, rather than to win, but you seem to prefer the latter.

Here's an example.

He can go reread his own posts from the early pages of this thread, where he discusses the positive feedback mechanism of momentum strategies, and how crowding impacts the strategy's future returns, and maybe he'll see for himself.

Are you not interested in quoting me back to myself or simply unable to find a quote that supports your prior poorly considered assertions?

Sol said you talked about positive feedback and crowding helps future returns.  Which you surely did.

So here is the quote for you:

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

You go on to spew other stuff like:

Quote
You made a claim that you can't back up. In order to support your claim you would have to prove the following.

1.  That DM investors materially benefit from others adopting their strategy.

And

2.  That they benefit in a manner that is distinct from other investors benefitting from others adopting their strategy.

No.  Sol wouldn't have to prove those, because he didn't make claims regarding that.  He made a claim about you talking about how crowding and positive feedback helps DM returns. Which it does, and you said so.

You try to claim he said much more than he did, which is disingenuous.  You often seem to misstate others points, changing what their claims were, and then "refuting" them.

But there you go. There's the quote proof of what you said, exactly as it related to Sol's claim.  It has nothing to do with what you claim Sol's claim was.
Title: Re: Dual Momentum Investing
Post by: DrF on July 13, 2015, 11:57:35 AM
I think the frustrating thing about trying to discuss things with you miles is that you don't argue fairly.

You won't ever admit someone else made a good point.  You won't directly answer questions, but you sidetrack to questions not asked.  You move the goalposts when people answer your concerns.  You switch positions, without being willing to defend what you've said previously (or deny you've said them, and then when quoted back claim it's out of context, or try to shift what you meant by it).

Surely things can come out of context, or be misspoken, but a genuine person would say "Oh, I said that wrong, you are correct that I said that, but what I meant was XYZ" rather than "No, that doesn't mean that" when it's clear to everyone that it did; you seem unwilling to admit an error, ever.

Sometimes I think it's a language issue, other times I think you're being deliberately obtuse.  Maybe it's a mixture of both.

It's maddening trying to actually have a real debate with you, because the goal of a debate should be mutual understanding and learning from the other, rather than to win, but you seem to prefer the latter.

+1

Again, you haven't even looked at the thread, or given any scrutiny to the spreadsheet I linked. I'll give you a pass if you don't comprehend, because what I'm laying down is some next level shit here. IME it does take some MDs an inordinate amount of time and handholding to understand enigmatic ideas.

It appears as though all you care about is "winning".

I'd gladly continue if I felt anyone else was following/remotely interested. Give a "yes" if you'd like me to continue. Otherwise, happy trails.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 13, 2015, 01:00:28 PM

I think the frustrating thing about trying to discuss things with you miles is that you don't argue fairly.

You won't ever admit someone else made a good point.  You won't directly answer questions, but you sidetrack to questions not asked.  You move the goalposts when people answer your concerns.  You switch positions, without being willing to defend what you've said previously (or deny you've said them, and then when quoted back claim it's out of context, or try to shift what you meant by it).

Surely things can come out of context, or be misspoken, but a genuine person would say "Oh, I said that wrong, you are correct that I said that, but what I meant was XYZ" rather than "No, that doesn't mean that" when it's clear to everyone that it did; you seem unwilling to admit an error, ever.

Sometimes I think it's a language issue, other times I think you're being deliberately obtuse.  Maybe it's a mixture of both.

It's maddening trying to actually have a real debate with you, because the goal of a debate should be mutual understanding and learning from the other, rather than to win, but you seem to prefer the latter.

Here's an example.

He can go reread his own posts from the early pages of this thread, where he discusses the positive feedback mechanism of momentum strategies, and how crowding impacts the strategy's future returns, and maybe he'll see for himself.

Are you not interested in quoting me back to myself or simply unable to find a quote that supports your prior poorly considered assertions?

Sol said you talked about positive feedback and crowding helps future returns.  Which you surely did.

So here is the quote for you:

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

You go on to spew other stuff like:

Quote
You made a claim that you can't back up. In order to support your claim you would have to prove the following.

1.  That DM investors materially benefit from others adopting their strategy.

And

2.  That they benefit in a manner that is distinct from other investors benefitting from others adopting their strategy.

No.  Sol wouldn't have to prove those, because he didn't make claims regarding that.  He made a claim about you talking about how crowding and positive feedback helps DM returns. Which it does, and you said so.

You try to claim he said much more than he did, which is disingenuous.  You often seem to misstate others points, changing what their claims were, and then "refuting" them.

But there you go. There's the quote proof of what you said, exactly as it related to Sol's claim.  It has nothing to do with what you claim Sol's claim was.

ARS,

If you have an axe to grind, grind away.

This doesn't concern you in the least and last I checked the title of this thread was not,

"What's frustrating about Miles?"

Maybe you could start a new thread?

I can point you to multiple times where I've admitted I was wrong, but I certainly won't admit it when I am not.

I could write a treatise about your debating shortcomings, and the downsides of engaging with you personally but again that's not the point of this thread. And frankly no one is likely to learn much from such petty drivel.


Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 13, 2015, 01:04:51 PM
(And the reason that Sol did not quote that quote is presumably because he is smart enough to know that a factor having a paradoxical positive feedback loop to crowding does not mean that it's practitioners benefit from others adopting the strategy as has already been dicussed.)

Title: Re: Dual Momentum Investing
Post by: arebelspy on July 13, 2015, 01:36:44 PM
Just trying to explain to you why sol does not seem to be interested in engaging any more.  It does not have to do with lack of support for his arguments.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 13, 2015, 01:45:04 PM
I don't remember anyone  asking for an explanation of Sol's decision to post or not to post.

Your second statement is merely an opinion. No more. No less.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on July 13, 2015, 01:53:37 PM
I don't remember anyone  asking for an explanation of Sol's decision to post or not to post.

This forum is a shining beacon of intelligent discourse in the internet's general sea of drek.  When an outstanding contributor like sol walks away from an ongoing debate, it's in all of our interests to ask ourselves why and reflect upon the potential answers.
Title: Re: Dual Momentum Investing
Post by: arebelspy on July 13, 2015, 01:57:14 PM
I don't remember anyone  asking for an explanation of Sol's decision to post or not to post.

You did, with your false dichotomy.

Sol posted:
I'm not really interested in quoting miles back to miles

And you asked:
Quote
Are you not interested in quoting me back to myself or simply unable to find a quote that supports your prior poorly considered assertions?

Since it seemed unlikely he would answer this, I was explaining why his lack of answer does not have to do with being unable to support his arguments.  His lack of a response is not proof of your being right.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 13, 2015, 02:13:04 PM
It's called a rhetorical question, ARS.

I think (hope) you are smart enough to recognize that.

If not, it's no fault of your own.

If so then it is you who are being disingenuous.







Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 13, 2015, 02:15:44 PM

I don't remember anyone  asking for an explanation of Sol's decision to post or not to post.

This forum is a shining beacon of intelligent discourse in the internet's general sea of drek.  When an outstanding contributor like sol walks away from an ongoing debate, it's in all of our interests to ask ourselves why and reflect upon the potential answers.

I don't disagree with your statement.

But it is not germane to the usefulness (or worthlessness)  of ARS' comment.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 13, 2015, 02:17:26 PM
In any case, I would propose we move this discussion away from petty personality conflicts and back to the topic at hand.
Title: Re: Dual Momentum Investing
Post by: forummm on July 13, 2015, 02:39:33 PM
There have been a lot of "petty personality conflicts" on this thread. Especially compared to others. Even ones where people disagree.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 13, 2015, 02:45:30 PM

There have been a lot of "petty personality conflicts" on this thread. Especially compared to others. Even ones where people disagree.

Agreed.

It's also been a particularly interesting and in depth thread.

Let's get back to that part.
Title: Re: Dual Momentum Investing
Post by: bdbrooks on July 13, 2015, 06:30:18 PM
Back to something on subject. I beleive that people crowding into momentum strategies will only returns.

"If DM calls for people to sell CBA buy ABC on the first of the month, then CBA will likely be selling lower and ABC would be selling higher. You would be selling for less and buying for more. A few days later and ABC and CBA will likely gravitate closer to where they started. The more volume following DM will at a minimum start to diminish risk adjusted returns."
Title: Dual Momentum Investing
Post by: milesdividendmd on July 13, 2015, 07:14:57 PM
Back to something on subject. I beleive that people crowding into momentum strategies will only returns.

"If DM calls for people to sell CBA buy ABC on the first of the month, then CBA will likely be selling lower and ABC would be selling higher. You would be selling for less and buying for more. A few days later and ABC and CBA will likely gravitate closer to where they started. The more volume following DM will at a minimum start to diminish risk adjusted returns."

BD,

I think you can argue it either way.

A world in which everyone invested is using  DM, is a tough thing to imagine.

On one hand momentum perpetuates momentum, which is why it's so difficult to arbitrage away, in which case mass adoption should strengthen the relative momentum effect.

On the other hand increasing the amplitude of downward momentum, or worse the frequency of whipsaws would dramatically lessen the drawdown protection of absolute momentum, which is by far the more important half of DM.

In addition as you point out being late in the momentum curve could force you to buy higher and sell lower than in the current state of the world. (Though being early might allow you to enjoy more of the ride up, and less of the ride down.

The only honest conclusion that I can come to is that I have no idea whether more DM investors is a good thing or a bad thing for me personally.

This is in stark contrast to equity-centric buy and holders who without doubt benefit if there is mass adoption of their strategy.

All things being equal think I would prefer for the market not to change dramatically and for there not to be mass adoption since DM has performed so well everywhere it has been studied to date.
Title: Re: Dual Momentum Investing
Post by: Mirwen on July 17, 2015, 10:50:34 AM
I've finally made my way through this entire thread.  I find the subject interesting and I have read most of the technical papers linked (that don't require an account).  I do believe that momentum is a real phenomenon and  that it has something to do with the fact that our economy is large and does not turn on a dime.  The times when this strategy fails are when there are behavioral anomalies like panics that are not related to underlying fundamentals.  Since I don't think our economy is likely to be cycling more rapidly in the future, I think a DM (or similar) model could be predictive most of the time. 

However, there's a big downside that not many people have discussed.  The closest I've seen is someone mentioning going surfing instead of reading financial papers.  Let's assume (a big assumption) for the moment that a DM strategy could beat a BH stategy most of the time, would you still do it?  I've decided that I wouldn't. 

I started investing regularly back in 2006.  I'm not one for watching the news (low-information diet) and so when I found out about the 2008 crash was when I was mailed a year end report from my 401k early in 2009.  I remember feeling slightly disappointed that I didn't make any money that year as my contributions just about covered my losses.  I felt no desire to do anything about my investment strategy.  It didn't even occur to me.  Until this discussion I had never heard of the "blip" in October 2011.  It just never registered.  So despite loving to play with spreadsheets and read technical papers, I don't think this strategy is a good one from a behavioral point of view because it forces one to regularly play close attention to what the market is doing and make changes in how you are investing based on what the market is doing.  This could lead at a minimum to one starting to have a background worry about what the market is doing and worst lead to changing investment strategy regularly (as new information is learned/published/discovered) leading to large losses with no cohesive plan over the decades.

So I guess I'm going to have agree with jlcollinsnh that stuffing it and forgetting about it is a really good strategy, at least for me.  Any active management can lead to behavioral inefficiencies.  For anyone choosing DM or another active management strategy, are you prepared to stick to this strategy even if you find something "better" later?  How many years are you committing to this plan?  Do you think the added stress about what the markets are doing is worth the possible extra return?  Are you choosing this plan because you've found that you worry about the market in any case and so that is not a factor for you? I'm genuinely interested if the DM followers have considered the personal costs of implementation rather than just, "can it beat the index on a risk adjusted basis?" 
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 17, 2015, 11:32:32 AM
Mirwen,

All good points that you make, and I don't disagree with a single one of them.

For all of your behavioral reasons my default recommendation for all investors is to buy and hold low cost index funds.

So why did I switch over to DM in my retirement accounts personally?

1.  I checked the stock market compulsively, even when I was buy and hold, so doing a momentum screen once a month and making a trade once a year is no hassle for me, and may even be a benefit for me personally. I'm weird. I enjoy it.

2.  The chief attraction for me is not market beating performance, it it derisking my portfolio. I find the likelihood of experiencing diminished drawdowns to take a lot of the stress of market volatility away for me personally. If it gets too bad, I know I'll be on the sidelines in safe assets.

3.  The drawdown protection allows me to take on more equity exposure than I would otherwise. When I was buy and hold I was 75/25 equity/bonds. I am now 100% equity in my tax protected accounts allowing me to comfortably take on more equity volatility.

4.  That it is at least an even money bet to beat an equity index long term is simply gravy not the main draw.

5.  I expect to use some variant of this approach for the rest of my life because it is such a good fit for me personally, but I doubt I'll ever change from advocating for passive buy and hold as my default recommendation. I think that's a very safe bet for most investors.
Title: Re: Dual Momentum Investing
Post by: arebelspy on July 17, 2015, 11:47:04 AM
I can't quite put my finger on why, but it bothers me when people say someone should invest in a different way than they do themselves.

Do as I say, not as I do?  The whole eat your own cooking thing I guess.  Seems hypocritical.

Maybe part of it is that it feels condescending--"this is good for me, but not for you--you wouldn't understand it, or wouldn't have the risk tolerance for it" or whatever.

Just me?  Anyone else bothered by that type of thing?
Title: Re: Dual Momentum Investing
Post by: ScroogeMcDutch on July 17, 2015, 11:58:08 AM
I understand that you see it that way arebelspy. Yet, I also understand miles's approach.

Given that you do not know your behavioural aspects with regards to investing, B&H is the safest approach.

Given that you do know your behavioural aspects with regards to investing, a different approach may be a better personal fit.

It's kinda like the question "should you stop for a red light" the answer is generally yes. If however, you have a 10 ton trailer behind you and it'll ram you from behind, I'd change the answer to "no". You can't know the specifics of the psychology of every investor, yet with broad assumptions you can take a position.
Title: Re: Dual Momentum Investing
Post by: arebelspy on July 17, 2015, 12:10:51 PM
Yeah, that's why I can't put my finger on why it bothers me.

Because we do say "it depends" when people want to know how to invest.  An AA is very personal, and depends on the person's situation, age, risk tolerance, knowledge, etc.

So it's not completely disingenuous to advise one thing while doing something else.  Yet it still feels wrong.

I guess because the "it depends" opens up a conversation and assumes agency for the other, whereas "you do this, not what I'm doing" does the opposite.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 17, 2015, 12:11:15 PM
I know what you mean ARS. I frankly try to shy away from telling other people how they should invest, other than they should keep it cheap, for this very reason. (Not always successful in this effort of course.)

But the fact is that the base rate scenario for any active strategy, is to underperform the broad market after costs.

Furthermore any active strategy (even those that beat the market) will have tracking error which is a tough sell for anyone, especially if they don't see it coming.

So advising that others do as I do seems very presumptuous and unwise to me.

As an example, I am the de facto financial advisor for both of my parents and I have counseled them to keep it simple cheap and passive even after I adopted DM.

My belief is that DM is a very good bet to decrease drawdowns, and a good bet to beat the broad market after costs long term.

But as true believer fundamentalist indexers like you (who accuse me both of defending my choice for selfish and self serving reasons while simultaneously criticizing me for being condescending by not advocating it for others) have done a good job pointing out it's definitely swimming upstream to adopt such a strategy.

So I'd feel weird recommending my approach for everyone.



Title: Re: Dual Momentum Investing
Post by: arebelspy on July 17, 2015, 12:20:29 PM
Thanks for validating that feeling miles.  I do understand where you're coming from.

As an example, I am the de facto financial advisor for both of my parents and I have counseled them to keep it simple cheap and passive even after I adopted DM.

Don't you feel that the decreased draw downs would benefit them?  And doesn't the once/month check seem simple enough?  What is the reason why you wouldn't have your parents do the same DM strategy you do?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 17, 2015, 12:31:11 PM
1. I don't think they're financially literate enough to do it for themselves. The fact that I am advising them speaks to this.

2.  I've spent a lot of time thinking about this strategy. I've modeled it. I have an idea of what to expect, with years of underperformance probable and the real possibility of whipsaws. I know there will be times when I am in short term treasuries and the market is doing great. I know what a 100% equity portfolio looks like in a volatile market. (Ie very different from a 50/50 portfolio.). They know none this. 

3.  As I mentioned I follow the market because I enjoy it. I can't help myself. They don't.

For all of these reasons I think that buy and hold fits them whereas DM doesn't.

Since I love them and will presumably one day inherit some of their money i think our interests are pretty well aligned.

Perhaps that seems condescending to you, but to me it it just seems reasonable.
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on July 17, 2015, 12:40:07 PM
I can't quite put my finger on why, but it bothers me when people say someone should invest in a different way than they do themselves.

Do as I say, not as I do?  The whole eat your own cooking thing I guess.  Seems hypocritical.

Maybe part of it is that it feels condescending--"this is good for me, but not for you--you wouldn't understand it, or wouldn't have the risk tolerance for it" or whatever.

Just me?  Anyone else bothered by that type of thing?


Warren Buffet must drive you crazy.

Jack Bogle too, for that matter.
Title: Re: Dual Momentum Investing
Post by: arebelspy on July 17, 2015, 12:58:11 PM
Warren Buffet must drive you crazy.

Good point--that fits exactly with what I was saying.  Buffett can say that the majority of people should index, while he shouldn't, because he is an exception. When I say it's arrogant or condescending, it's because most people haven't earned the right to say they're special or elite.  He definitely has, so it's not arrogant for him to say "you can't do what I do."
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 17, 2015, 01:00:19 PM
Warren Buffet must drive you crazy.

Good point--that fits exactly with what I was saying.  Buffett can say that the majority of people should index, while he shouldn't, because he is an exception. When I say it's arrogant or condescending, it's because most people haven't earned the right to say they're special or elite.  He definitely has, so it's not arrogant for him to say "you can't do what I do."

And Bogle?
Title: Re: Dual Momentum Investing
Post by: arebelspy on July 17, 2015, 01:08:51 PM
I honestly haven't thought about it. 

Your comment of "my default recommendation for all investors is to buy and hold low cost index funds" reminded me of similar comments you've made, here and on your blog, and I extemporaneously wrote that comment about how it bugs me, but I can't quite place why.

Jack Bogle isn't on threads here posting defending one investment type but advocating for another.  I suppose if he did, it might catch my attention as well.
Title: Re: Dual Momentum Investing
Post by: forummm on July 17, 2015, 02:22:20 PM
I can't quite put my finger on why, but it bothers me when people say someone should invest in a different way than they do themselves.

Do as I say, not as I do?  The whole eat your own cooking thing I guess.  Seems hypocritical.

Maybe part of it is that it feels condescending--"this is good for me, but not for you--you wouldn't understand it, or wouldn't have the risk tolerance for it" or whatever.

Just me?  Anyone else bothered by that type of thing?

Like Warren Buffett saying almost everyone should index? I guess it's condescending. But I think it's warranted. He's clearly going to get better deals than I am. And he spends way more time understanding markets than I do. And the average person is just not intellectually or emotionally suited to be good enough at investing to be able to beat the market when including all expenses, taxes, etc.

I think DM is different though. It's super easy to do. A few hundred posts ago someone posted a link where you could just click on the link 1 day each month and the link would tell you which fund had done the best, so you buy (or keep holding) that with your entire portfolio.

And DM seems to be exactly what most people want to do--get out of the market/fund when it's not performing well. There are people with over 1000 posts on this forum wanting to get out of the S&P500 because it's been flat for a year (they think) and instead go into YYY fund that has done well. It seems well suited to performance chasers.
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on July 17, 2015, 02:25:18 PM
Executing a momentum based strategy seems to require discipline: the disciple to look at the evidence and decide whether it works for you, the discipline to take the risk to enact such a strategy, the discipline to concentrate into a single "thing," the discipline to check up on the markets on a monthly (or whatever) basis, and the discipline to switch as necessary and keep the whole thing going for the long term.

Other non buy and hold strategies require the same discipline, effort, and time- not to mention the risk of going against the herd. For example, Warren Buffett goes against the grain and invests considerable time and brainpower concentrating his capital into individual businesses. Bogle made his wealth starting a business and selling index funds. They are hardworking, intelligent and disciplined. But they (quite rightly) assume that the average investor lacks their discipline and "sophistication", so they advise the masses to just blindly plow their capital into index funds and pray for mercy from the gods of long term averages.

Even though that's not what they did to create and grow wealth.

It's not really hypocrisy or arrogance, it's a realization that index funds are a nice "safe" place where the average moron retirement investors can't really hurt themselves. It's like Bogle and Buffett are the mom and dad who take the big scissors away from us toddlers and then hand us the kid safe plastic kindergarden scissors. "Use these instead, sport. That way you won't hurt yourself."

Put another way, my favorite quote from Scott Adams:
"Beware the advice of successful people; they do not seek company."

I think it's ok to look at the evidence of a different strategy, have self-confidence in your own intelligence and ability, and take an (educated) chance.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 17, 2015, 02:26:03 PM

I can't quite put my finger on why, but it bothers me when people say someone should invest in a different way than they do themselves.

Do as I say, not as I do?  The whole eat your own cooking thing I guess.  Seems hypocritical.

Maybe part of it is that it feels condescending--"this is good for me, but not for you--you wouldn't understand it, or wouldn't have the risk tolerance for it" or whatever.

Just me?  Anyone else bothered by that type of thing?

Like Warren Buffett saying almost everyone should index? I guess it's condescending. But I think it's warranted. He's clearly going to get better deals than I am. And he spends way more time understanding markets than I do. And the average person is just not intellectually or emotionally suited to be good enough at investing to be able to beat the market when including all expenses, taxes, etc.

I think DM is different though. It's super easy to do. A few hundred posts ago someone posted a link where you could just click on the link 1 day each month and the link would tell you which fund had done the best, so you buy (or keep holding) that with your entire portfolio.

And DM seems to be exactly what most people want to do--get out of the market/fund when it's not performing well. There are people with over 1000 posts on this forum wanting to get out of the S&P500 because it's been flat for a year (they think) and instead go into YYY fund that has done well. It seems well suited to performance chasers.

Well said, Forummm.

Which is to say it's well suited to humans.
Title: Re: Dual Momentum Investing
Post by: sol on July 17, 2015, 02:41:40 PM
So has the mustachian horde officially endorsed market timing as the new standard advice for all newcomers?  I'm seeing an awful lot of love in here for what looks to me like really bad advice, but I don't drive this train.

If you are all actually serious about this "market timing is totally fine" advice you're rolling around in, can I at least suggest you dispense that advice with a required disclaimer?  Something like "we generally recognize that market timing is always a losing game in the long run, but we recommend it anyway because..." then fill in the blank with whatever your current justification is for reducing diversification and making big contrarian bets on the market.  That way people have at least been warned that you're trying to fuck up their shit.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on July 17, 2015, 02:48:09 PM
Well said, Forummm.

Which is to say it's well suited to humans.

Uh, then why do you have a different default recommendation for all investors again?  I read forummm's post as an explanation for why it makes sense for Buffett to recommend that others do as he says rather than as he does, while it doesn't make sense for a DM advocate to do the same.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 17, 2015, 02:52:50 PM
Just a quip Brooklyn. As in we are all performance chasers.

Sorry for the levity.
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on July 17, 2015, 03:01:52 PM
"What if I told you that long term Buy and Hold investing is just momentum investing with a multi-decade look back period?"

(http://i1.kym-cdn.com/entries/icons/original/000/009/889/Morpheus2.jpg)

(http://www.advisor.ca/wp-content/uploads/2014/10/Chart-2-return-factor-estimates-over-various-horizons-e1413951428416.jpg)

Source: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2328254
Title: Re: Dual Momentum Investing
Post by: Mirwen on July 17, 2015, 03:43:06 PM
So has the mustachian horde officially endorsed market timing as the new standard advice for all newcomers?  I'm seeing an awful lot of love in here for what looks to me like really bad advice, but I don't drive this train.

If you are all actually serious about this "market timing is totally fine" advice you're rolling around in, can I at least suggest you dispense that advice with a required disclaimer?  Something like "we generally recognize that market timing is always a losing game in the long run, but we recommend it anyway because..." then fill in the blank with whatever your current justification is for reducing diversification and making big contrarian bets on the market.  That way people have at least been warned that you're trying to fuck up their shit.

I certainly don't know enough to endorse a particular investing strategy, but I'm not going to dismiss it out of hand and ignore it just because is conflicts with popular advice.  I'm having a great time investigating this new idea, and it has helped me evaluate why I take the position that I do.  There's also room for your much needed advisories to new investors.  I appreciate that this is a place where I can discuss things that I can't discuss elsewhere and generally have a thoughtful response.
Title: Re: Dual Momentum Investing
Post by: arebelspy on July 17, 2015, 03:44:29 PM
So has the mustachian horde officially endorsed market timing as the new standard advice for all newcomers?  I'm seeing an awful lot of love in here for what looks to me like really bad advice, but I don't drive this train.

If you are all actually serious about this "market timing is totally fine" advice you're rolling around in, can I at least suggest you dispense that advice with a required disclaimer?  Something like "we generally recognize that market timing is always a losing game in the long run, but we recommend it anyway because..." then fill in the blank with whatever your current justification is for reducing diversification and making big contrarian bets on the market.  That way people have at least been warned that you're trying to fuck up their shit.

I think the vast majority of the people here don't recommend any market timing; DM is no different.  There's a small vocal minority who do market time.  Before smedley led the charge, now Miles does.  Doesn't change what most of us do.

Well said, Forummm.

Which is to say it's well suited to humans.

Uh, then why do you have a different default recommendation for all investors again?  I read forummm's post as an explanation for why it makes sense for Buffett to recommend that others do as he says rather than as he does, while it doesn't make sense for a DM advocate to do the same.

Ditto.

Why does it make sense for a DM advocate to not say everyone should do it, if it's easy and beneficial, and available to everyone?
Title: Re: Dual Momentum Investing
Post by: brooklynguy on July 17, 2015, 03:55:01 PM
"What if I told you that long term Buy and Hold investing is just momentum investing with a multi-decade look back period?"

This argument was made earlier in this thread but it's a false comparison that doesn't hold water.  For ease of reference, here is the response I gave to that claim the first time it was made (in post # 406 of this thread):


Essentially B&H investors is a special case of the absolute momentum strategy, specifying a lookback period of infinite (or at least 20+ years). Stocks have historically shown to have the best results, and as such, we extrapolate that to the future and pick stocks as the asset class of choice for returns.

At the risk of reopening the whole "a priori / a posteriori" debate, I think you have articulated an elegant way of describing the argument Miles advocated for earlier that all the buy and hold index investors in the world picked their strategy because, and only because, they looked to the past and saw that it worked.

But, again, I don't think this is true, even if we assume, for the sake of argument, that it is history's "indexing worked" lesson that first put that strategy on the radar of every indexer in the world.  Instead, I think at least some B&H indexing proponents (including the strategy's founder) evaluated the logic of the strategy (which, of course, history tells us has worked in the past) and found it compelling.  And, even if that were not true, the fact remains that there is an underlying logic behind the strategy capable of being described.

Your argument is equivalent to saying that we expect the sun to rise tomorrow solely because we know it has done so every day in the past, and not because we expect the same physical forces that caused it to do so in the past (as evidenced by its uninterrupted track record of doing so every morning for the entire existence of the Earth) to continue to operate tomorrow.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on July 17, 2015, 04:17:37 PM
This post from Ben Carlson of A Wealth of Common Sense helped me in thinking about why this strategy may work for some people but not others.

Quote
"You have to know yourself as an investor when considering this type of strategy. It’s more about knowing yourself than understanding the strategy. Here are some questions to think about in terms of dual momentum:

Momentum may continue to work, but will it work for you personally?
Do you understand this type of system enough to force yourself to follow it?
Will this type of strategy allow you to make fewer emotionally charged decisions during market losses?
Would adding a trend following rule reduce or accentuate your behavioral biases?
Would it make you more or less emotional about your portfolio decisions?

It’s almost impossible to recommend this or any system to an investor without first understanding where they’re coming from. Even simple strategies are never easy. This system has worked in the past, but investors have to define what “works” means to them. I say an investment strategy “works” if you’re to follow it over many different cycles. It never “works” if you bail out at the first sign of trouble or relative underperformance."

http://awealthofcommonsense.com/my-thoughts-on-gary-antonaccis-dual-momentum/
Title: Re: Dual Momentum Investing
Post by: EngiNerd on July 17, 2015, 04:57:58 PM
I too have enjoyed investigating this alternative investment strategy.  I have read most of the linked pdfs, miles' blog, the boglehead thread, and other articles but have not performed my own backtesting yet or read Gary's book.  To me it seems that accurate backtesting requires index fund data and that goes back to the early 90s, maybe early 70s (not really that long).  Then we can you use market indexes to more loosely match the strategy back even further, maybe the early 1900s.  Then the author and other researchers pointed to evidence that momentum has always has existed in every type of market, and use this claim to try and defend the timeless of the strategy (does support the concept of momentum but not so much the actual GEM strategy). 

There definitely seems to be evidence that there is momentum in the markets.  And I do not agree with complete EMH.  But like other critics I get a spidy sense that it's too easy, "there's no free lunch", and this strategy really does increases ROI and decrease draw downs it wouldn't take long for all the smart money to follow it.  I guess my one specific question for miles is: you indicate you prefer this investment strategy not for the increased gains but for the protection from losses.  However, for me it is easy to imagine a poorly timed flash crash that due to your look back period causes you to sell high and buy very low while 100% concentrated in an asset class.  And if this happened when you were retired it could effectively give you less purchasing power than if you had just stacked money in a bank account.  However, it is hard to imagine actually losing purchasing power through a balanced and diversified portfolio with rebalancing without the total economic collapse that would wipe out all strategies.  So is that the increased risk that balances out the reward for utilizing the momentum strategy?   
Title: Re: Dual Momentum Investing
Post by: EngiNerd on July 17, 2015, 04:59:02 PM
Good article sirdoug!
Title: Dual Momentum Investing
Post by: milesdividendmd on July 17, 2015, 07:42:00 PM
I too have enjoyed investigating this alternative investment strategy.  I have read most of the linked pdfs, miles' blog, the boglehead thread, and other articles but have not performed my own backtesting yet or read Gary's book.  To me it seems that accurate backtesting requires index fund data and that goes back to the early 90s, maybe early 70s (not really that long).  Then we can you use market indexes to more loosely match the strategy back even further, maybe the early 1900s.  Then the author and other researchers pointed to evidence that momentum has always has existed in every type of market, and use this claim to try and defend the timeless of the strategy (does support the concept of momentum but not so much the actual GEM strategy). 

There definitely seems to be evidence that there is momentum in the markets.  And I do not agree with complete EMH.  But like other critics I get a spidy sense that it's too easy, "there's no free lunch", and this strategy really does increases ROI and decrease draw downs it wouldn't take long for all the smart money to follow it.  I guess my one specific question for miles is: you indicate you prefer this investment strategy not for the increased gains but for the protection from losses.  However, for me it is easy to imagine a poorly timed flash crash that due to your look back period causes you to sell high and buy very low while 100% concentrated in an asset class.  And if this happened when you were retired it could effectively give you less purchasing power than if you had just stacked money in a bank account.  However, it is hard to imagine actually losing purchasing power through a balanced and diversified portfolio with rebalancing without the total economic collapse that would wipe out all strategies.  So is that the increased risk that balances out the reward for utilizing the momentum strategy?

Enginerd,

A flash crash with a rapid recovery is the worst case scenario for dual momentum, or really any trend following strategy.  There's really no way around that.

One can imagine ways of circumventing this scenario, but since there has been only one of these events that would have had any affect on a dual momentum strategy (1987)  in the entire history of the stock market, there is really no effective way of backtesting how such an circumvention would work.

Fortunately there has been only one such crash in the US stock market to date, versus dozens of bear markets.  Ie significant/flash crashes that erase 6 to 12 months of equity returns with rapid recoveries have historically been very rare.

Unfortunately, every approach has its own unique weakness(es.)

As an example domestically oriented equity-centric buy and hold does very poorly in prolonged equity bear markets, as Japanese investors learned in the post bubble era.

The best we can do is to pick our poison and stick to our strategy through thick and thin.

And I believe that knowing that such a worst case possibility exist before it happens, can be helpful in terms of sticking to one's approach when the shit hits the fan.

In terms of the retirement question, there's no reason for one to have to be 100% equities in retirement regardless of his/her approach.

One could implement a dual momentum strategy in which One half of ones portfolio toggled between total bond market/long term treasuries/short term treasuries, and the other half of your portfolio toggled between domestic equities/International  equities/short-term treasuries.

One thing is certain, I personally would be much more comfortable with a dual momentum approach in retirement then with a 100% equity portfolio. Betting that dual momentum will continue to have smaller drawdowns than a pure equity portfolio is not a longshot by any rational metric.
Title: Re: Dual Momentum Investing
Post by: innerscorecard on July 17, 2015, 07:42:28 PM
I can't quite put my finger on why, but it bothers me when people say someone should invest in a different way than they do themselves.

Do as I say, not as I do?  The whole eat your own cooking thing I guess.  Seems hypocritical.

Maybe part of it is that it feels condescending--"this is good for me, but not for you--you wouldn't understand it, or wouldn't have the risk tolerance for it" or whatever.

Just me?  Anyone else bothered by that type of thing?

I actually think it's far more ethical. The reverse is often extremely detrimental, when the strategy that the teacher is following has a limited carrying capacity. For example, history or English professors telling their students to get history or English PhDs is unethical, because there are far less positions for professors than students.
Title: Re: Dual Momentum Investing
Post by: innerscorecard on July 17, 2015, 07:50:14 PM
Executing a momentum based strategy seems to require discipline: the disciple to look at the evidence and decide whether it works for you, the discipline to take the risk to enact such a strategy, the discipline to concentrate into a single "thing," the discipline to check up on the markets on a monthly (or whatever) basis, and the discipline to switch as necessary and keep the whole thing going for the long term.

Other non buy and hold strategies require the same discipline, effort, and time- not to mention the risk of going against the herd. For example, Warren Buffett goes against the grain and invests considerable time and brainpower concentrating his capital into individual businesses. Bogle made his wealth starting a business and selling index funds. They are hardworking, intelligent and disciplined. But they (quite rightly) assume that the average investor lacks their discipline and "sophistication", so they advise the masses to just blindly plow their capital into index funds and pray for mercy from the gods of long term averages.

Even though that's not what they did to create and grow wealth.

It's not really hypocrisy or arrogance, it's a realization that index funds are a nice "safe" place where the average moron retirement investors can't really hurt themselves. It's like Bogle and Buffett are the mom and dad who take the big scissors away from us toddlers and then hand us the kid safe plastic kindergarden scissors. "Use these instead, sport. That way you won't hurt yourself."

Put another way, my favorite quote from Scott Adams:
"Beware the advice of successful people; they do not seek company."

I think it's ok to look at the evidence of a different strategy, have self-confidence in your own intelligence and ability, and take an (educated) chance.

Adams is very correct. I have learned so much from Buffett and Munger. But their general life advice they give at shareholder meetings ("just do what you love") is terrible (mostly because just asking for generic life advice from them is a bad question in the first place).
Title: Re: Dual Momentum Investing
Post by: arebelspy on July 17, 2015, 07:51:29 PM
I don't think that analogy holds, unless this is a limited capacity situation.

It's more like me saying "I don't bike to work, but you should."
Title: Re: Dual Momentum Investing
Post by: innerscorecard on July 17, 2015, 07:57:51 PM
So has the mustachian horde officially endorsed market timing as the new standard advice for all newcomers?  I'm seeing an awful lot of love in here for what looks to me like really bad advice, but I don't drive this train.

If you are all actually serious about this "market timing is totally fine" advice you're rolling around in, can I at least suggest you dispense that advice with a required disclaimer?  Something like "we generally recognize that market timing is always a losing game in the long run, but we recommend it anyway because..." then fill in the blank with whatever your current justification is for reducing diversification and making big contrarian bets on the market.  That way people have at least been warned that you're trying to fuck up their shit.

I think the vast majority of the people here don't recommend any market timing; DM is no different.  There's a small vocal minority who do market time.  Before smedley led the charge, now Miles does.  Doesn't change what most of us do.

Well said, Forummm.

Which is to say it's well suited to humans.

Uh, then why do you have a different default recommendation for all investors again?  I read forummm's post as an explanation for why it makes sense for Buffett to recommend that others do as he says rather than as he does, while it doesn't make sense for a DM advocate to do the same.

Ditto.

Why does it make sense for a DM advocate to not say everyone should do it, if it's easy and beneficial, and available to everyone?

What were smedley's ideas? Did events turn out discrediting him or her?
Title: Re: Dual Momentum Investing
Post by: MDM on July 17, 2015, 07:58:13 PM
As long as a "do as I say not as I do" statement is preceded/accompanied/followed by a "this is why" explanation, then one can look at the reasons and decide.
Title: Re: Dual Momentum Investing
Post by: innerscorecard on July 17, 2015, 08:00:41 PM
I don't think that analogy holds, unless this is a limited capacity situation.

It's more like me saying "I don't bike to work, but you should."

It's actual the inverse of that, though, no? Miles is taking the weirder and less proven approach, but recommending the more conventional one to others as the default. So he's biking to work, but saying others should drive. Of course - that is a little interesting, isn't it?

Now that I think about it, what might make you uneasy is this - by taking this stance, if dual momentum ends up doing badly, then Miles won't have led lemmings down the abyss, even if he himself is hurt. And to me, that's a fairly ethical thing to do. It also serves Miles' self-interest (he won't be blamed and ridiculed).
Title: Re: Dual Momentum Investing
Post by: forummm on July 17, 2015, 08:09:41 PM
I can't quite put my finger on why, but it bothers me when people say someone should invest in a different way than they do themselves.

Do as I say, not as I do?  The whole eat your own cooking thing I guess.  Seems hypocritical.

Maybe part of it is that it feels condescending--"this is good for me, but not for you--you wouldn't understand it, or wouldn't have the risk tolerance for it" or whatever.

Just me?  Anyone else bothered by that type of thing?

I actually think it's far more ethical. The reverse is often extremely detrimental, when the strategy that the teacher is following has a limited carrying capacity. For example, history or English professors telling their students to get history or English PhDs is unethical, because there are far less positions for professors than students.

Maybe you could pick a better example. Professors already have their job and would never be in competition with someone who wasn't even a doctoral student yet. Instead they might be legitimately encouraging students not to get a history PhD because the cost is high and the yield is low or nonexistent.

Perhaps realtors or some other field where the advisor would have to compete with he advisee and the barrier to entry is low, the profits are absurdly high, and the service provided is easily substituted among providers.
Title: Dual Momentum Investing
Post by: milesdividendmd on July 17, 2015, 09:02:18 PM
I can't quite put my finger on why, but it bothers me when people say someone should invest in a different way than they do themselves.

Do as I say, not as I do?  The whole eat your own cooking thing I guess.  Seems hypocritical.

Maybe part of it is that it feels condescending--"this is good for me, but not for you--you wouldn't understand it, or wouldn't have the risk tolerance for it" or whatever.

Just me?  Anyone else bothered by that type of thing?

I actually think it's far more ethical. The reverse is often extremely detrimental, when the strategy that the teacher is following has a limited carrying capacity. For example, history or English professors telling their students to get history or English PhDs is unethical, because there are far less positions for professors than students.

Maybe you could pick a better example. Professors already have their job and would never be in competition with someone who wasn't even a doctoral student yet. Instead they might be legitimately encouraging students not to get a history PhD because the cost is high and the yield is low or nonexistent.

Perhaps realtors or some other field where the advisor would have to compete with he advisee and the barrier to entry is low, the profits are absurdly high, and the service provided is easily substituted among providers.

You are missing the point.

The professor is the unlikely one who has already achieved tenure.

The students have a statistically low likelihood of getting future tenure (unlike the professor.)  For him to advise his students to seek tenure, is to condemn most of them to failure.

The point is that he is giving them bad advice based on the unlikely outcome of his own pursuit of tenure.

I'm not sure unethical is the best way to describe this phenomenon (perhaps delusional?), but it is certainly destructive for the students.
Title: Re: Dual Momentum Investing
Post by: arebelspy on July 17, 2015, 09:14:52 PM
So it would be unethical to tell people to DM, because it's unlikely to succeed?

Unless the answer is yes, it seems that's a bad analogy.
Title: Re: Dual Momentum Investing
Post by: innerscorecard on July 17, 2015, 09:33:18 PM
Strategies have different likelihoods of success depending on who you are temperamentally, so it does make some sense. Of course the big difference (really big) is that Miles does not know yet if he has succeeded or will, either.
Title: Dual Momentum Investing
Post by: milesdividendmd on July 17, 2015, 09:56:13 PM
So it would be unethical to tell people to DM, because it's unlikely to succeed?

Unless the answer is yes, it seems that's a bad analogy.

Not following your train of thought here.

The perfect corollary to the professor analogy (which was brought up in contrast to what I actually did) would be for me as a lottery winner to advocate for others to buy lottery tickets even though  I knew their likelihood of success was low.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 17, 2015, 10:09:25 PM

I don't think that analogy holds, unless this is a limited capacity situation.

It's more like me saying "I don't bike to work, but you should."

It's actual the inverse of that, though, no? Miles is taking the weirder and less proven approach, but recommending the more conventional one to others as the default. So he's biking to work, but saying others should drive. Of course - that is a little interesting, isn't it?

Now that I think about it, what might make you uneasy is this - by taking this stance, if dual momentum ends up doing badly, then Miles won't have led lemmings down the abyss, even if he himself is hurt. And to me, that's a fairly ethical thing to do. It also serves Miles' self-interest (he won't be blamed and ridiculed).

This captures my thinking perfectly.

After plenty of consideration I believe in DM as a smart strategy that fits me well and I like my odds with it. (As evidenced by my skin in the game.)

But this was a leap of faith for me personally that I made after plenty of consideration, and study, and backtesting, and I have no desire (and am in fact afraid) to expose others to risking their money on my decision.

I am willing to pay for my own mistakes but want no responsibility for other people's.

If others come to the same (or different) conclusions from me I'm fine with it, but I don't really believe in advising others, because that presumes that I have the answers.

Lord knows I don't. I only have my own guesses.
Title: Dual Momentum Investing
Post by: milesdividendmd on July 17, 2015, 11:34:34 PM
So has the mustachian horde officially endorsed market timing as the new standard advice for all newcomers?  I'm seeing an awful lot of love in here for what looks to me like really bad advice, but I don't drive this train.

If you are all actually serious about this "market timing is totally fine" advice you're rolling around in, can I at least suggest you dispense that advice with a required disclaimer?  Something like "we generally recognize that market timing is always a losing game in the long run, but we recommend it anyway because..." then fill in the blank with whatever your current justification is for reducing diversification and making big contrarian bets on the market.  That way people have at least been warned that you're trying to fuck up their shit.

What is this mustachian horde of which you speak?

I always thought the "Join the Cult" phrase on MMM, was meant ironically. From your comments It seems you have taken it quite literally.

Why do you care if there is "an awful lot of love" for active investing?

Isn't this is a forum for the exchange of ideas of and pertaining to mustachianism?

If you find a logical crack in someone else's argument, why not just attack the faulty logic  and argue on the merits?

You are clearly a smart dude, but you are not responsible for others opinions, or arguments. Only your own.

From my perspective you have

1. Equated my defending of my own decision to pursue dual momentum with trying to profit off of other people's investment decisions.

2. Claimed that I am trying to "fuck up other people's shit."

3. Claimed that defending the rationale of my own investment decisions is somehow disloyal to other readers.

You have felt comfortable making these statements about me, which I believe to be meritless. So I will make my own statement about you.

Cut out the sanctimonious crap.

Smart people can disagree.

The only way to convince people of your own advice (which for some reason you see as your responsibility to dispense) is to make smart arguments, which you are perfectly capable of.

Leave the moralistic platitudes to the preachers and politicians.  At least they get paid for it.
Title: Re: Dual Momentum Investing
Post by: arebelspy on July 17, 2015, 11:40:34 PM
That's a fair point miles.
Title: Re: Dual Momentum Investing
Post by: sol on July 18, 2015, 12:16:48 AM
I think sanctimonious and moralistic mean pretty much the same thing, with the subtle distinction that the first is less genuine, but I feel neither of those things.  There is no moral high ground in a discussion about investment strategies, so maybe take a deep breath and curtail the attacks on me as a person?  I'm pretty sure some of our moderators have been strictly enforcing that forum rule about attacking arguments rather than people.  You wouldn't want to get snared.

I've been careful to stay on the right side of that line.  I've pointed out that your strategy is just pure market timing, and market timers always lose in the long run.  I've reminded you of your own argument that the strategy has a positive feedback mechanism, whereby it is more effective if you win over converts to follow the same strategy.  When I said you're fucking up their shit, I meant they will lose money if they follow the strategy.  See the difference?  Criticisms of the idea, not the person.  No moralizing.

Take notes if you have to.  Your use of personal pronouns in those three bulleted list items is entirely unwarranted.

Unless you meant to say that the discussion is somehow sanctimonious?  No, that doesn't make much sense.  I'm pretty sure that was you directing a personal insult at me.

It won't bother me if you don't see why that's a problem.


Title: Dual Momentum Investing
Post by: milesdividendmd on July 18, 2015, 01:46:22 AM
It seems to me that you are carefully skirting the issue.

You are defending your legal phrasing but not the substance of your arguments.

It also seems to me that you are smart enough to know that

1.  Market timers don't always lose in the long run. (George Soros anyone?)

2.  Crowding causing a positive feedback mechanism in Relative momentum and DM investors benefitting from crowding are not the same thing at all (See reply 571).

3. You can't  know if DM will lose money long term.  (You might credibly hypothesize that there is an 80% chance of it not gaining as much money as a passive buy and hold equity portfolio by virtue of it being an active strategy and base rate probabilities, but if you really think it will lose money simply because it is active then you have badly misread the data. (If you do feel certain, then I will gladly bet you 100K that GEM will not lose money over a 10 year time horizon starting today. )

As to the moralistic/sanctimonious charge, when you argue that those that disagree with you are trying to make others lose money or profit off of them, while you are trying to steer the newbies to the one true way to successfully invest (which happens to be your chosen strategy) I feel that both sanctimonious and moralistic fit the bill quite well, although I'm willing to include some other adjectives that describe that sort of a message too: arrogant and presumptuous.   

Here is one of your quotes which I feel fits the bill:

"My only motivation for participating in this thread is the same one I feel in all threads about market timing, to discourage new readers from being misled into making decisions that will cost them money."

Finally in reading your replies it seems that one thing that has hampered the exchange of ideas here is that you haven't made the minimum effort to even understand the basic strategy which you criticize.

As an example in post number 555 you attempt to describe what "momentum traders" try to do. You claim we

1.  Seek to amplify short term volatility.

2.  Effectively short stocks that are down.

3. Are responsible for market inefficiency.

4.  Sector rotate to increase volatility between sectors.

I will simply point out that I am an admitted dual momentum practitioner and I do none of those things. (3 is a value judgement, the rest are black and white). (I have made exactly 1 trade in 9 months, don't trade sectors, and am long only....not exactly the ingredients for boosting short term volatility, shorting down stocks, or increasing intersector volatility.)

I know what buy and hold passive investing is and I endorse it, you clearly don't understand DM and presume to judge it.

Don't you see a problem there?
Title: Re: Dual Momentum Investing
Post by: EngiNerd on July 18, 2015, 08:19:18 AM
I too have enjoyed investigating this alternative investment strategy.  I have read most of the linked pdfs, miles' blog, the boglehead thread, and other articles but have not performed my own backtesting yet or read Gary's book.  To me it seems that accurate backtesting requires index fund data and that goes back to the early 90s, maybe early 70s (not really that long).  Then we can you use market indexes to more loosely match the strategy back even further, maybe the early 1900s.  Then the author and other researchers pointed to evidence that momentum has always has existed in every type of market, and use this claim to try and defend the timeless of the strategy (does support the concept of momentum but not so much the actual GEM strategy). 

There definitely seems to be evidence that there is momentum in the markets.  And I do not agree with complete EMH.  But like other critics I get a spidy sense that it's too easy, "there's no free lunch", and this strategy really does increases ROI and decrease draw downs it wouldn't take long for all the smart money to follow it.  I guess my one specific question for miles is: you indicate you prefer this investment strategy not for the increased gains but for the protection from losses.  However, for me it is easy to imagine a poorly timed flash crash that due to your look back period causes you to sell high and buy very low while 100% concentrated in an asset class.  And if this happened when you were retired it could effectively give you less purchasing power than if you had just stacked money in a bank account.  However, it is hard to imagine actually losing purchasing power through a balanced and diversified portfolio with rebalancing without the total economic collapse that would wipe out all strategies.  So is that the increased risk that balances out the reward for utilizing the momentum strategy?

Enginerd,

A flash crash with a rapid recovery is the worst case scenario for dual momentum, or really any trend following strategy.  There's really no way around that.

One can imagine ways of circumventing this scenario, but since there has been only one of these events that would have had any affect on a dual momentum strategy (1987)  in the entire history of the stock market, there is really no effective way of backtesting how such an circumvention would work.

Fortunately there has been only one such crash in the US stock market to date, versus dozens of bear markets.  Ie significant/flash crashes that erase 6 to 12 months of equity returns with rapid recoveries have historically been very rare.

Unfortunately, every approach has its own unique weakness(es.)

As an example domestically oriented equity-centric buy and hold does very poorly in prolonged equity bear markets, as Japanese investors learned in the post bubble era.

The best we can do is to pick our poison and stick to our strategy through thick and thin.

And I believe that knowing that such a worst case possibility exist before it happens, can be helpful in terms of sticking to one's approach when the shit hits the fan.

In terms of the retirement question, there's no reason for one to have to be 100% equities in retirement regardless of his/her approach.

One could implement a dual momentum strategy in which One half of ones portfolio toggled between total bond market/long term treasuries/short term treasuries, and the other half of your portfolio toggled between domestic equities/International  equities/short-term treasuries.

One thing is certain, I personally would be much more comfortable with a dual momentum approach in retirement then with a 100% equity portfolio. Betting that dual momentum will continue to have smaller drawdowns than a pure equity portfolio is not a longshot by any rational metric.


Right a Japan investor heavily invested in Japan equities would have been hurt badly by the decade long bear market.  However, a more balanced AA that includes foreign equities and bonds probably would have been alright and still came out ahead of inflation.  I agree that GEM has shown to decrease drawdowns and I understand believing it will in the future.  However, despite there being only 1 flash crash in market history, I still feel like it can be stated that the worst case scenario that would cause one strategy, Dual Momentum vs buy and hold indexing with diversity, to fail to beat inflation while the other one outperforms would be a flash crash wiping out the dual momentum investor.  Right now I suspect that it might be a good bet for superior gains to use a dual momentum strategy but if you're primary concern is security or to not actually losing purchasing power while investing I think a cost conscious buy and hold with diversity is still the way to go.  Your thoughts?
Title: Re: Dual Momentum Investing
Post by: brooklynguy on July 18, 2015, 08:31:07 AM
This captures my thinking perfectly.

After plenty of consideration I believe in DM as a smart strategy that fits me well and I like my odds with it. (As evidenced by my skin in the game.)

But this was a leap of faith for me personally that I made after plenty of consideration, and study, and backtesting, and I have no desire (and am in fact afraid) to expose others to risking their money on my decision.

I am willing to pay for my own mistakes but want no responsibility for other people's.

If others come to the same (or different) conclusions from me I'm fine with it, but I don't really believe in advising others, because that presumes that I have the answers.

Lord knows I don't. I only have my own guesses.

Miles, it sounds to me like you are saying the same thing as sol in the quoted post (namely, that market-timing advice should come with a big disclaimer because it could fuck up peoples' shit, which is why passive indexing is your default recommendation, no?).
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on July 18, 2015, 08:49:30 AM
^^^
People should conduct their own due diligence before enacting any particular investment strategy.

Therefore, advice doesn't need "disclaimers." If you assume the strategy, you assume the risk. Personal responsibility.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 18, 2015, 08:57:23 AM

I too have enjoyed investigating this alternative investment strategy.  I have read most of the linked pdfs, miles' blog, the boglehead thread, and other articles but have not performed my own backtesting yet or read Gary's book.  To me it seems that accurate backtesting requires index fund data and that goes back to the early 90s, maybe early 70s (not really that long).  Then we can you use market indexes to more loosely match the strategy back even further, maybe the early 1900s.  Then the author and other researchers pointed to evidence that momentum has always has existed in every type of market, and use this claim to try and defend the timeless of the strategy (does support the concept of momentum but not so much the actual GEM strategy). 

There definitely seems to be evidence that there is momentum in the markets.  And I do not agree with complete EMH.  But like other critics I get a spidy sense that it's too easy, "there's no free lunch", and this strategy really does increases ROI and decrease draw downs it wouldn't take long for all the smart money to follow it.  I guess my one specific question for miles is: you indicate you prefer this investment strategy not for the increased gains but for the protection from losses.  However, for me it is easy to imagine a poorly timed flash crash that due to your look back period causes you to sell high and buy very low while 100% concentrated in an asset class.  And if this happened when you were retired it could effectively give you less purchasing power than if you had just stacked money in a bank account.  However, it is hard to imagine actually losing purchasing power through a balanced and diversified portfolio with rebalancing without the total economic collapse that would wipe out all strategies.  So is that the increased risk that balances out the reward for utilizing the momentum strategy?

Enginerd,

A flash crash with a rapid recovery is the worst case scenario for dual momentum, or really any trend following strategy.  There's really no way around that.

One can imagine ways of circumventing this scenario, but since there has been only one of these events that would have had any affect on a dual momentum strategy (1987)  in the entire history of the stock market, there is really no effective way of backtesting how such an circumvention would work.

Fortunately there has been only one such crash in the US stock market to date, versus dozens of bear markets.  Ie significant/flash crashes that erase 6 to 12 months of equity returns with rapid recoveries have historically been very rare.

Unfortunately, every approach has its own unique weakness(es.)

As an example domestically oriented equity-centric buy and hold does very poorly in prolonged equity bear markets, as Japanese investors learned in the post bubble era.

The best we can do is to pick our poison and stick to our strategy through thick and thin.

And I believe that knowing that such a worst case possibility exist before it happens, can be helpful in terms of sticking to one's approach when the shit hits the fan.

In terms of the retirement question, there's no reason for one to have to be 100% equities in retirement regardless of his/her approach.

One could implement a dual momentum strategy in which One half of ones portfolio toggled between total bond market/long term treasuries/short term treasuries, and the other half of your portfolio toggled between domestic equities/International  equities/short-term treasuries.

One thing is certain, I personally would be much more comfortable with a dual momentum approach in retirement then with a 100% equity portfolio. Betting that dual momentum will continue to have smaller drawdowns than a pure equity portfolio is not a longshot by any rational metric.


Right a Japan investor heavily invested in Japan equities would have been hurt badly by the decade long bear market.  However, a more balanced AA that includes foreign equities and bonds probably would have been alright and still came out ahead of inflation.  I agree that GEM has shown to decrease drawdowns and I understand believing it will in the future.  However, despite there being only 1 flash crash in market history, I still feel like it can be stated that the worst case scenario that would cause one strategy, Dual Momentum vs buy and hold indexing with diversity, to fail to beat inflation while the other one outperforms would be a flash crash wiping out the dual momentum investor.  Right now I suspect that it might be a good bet for superior gains to use a dual momentum strategy but if you're primary concern is security or to not actually losing purchasing power while investing I think a cost conscious buy and hold with diversity is still the way to go.  Your thoughts?

A couple of thoughts.

A flash crash hurts DM specifically not because of the crash itself which effects equity investors equally but because of the missed months of an early recovery. In a flash crash followed by a bear market the DM investor will come out way ahead.

Note also that the drawdown is no worse for a DM investor in a flash crash then it is for an long only equity investor.

This flash crash/early recovery scenario is very specific indeed. It is literally one possibility out of millions.

Could it happen again? Absolutely. Could I survive it and stick to the plan? I think so. Does it keep me up at night?  No.

I think if that you want the safest possible portfolio then diversification is absolutely key. Something like the permanent portfolio comes to mind with 25% equity(I favor weighted to region by world capitalization) , 25% gold, 25 % long term treasuries, 25% short term treasuries/cash. The upside with such an approach is diversification and very stable returns in diverse environments.  The downside is lost upside.

So you can always find a safer strategy or one with more upside. In this sense there is no free ride.

But I am comfortable with the risk of DM personally because it allows me to take on a large amount of expected beta with a disproportionately small amount of expected volatility.

What I am deathly afraid in investing are risks that kick me out of the game altogether. (I don't want to blow up.) This is why I am allergic to leverage, and why buy and hold 100% equities would not be comfortable for me, personally.

Finally as I mentioned before you can diversify as much as you want within a DM approach. 1/4 of your portfolio could be exposed to equity risk, 1/4 to inflation risk, 1/4 to credit risk, and 1/4 to safe assets if you wanted. So I see this diversification question as quite separate from the DM vs buy and hold question.

Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 18, 2015, 09:15:28 AM

This captures my thinking perfectly.

After plenty of consideration I believe in DM as a smart strategy that fits me well and I like my odds with it. (As evidenced by my skin in the game.)

But this was a leap of faith for me personally that I made after plenty of consideration, and study, and backtesting, and I have no desire (and am in fact afraid) to expose others to risking their money on my decision.

I am willing to pay for my own mistakes but want no responsibility for other people's.

If others come to the same (or different) conclusions from me I'm fine with it, but I don't really believe in advising others, because that presumes that I have the answers.

Lord knows I don't. I only have my own guesses.

Miles, it sounds to me like you are saying the same thing as sol in the quoted post (namely, that market-timing advice should come with a big disclaimer because it could fuck up peoples' shit, which is why passive indexing is your default recommendation, no?).

I completely agree Brooklyn. I have made that disclaimer over and over again.

What I disagree with are the mischaracterizations others (my) ethics, and  motivations.

I feel it is ethical for me to share my approach and my thinking about investment, but unwise for me to recommend my approach for others since them losing money confers no risk to me. It's enough to just share the facts and let them speak for themselves.

I also have a problem with the overstating of the benefits of passive investment and the risks of active investing.

It's enough to say active investment underperforms passive 80%of the time.

It is unnecessary and demonstrably inaccurate to say that an active approach "always loses."

Finally I have a problem with this urge to censor others thinking.

It's enough for us to honestly share our thinking and to let the thoughts speak for themselves.

No one has a monopoly on the truth and hearing thoughtful people who disagree with you is generally healthy and good.

I reject the notion that there are newbies out there who have to be given a consistent message of what is right and wrong for fear of being led astray.

That to me is the ultimate condescension.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 18, 2015, 09:30:32 AM
Also don't you think that there is a distinction to be drawn between making an honest disclaimer and saying that I am "trying to fuck (other's) shit up?"

In addition to being insulting, it's completely implausible. What possible motivation could I have for such a thing other than sociopathy?
Title: Re: Dual Momentum Investing
Post by: arebelspy on July 18, 2015, 10:42:27 AM
I don't think you have a motivation to harm other's returns, but I do think it is what will be done, even inadvertently, when newbies to investing see threads about active investing and decide it's the new best thing that they should be doing.

3. You can't  know if DM will lose money long term.  (You might credibly hypothesize that there is an 80% chance of it not gaining as much money as a passive buy and hold equity portfolio by virtue of it being an active strategy and base rate probabilities, but if you really think it will lose money simply because it is active then you have badly misread the data. (If you do feel certain, then I will gladly bet you 100K that GEM will not lose money over a 10 year time horizon starting today. )

This is a stupid straw man.  Obviously he meant make less than the comparable index.  Nitpicking on the word choice of "lose money" when we all know what is meant only weakens the rest of your post.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 18, 2015, 12:23:34 PM
It's not a straw man. It is one of a number of forcefully delivered flat out wrong declarations.

He repeatedly makes the claim that "market timers always lose," when they clearly don't.

His assumption seems to actually be that market timers always lose. He makes this point repeatedly.

It is obviously not true.

His description of "momentum traders" is a pure fantasy that bears no resemblance to the actual strategy that we are discussing.

Who's to say he doesn't believe that "market timers" lose money?

I'll let him tell us whether or not he was being deliberately or accidentally innaccurate with his language or whether or not he actually believes this stuff.

I'm not playing word games I'm responding to his repeatedly innaccurate statements.

If it's simply a typo he can own it and we can move on to discuss the disagreements that we actually have.
Title: Dual Momentum Investing
Post by: arebelspy on July 18, 2015, 01:42:04 PM
And I repeat:
This is a stupid straw man.  Obviously he meant make less than the comparable index.  Nitpicking on the word choice of "lose money" when we all know what is meant only weakens the rest of your post.

That is losing. It doesn't mean they lose money, but that they lose in comparison. It's pretty obvious to anyone familiar with the debate of market timing versus not, so trying to claim he's saying something he's not (that they always lose money) is disingenuous.

They lose relative to a comparable benchmark.
Title: Dual Momentum Investing
Post by: milesdividendmd on July 18, 2015, 02:13:06 PM
Repeat all you like. Here is what he in fact said.

"When I said you're fucking up their shit, I meant they will lose money if they follow the strategy."

Now you can interpret that any way you want. Maybe he meant they will lose money relative to an index, maybe he meant what he actually said, which is something entirely different.
 
If I give you 2 dollars instead of the 3 I give your neighbor you have not lost money by any reasonable definition.

You have an opinion that he meant something different from what he said for whatever reason.

I will gladly take Sol at face value if he in fact meant something different from what he said. But you repeating your own interpretation changes nothing.

A straw man argument is when you argue against an argument that was not made, not when you argue against an argument that was made poorly or imprecisely. So either way it is not a straw man argument.

Maybe you meant something else?
Title: Dual Momentum Investing
Post by: milesdividendmd on July 18, 2015, 02:26:48 PM
The other point is that even if your interpretation is correct and he did mean lose relative to an index, rather than what he actually said, the statement is still wrong since,

A.  No one knows the future

And

B. 20 % of active investors have historically beat the market over long time horizons. (10 years.)
Title: Re: Dual Momentum Investing
Post by: innerscorecard on July 22, 2015, 09:42:28 PM
Interesting:

http://blog.alphaarchitect.com/2015/07/22/market-timing-with-value-and-momentum/
Title: Dual Momentum Investing
Post by: milesdividendmd on July 22, 2015, 11:36:01 PM
Definitely interesting.

The take home is that one should stay invested as long as there is positive momentum OR fair valuation based on simple market signals. (200 day MA and 1/CAPE - inflation. )

Based on backtesting,  DM has been more successful historically.

This approach does diversify between 2 winning approaches however, which is attractive.
Title: Re: Dual Momentum Investing
Post by: bdbrooks on July 24, 2015, 09:22:24 AM
Based on backtesting,  DM has been more successful historically.

This was only the market timing piece of it. You could still use relative momentum. To make a far comparison, you would need to compare absolute momentum vs (value and momentum timing) for the same asset (S&P 500) over the same time period. I bet that the combination has done better than absolute momentum over the long haul. While testing you may as well look at testing value and absolute momentum together (instead of value and 200 day MA momentum). I might do this sometime in the next few days if I can find time. Wouldn't be hard. All you need is CAPE data and S&P 500 price data.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on July 24, 2015, 06:56:24 PM

Based on backtesting,  DM has been more successful historically.

This was only the market timing piece of it. You could still use relative momentum. To make a far comparison, you would need to compare absolute momentum vs (value and momentum timing) for the same asset (S&P 500) over the same time period. I bet that the combination has done better than absolute momentum over the long haul. While testing you may as well look at testing value and absolute momentum together (instead of value and 200 day MA momentum). I might do this sometime in the next few days if I can find time. Wouldn't be hard. All you need is CAPE data and S&P 500 price data.

BD,

To add relative momentum to the mix you would have to include another asset class like foreign developed.

So it would end up meaning that if s&p and vea both performed below their 200 day MA (or short term treasuries for the look back period) but both were at fair cape value you would stay invested in the more momentous asset.

I doubt this would add much value and it would be hard to model with the tools I have available, but it would be interesting to see the results.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 10, 2015, 11:33:44 AM
Nice post today from Antonacci on robustness....

http://www.dualmomentum.net/2015/08/bring-data.html?m=1
Title: Re: Dual Momentum Investing
Post by: starguru on August 13, 2015, 02:02:28 PM
I have a few questions about the blog post where you explain the DM strategy.

1.  Why are you not using all vanguard funds?
2.  Why use an SP500 index instead of a total US market index? 
3.  Can a total bond fund replace short term treasuries? Why?
4.  Is there a page that indicates what the current indicated asset is?

Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 13, 2015, 02:58:28 PM
1.  My 403B is throgh fidelity.  No vanguard international fund is available to me.
2.  Yes, should be a small difference.
3.  Antonacci uses total bond for his global equities momentum for unstated reasons.  (should be higher returns with inccreased volatility).  I use short term treasuries.
4.  Not on my site.  But it's been sitting in FSPNX (fidelity spartan international fund for 4 months now.

I use this perf charts on this site site to determine elections for the month:

http://stockcharts.com/freecharts/

Title: Re: Dual Momentum Investing
Post by: starguru on August 13, 2015, 03:06:26 PM
1.  My 403B is throgh fidelity.  No vanguard international fund is available to me.
2.  Yes, should be a small difference.
3.  Antonacci uses total bond for his global equities momentum for unstated reasons.  (should be higher returns with inccreased volatility).  I use short term treasuries.
4.  Not on my site.  But it's been sitting in FSPNX (fidelity spartan international fund for 4 months now.

I use this perf charts on this site site to determine elections for the month:

http://stockcharts.com/freecharts/

Don't the spartan funds have short term (<90days) redemption fees?  How does that affect this strategy?  Also, is there any significance to checking every month?  What about every quarter, or every week?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 13, 2015, 03:21:17 PM
Spartan funds do, which is problematic.  Fortunately trades are rare, but it would certainly bite if the markets were to tank 1 month after investing in FSPNX.  I have no other low cost international options available in my 403B unfortunately.

The best brokerage for DM is Schwab, IMHO, because their >200 fee free ETFs have no minimum hold periods.  Their index funds are also usually a touch cheaper than Vanguard too.

That's a really good question about checking quarterly or bimonthly.  I have not modeled it myself, but my guess is that there would be less slightly trading and slightly larger drawdowns.
Title: Re: Dual Momentum Investing
Post by: starguru on August 13, 2015, 05:56:02 PM
Spartan funds do, which is problematic.  Fortunately trades are rare, but it would certainly bite if the markets were to tank 1 month after investing in FSPNX.  I have no other low cost international options available in my 403B unfortunately.

The best brokerage for DM is Schwab, IMHO, because their >200 fee free ETFs have no minimum hold periods.  Their index funds are also usually a touch cheaper than Vanguard too.

That's a really good question about checking quarterly or bimonthly.  I have not modeled it myself, but my guess is that there would be less slightly trading and slightly larger drawdowns.

The idea is pretty interesting.  Why limit the signal funds to just the 4 though?  Why not go by sector?  Or add gold to the mix? REITs? 

EDIT - and why a 6 month lookback?  And I assume the test is

for each signal fund, take the price today, and the price 6 months ago, and subtract todays value from six months ago value.  The signal fund with the best differential wins?

Title: Dual Momentum Investing
Post by: milesdividendmd on August 13, 2015, 06:17:50 PM
Spartan funds do, which is problematic.  Fortunately trades are rare, but it would certainly bite if the markets were to tank 1 month after investing in FSPNX.  I have no other low cost international options available in my 403B unfortunately.

The best brokerage for DM is Schwab, IMHO, because their >200 fee free ETFs have no minimum hold periods.  Their index funds are also usually a touch cheaper than Vanguard too.

That's a really good question about checking quarterly or bimonthly.  I have not modeled it myself, but my guess is that there would be less slightly trading and slightly larger drawdowns.



The idea is pretty interesting.  Why limit the signal funds to just the 4 though?  Why not go by sector?  Or add gold to the mix? REITs? 

EDIT - and why a 6 month lookback?  And I assume the test is

for each signal fund, take the price today, and the price 6 months ago, and subtract todays value from six months ago value.  The signal fund with the best differential wins?

No reason at all.

In his book, Antonacci details DMSR which is a sector rotation strategy, as well as a diversified portfolio strategy that includes mortgage REIT/commercial REIT, Gold/long term treasuries, total bond/high yield buckets with cash filters. 

I chose 6 months for no great reason.  In general shorter lookbacks mean quicker exits from and entrances to bear/bull markets and more trading.  I thought it would be behaviorally easier for me to stick to the shorter lookback. 

I now think the smartest method would be to split your portfolio into 3-4 look back periods and manage each quarter/third seperately.  This should diversify away lookback period specific whipsaw risk, (which admittedly rarely happens.)

Antonacci advocates a 12 month lookback.

In back testing anything betwen 3 and 12 months gives you very similar results. 

If you're interested in the strategy,I highly recommend Gary's book.  It's a great resource.

His blog optimal momentum has a ton of great content as well.
Title: Dual Momentum Investing
Post by: milesdividendmd on August 14, 2015, 01:21:00 AM
http://blog.alphaarchitect.com/2015/08/13/avoiding-the-big-drawdown-is-downside-protection-helpful-or-heresy/

Really nice review of both trend following and absolute momentum (and a combo of the 2) for downside protection.

I particularly enjoyed the discussion  of the variability of risk tolerance in investors (which seems to be using a form of recency bias) to explain negative momentum. New (to me) behavioral story for such approaches.

Also nice robustness testing.
Title: Re: Dual Momentum Investing
Post by: peterpatch on August 14, 2015, 06:03:15 PM
I was involved a thread that was about dividend growth investing and MDM came along and mentioned trending as an investing factor.

In that thread I mentioned that trending did not seem to have clear cause, it seemed that it might be a case of confusing causation with co-relation. That was my first impression. I make it a personal policy to read broadly and in particular to read about concepts and ideas that I find lacking at first glance. Often my first inclinations are right, but sometimes it turns out they are false and this was one of those times. Sometimes I'll read something that is 90% junk but then the author stumbles upon a gem which makes the 90% junk worthwhile.

I did research on relative momentum and found out about the strong statistical anomaly that is relative momentum. This has been researched and confirmed by numerous academic studies. It is pervasive and has occurred across asset classes and markets.

I also did research on absolute momentum and there is also very strong empirical evidence for it across asset classes and markets.


I think it's important to educate oneself on the source literature of a topic before taking a position. My position is that momentum works due to a variety of behavioural biases that act together to create the momentum anomaly. Chapter 4 of the book "Dual momentum Investing" provides an excellent overview of the biases which I list below:

• Anchoring, insufficient adjustment, underreaction

        •    Confirmation bias

        •    Herding, feedback trading, overreaction

        •    Conservatism, representativeness

        •    Overconfidence, self-attribution

        •    Slow diffusion of information

        •    Disposition effect

Although I am not going to go into all the details of the concept in this thread , I think the argument Antonacci makes for Dual momentum is extremely compelling and that any serious investor should at least read his book before casting judgement. This book is more like 90% good/great and 10% so-so with very little bad. The market history alone made it a great read but there is so much more.

Also thanks to MDM for prodding me about the momentum effect, I'll be implementing GEM with about half my portfolio soon.
Title: Re: Dual Momentum Investing
Post by: starguru on August 17, 2015, 08:43:13 PM
miles

Im writing a program that graphs the 6 month lookback of the funds as you prescribe in your blog.  I believe I see the last 4 months being on DFALX, but very recently everything dipped below the show term treasury (SP500 is very close, too close for me to tell from graph alone).

Is that what you are seeing?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 17, 2015, 10:22:32 PM
Star guru.

The funds I have at my disposal in my retirement accounts are FSPNX for international developed and VIIIX for s&p.

I've been sitting in FSPNX for 4 months, and s & p is gaining.

Title: Re: Dual Momentum Investing
Post by: starguru on August 18, 2015, 07:05:37 AM
Star guru.

The funds I have at my disposal in my retirement accounts are FSPNX for international developed and VIIIX for s&p.

I've been sitting in FSPNX for 4 months, and s & p is gaining.

Yeah Im not sure it matters which funds one uses as long as they track their index properly.  Interesting problem trying to put the algorithm into code:  what happens when the six month lookback for a day is a non-market day?  Currently I am ignoring those days, but that means days like yesterday have no data.

(http://i.imgur.com/RijkUux.png)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 18, 2015, 03:17:00 PM
100% agree. If its cheap and it tracks the same index, any fund should do.

Can't you just write your code for the last trading day of the month's close?
Title: Re: Dual Momentum Investing
Post by: starguru on August 18, 2015, 04:00:42 PM
100% agree. If its cheap and it tracks the same index, any fund should do.

Can't you just write your code for the last trading day of the month's close?

I thought it would be interesting to track the signal day by day so I could see how it moves.  I am going to try and make the graph look better, as well as show more information like the boundary days.

Title: Re: Dual Momentum Investing
Post by: starguru on August 18, 2015, 07:49:40 PM
100% agree. If its cheap and it tracks the same index, any fund should do.

Can't you just write your code for the last trading day of the month's close?

How exactly do you do the look-back?  So at the end of August, do you

1)  look on the last day of February (back 6 months)?
2)  Or do you go back exactly 7*26 days, which might not be the same day as "last of feb"?   
3)  Or do you just take the last trading day of the six months ago month (e.g. last trading day of Aug against last trading day of Feb, whatever the dates)?

Also, Im calculating performance as 

(currentClosingPrice - sixMonthsAgoClosingPrice) / sixMonthsAgoClosingPrice

does that make sense?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 18, 2015, 08:23:29 PM
I use perfcharts on

http://stockcharts.com/

This calculates total returns (including dividends).

I toggle from the six months bar and manually adjust it to the last trading day 6 months ago (ie at the end of August I calculate back to the last trading day in February.)

Including dividends in your look back is very important, I think I'm that dividends in cheap markets will be higher than in expensive markets.

Title: Re: Dual Momentum Investing
Post by: starguru on August 18, 2015, 08:37:31 PM
I use perfcharts on

http://stockcharts.com/

This calculates total returns (including dividends).

I toggle from the six months bar and manually adjust it to the last trading day 6 months ago (ie at the end of August I calculate back to the last trading day in February.)

Including dividends in your look back is very important, I think I'm that dividends in cheap markets will be higher than in expensive markets.

I wonder how they calculate their data.  Are all the values relative to the start day, or is every day computed against whatever day was 6 months before.  So are they doing

dayN - day0 where day0 is 6 months before the last day
or
dayN - dayN-6months?


So on the last day of a month you go to something like this and just pick the fund with the highest value against the right axis?
(http://i.imgur.com/sd0qQ5G.png)

Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 18, 2015, 09:50:22 PM
They do it by trading days, but you can adjust the bar to cover more or less days to make day 1 coincide with the last day of the trading month in question.
Title: Re: Dual Momentum Investing
Post by: K-ice on August 19, 2015, 01:14:01 AM
I like the idea of this momentum thing. It always kind of bothered me to invest in something that is performing poorly. I may not throw 100% into it but it is worth doing some of my own calculations.

I tried to read through a lot of the posts & two linked papers but couldn't find the answer to this basic question.

How is the 6 month look back calculated?

Is it: (Stock value at month 7- stock value at month 1)/ stock value at month 1
(basically ignoring what happens in the middle) Brief format  (7-1)/1

Or is it:

 the average of months (7-6)/6 , (6-5)/5 .... (2-1)/1  for 6 months.

Thanks

Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 19, 2015, 08:39:45 AM
Total returns now (stock price plus dividends) minus stock price 6 months ago.
Title: Re: Dual Momentum Investing
Post by: starguru on August 19, 2015, 12:07:43 PM
Total returns now (stock price plus dividends) minus stock price 6 months ago.

Yeah im not sure i can get the total returns, i think these datasets are simply limited to stock price.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 19, 2015, 12:42:41 PM
Stock charts calculates total returns.
Title: Re: Dual Momentum Investing
Post by: starguru on August 19, 2015, 12:51:56 PM
Stock charts calculates total returns.

Doesn't help when Im trying to figure out my own, unless they have a publicly accessible API.

Would total performance be

(CP2 + DP - CP1)/CP1

where

CP2 is the closing price at the end of the interval
CP1 is the closing price at the start of the interval
DP is all the dividend payments distributed during the interval?

so if a stock has a closing price of 100 at the start of the interval, and then closes at 105 at the end of the interval, and then distributed $4 in dividends during the interval,

(105 + 4 - 100)/100 = 9%?

Title: Dual Momentum Investing
Post by: milesdividendmd on August 19, 2015, 01:05:46 PM
(Cp2 + DP -CP1)/CP1
Title: Re: Dual Momentum Investing
Post by: starguru on August 20, 2015, 04:09:36 PM
(Cp2 + DP -CP1)/CP1

Hey if a dataset returns "Adjusted Closing Price" is it true that all i would have to do is my calculations based off that?

https://help.yahoo.com/kb/SLN2311.html
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 20, 2015, 06:29:59 PM
It would seem to fit the bill. Thanks for teaching me a new term.
Title: Re: Dual Momentum Investing
Post by: starguru on August 21, 2015, 09:04:31 AM
It would seem to fit the bill. Thanks for teaching me a new term.

I have some fear that they calculate adjusted close on a day where it applies, but don't carry that new value forward.  I don't know how to prove or disprove that.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 21, 2015, 09:40:32 AM
Compare the pure price of the stock to the adjusted closing cost. If the latter only diverges to the upside, you should be fine.
Title: Re: Dual Momentum Investing
Post by: forummm on August 21, 2015, 09:44:15 AM
Are you guys getting ready to head to bonds or something with the market taking a slight dip lately?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 21, 2015, 09:58:29 AM

Are you guys getting ready to head to bonds or something with the market taking a slight dip lately?

We'll calculate at the end of the month and see.

This damned Chrystal ball is cloudy at the moment.
Title: Re: Dual Momentum Investing
Post by: K-ice on August 22, 2015, 11:37:43 PM
This link may already be posted but I just found it so I thought I would share (again).

http://awealthofcommonsense.com/my-thoughts-on-gary-antonaccis-dual-momentum/

Title: Re: Dual Momentum Investing
Post by: starguru on August 23, 2015, 01:30:32 PM

Are you guys getting ready to head to bonds or something with the market taking a slight dip lately?

We'll calculate at the end of the month and see.

This damned Chrystal ball is cloudy at the moment.

Got the date ticks to be last trading day of each month.  US stocks lost were still superior to cash Wednesday, but fell way below the last two days.  Although this is with the understanding the algorithm only calls for checking at the end of the month.

Why not check every two weeks?

(http://i.imgur.com/ArqGWwn.png)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 23, 2015, 01:53:45 PM
Too much checking would lead to too much noise which would lead to to much unnecessary trading/costs.

The timeframe of momentum is on the order of months, so no need to check weekly.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 23, 2015, 03:49:13 PM
No reason not to model it, though. Just make sure to account for trading costs.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on August 23, 2015, 07:47:41 PM
Are you guys getting ready to head to bonds or something with the market taking a slight dip lately?

I set up a reminder to check the momentum charts on the third Friday of every month several months ago.

I just checked and the signal is to move to cash. 

This is the chart I use: http://stockcharts.com/freecharts/perf.php?VTI,EFA,BND,VNQ&n=125&O=011000
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 23, 2015, 07:59:04 PM
Make the move!
Title: Re: Dual Momentum Investing
Post by: starguru on August 23, 2015, 08:13:14 PM
Are you guys getting ready to head to bonds or something with the market taking a slight dip lately?

I set up a reminder to check the momentum charts on the third Friday of every month several months ago.

I just checked and the signal is to move to cash. 

This is the chart I use: http://stockcharts.com/freecharts/perf.php?VTI,EFA,BND,VNQ&n=125&O=011000

Confused about what these charts are showing.  Are they showing performance on a 6 month look-back?
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on August 23, 2015, 08:22:05 PM
Are you guys getting ready to head to bonds or something with the market taking a slight dip lately?

I set up a reminder to check the momentum charts on the third Friday of every month several months ago.

I just checked and the signal is to move to cash. 

This is the chart I use: http://stockcharts.com/freecharts/perf.php?VTI,EFA,BND,VNQ&n=125&O=011000

Confused about what these charts are showing.  Are they showing performance on a 6 month look-back?

It's looking back 125 trading days, which is pretty close to 6 months.  There are 252 trading days per year.

The first day shown is February 25, 2015.  Last day is August 21, 2015.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on August 23, 2015, 08:24:00 PM
Make the move!

The order is in.  This could be a bit gut wrenching but I believe this is a good, well researched strategy.  Especially as what we are talking about is absolute momentum here.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on August 23, 2015, 08:37:25 PM
Just looking back at 6 month periods and the last time everything all the major equity categories were negative was August 2011.

The last time everything was negative like this (including bonds) was Fall 2008.  Yikes!
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 23, 2015, 09:27:35 PM

Just looking back at 6 month periods and the last time everything all the major equity categories were negative was August 2011.

The last time everything was negative like this (including bonds) was Fall 2008.  Yikes!


It's not so surprising. The market has been sideways since January.

Even a minor move down (like -6% last week)  will move the total returns negative relative to Tbills.

The market could just as easily bounce this week and give domestic or foreign stocks a positive absolute return for the last 6 months by the end of the month.

It seems a bit voodoo, I will concede . After all you can exit too soon or or too late depending on nothing more than your randomly selected trade date.

And now the shit might be hitting the fan (or it might not).  But the fact is that getting out of most significant bear markets early and missing out on a month here or there of positive returns is a good trade.
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on August 23, 2015, 11:51:17 PM
^^
I follow a DM allocation strategy very similar to that laid out in your blog.

Not a good time to be concentrated in Foreign Developed, it seems. And my "trade date" isn't until the 2nd week of the month. I know I shouldn't be paying attention- something I'm still working on. But I have to stay the course.

Hold me, I'm scared :)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 24, 2015, 12:02:04 AM
Foreign developed outperformed the S&P last week. Not much difference between the 2 recently other than higher dividends in foreign.

I hope that the market recovers before your (and my) trade dates so you don't have to trade at all. That's the best case scenario.

Either way, much of our downside is protected, which is a nice feeling.

Stick to the plan. That's the key.
Title: Dual Momentum Investing
Post by: milesdividendmd on August 24, 2015, 12:02:09 AM
Duplicate post
Title: Re: Dual Momentum Investing
Post by: K-ice on August 24, 2015, 09:48:43 AM

I hope that the market recovers before your (and my) trade dates so you don't have to trade at all. That's the best case scenario.

Either way, much of our downside is protected, which is a nice feeling.

Stick to the plan. That's the key.

My trade day is the 5th of the month. So I will just need to hold tight.

Not that easy to do. This might need to become a support group during this crazy stock time.  ;)
Title: Re: Dual Momentum Investing
Post by: ChaseJuggler on August 24, 2015, 10:16:35 AM
I can't wait to see how this plays out. We've only got 30k in the market so now is the perfect time for a nice long dip to save for the ride back up!
Title: Re: Dual Momentum Investing
Post by: sol on August 25, 2015, 10:42:52 AM
I'm so eager for updates to this thread I can barely contain myself.  How are all of you DM proponents responding to the market gyrations?  Any asset class transitions yet?

As we've previously discussed, the basic strategy of momentum trading seems to be getting out of bear markets early and getting back in to bull markets early, where "early" is defined by your lookback period to ideally switch asset classes after some small change but before the expected subsequent larger change.  I'm keen to see how the strategy holds up under conditions like this, where the market is flat for a long time (no signal) then suddenly drops a bunch (signal?) and then maybe starts to climb back up again. 

In essence, getting that sell signal from your DM strategy means you are betting that markets will continue to drop, and will drop by more than they rise again before you get the signal to buy back in.  I don't think I would have the stomach for that sort of market timing.  If I just sit in the market, I'm guaranteed to do average.  If I started trading in and out, I think I would feel queasy about the possibility of deliberately exposing myself to catastrophic losses.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 25, 2015, 01:03:08 PM

I'm so eager for updates to this thread I can barely contain myself.  How are all of you DM proponents responding to the market gyrations?  Any asset class transitions yet?

As we've previously discussed, the basic strategy of momentum trading seems to be getting out of bear markets early and getting back in to bull markets early, where "early" is defined by your lookback period to ideally switch asset classes after some small change but before the expected subsequent larger change.  I'm keen to see how the strategy holds up under conditions like this, where the market is flat for a long time (no signal) then suddenly drops a bunch (signal?) and then maybe starts to climb back up again. 

In essence, getting that sell signal from your DM strategy means you are betting that markets will continue to drop, and will drop by more than they rise again before you get the signal to buy back in.  I don't think I would have the stomach for that sort of market timing.  If I just sit in the market, I'm guaranteed to do average.  If I started trading in and out, I think I would feel queasy about the possibility of deliberately exposing myself to catastrophic losses.

Glad you are interested Sol.

My intuition is that the economy is OK and that this correction will be short lived.

That being said, whatever the signal is at month's end I will execute it since I respect the strategy more than my intuition.

This article nicely captures this tension between sticking to the plan and trusting your own intuition.

http://www.sharpereturns.ca/2015/07/never-override-your-system.html?m=1

The bargain with DM is that you agree to sit out some good months in order to avoid the large majority of bear market drawdowns.

It's a great bargain in my book but it's not for everyone.

If that uncertainty is not comfortable to you and you can't stomach tracking error, then DM would never work for you.

To each his/her own.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on August 25, 2015, 01:42:08 PM
It'll be interesting to see where this market goes over the next 6 months. The last 6 months have been flat until now.

This afternoon it looks like the proverbial dead cat has bounced and is headed lower...


Sent from my iPhone using Tapatalk
Title: Re: Dual Momentum Investing
Post by: thepokercab on August 25, 2015, 02:36:29 PM
I gotta say, i don't think i'd have the stomach for this strategy, so props I guess to those who do.  I'm pretty content to just continue to auto invest into my set asset allocation and ignore pretty much everything else.  Can't imagine if say, today was the end of my 6 month lookback period and the strategy dictated that I move everything to cash.  Really? I've lost five figures and now i'm going to sell?  Then watch as the market possibly rebounds. Yikes. 
Title: Re: Dual Momentum Investing
Post by: forummm on August 25, 2015, 04:42:07 PM
I gotta say, i don't think i'd have the stomach for this strategy, so props I guess to those who do.  I'm pretty content to just continue to auto invest into my set asset allocation and ignore pretty much everything else.  Can't imagine if say, today was the end of my 6 month lookback period and the strategy dictated that I move everything to cash.  Really? I've lost five figures and now i'm going to sell?  Then watch as the market possibly rebounds. Yikes. 

And the market will keep going up and down every day. You'll think about how much you missed out on when it moves. I think it's a hard strategy to hold to. Especially since it lags buy-and-hold in about half of the past 14 decades. I can even hear Miles questioning whether this is really a market that will continue on its way down after he sells next week. If I were being a market timer, I would also guess that the market isn't about to drop another 10% (although I hope it does the next couple days before I get paid).
Title: Re: Dual Momentum Investing
Post by: K-ice on August 25, 2015, 05:15:24 PM
So unless you are a day trader (which this isn't) it is best to wait until your monthly rebalance date. 

The ups and downs of the past few days haven’t really bothered me.

However, if today was my day then my only issue is that depending on my look back time my result is different.  For 1y I do nothing for 6 months I switch to bonds.

I have never had that scenario before.  I am leaning towards a 6 month look back and hope I don’t have to make the call in 2 weeks when it is my day.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 25, 2015, 05:23:36 PM

So unless you are a day trader (which this isn't) it is best to wait until your monthly rebalance date. 

The ups and downs of the past few days haven’t really bothered me.

However, if today was my day then my only issue is that depending on my look back time my result is different.  For 1y I do nothing for 6 months I switch to bonds.

I have never had that scenario before.  I am leaning towards a 6 month look back and hope I don’t have to make the call in 2 weeks when it is my day.

You should really know your look back methodology before you know your trading day!

It doesn't matter too much long term as long as you stick to your plan.

That being said,

The best evidence is for a 12 month look back.

If you want to diversify against whipsaw risk, splitting your portfolio into buckets with different look back periods would seem to make sense.

I personally use 6 months, for no great reason. (I thought it would be behaviorally easier for me to get out sooner rather than later at the cost of increased trading.

AZ



Title: Re: Dual Momentum Investing
Post by: peterpatch on August 25, 2015, 06:13:49 PM
As we've previously discussed, the basic strategy of momentum trading seems to be getting out of bear markets early and getting back in to bull markets early, where "early" is defined by your lookback period to ideally switch asset classes after some small change but before the expected subsequent larger change.

That's a good description for the absolute momentum component of the dual momentum strategy because it's trying to get out of bear markets early enough to miss most of the losses and get back into bull markets early enough to reap most of the gains. The other half of the strategy involves being the in the asset that has had the strongest past (3-12 month look back) total returns which is referred to as relative momentum. Relative momentum is , historically, just as volatile if notmore volatile then buy and hold.

  If I started trading in and out, I think I would feel queasy about the possibility of deliberately exposing myself to catastrophic losses.

That's like asking the fireman to turn the hose off while you're burning in a fire because you don't want to risk drowning. Although drowning would be a risk, dying from the fire is a much higher risk. The absolute momentum component of the strategy should, at least, have a very good chance of having lower drawdowns and volatility vs a pure buy and hold strategy. However I think there's a slightly higher probability that the returns of dual momentum could be lower long term compared to buy and hold.

I guess if you're comfortable with buy and hold and that's your strategy than you should stick to the strategy like a stamp. It's probably more important to feel comfortable enough with a  decent strategy than it is to choose the most empirically and theoretically sound strategy you can find but not be able to stomach it.

Title: Re: Dual Momentum Investing
Post by: innerscorecard on August 25, 2015, 07:36:59 PM
It's precisely because it's so hard to do that it works (or has worked in the past, at least - that uncertainty about whether a past strategy will continue to work in the future is also, by itself, a reason that it will keep on working).
Title: Re: Dual Momentum Investing
Post by: brooklynguy on August 25, 2015, 08:04:38 PM
I guess if you're comfortable with buy and hold and that's your strategy than you should stick to the strategy like a stamp. It's probably more important to feel comfortable enough with a  decent strategy than it is to choose the most empirically and theoretically sound strategy you can find but not be able to stomach it.

At the risk of re-re-opening the same can of worms that has already been opened and sealed more than once over the course of this thread, I believe this is the first time someone has argued that DM has a superior theoretical underpinning in comparison to buy and hold indexing.  Much of the discussion has centered around whether any theoretical basis exists to support a specific-lookback-period-dependent DM strategy, but thus far no one has argued it is the more theoretically sound strategy.  The theoretical basis behind buy and hold indexing (i.e., mathematical certainty to match the market's performance minus costs) is clear and unassailable, but, while theoretical reasons have been offered to explain the existence of momentum in markets and why the specific lookback period or range of lookback periods that worked in the past will continue to work in the future, they certainly don't carry the guarantee that comes with the laws of arithmetic.
Title: Re: Dual Momentum Investing
Post by: sol on August 25, 2015, 08:14:12 PM
I think you've bolded the wrong part, brooklyn.  I suspect he meant to emphasize "empirically sound" over theoretically sound, and was slightly wishy washy on what constitutes "sound"

If he primarily values reduced volatility over total long term returns, and tacitly accepts the data mining approach implicit in an empirical analysis of historical returns, then DM looks more "sound" even in the complete absence of any theoretical underpinning.  As we've already discussed, they don't care why it works as long as the data suggests that it has worked in the past.
Title: Dual Momentum Investing
Post by: milesdividendmd on August 25, 2015, 09:05:22 PM
I think you've bolded the wrong part, brooklyn.  I suspect he meant to emphasize "empirically sound" over theoretically sound, and was slightly wishy washy on what constitutes "sound"

If he primarily values reduced volatility over total long term returns, and tacitly accepts the data mining approach implicit in an empirical analysis of historical returns, then DM looks more "sound" even in the complete absence of any theoretical underpinning.  As we've already discussed, they don't care why it works as long as the data suggests that it has worked in the past.

This is too smug by quite a bit. I would guess that the reason why you continue to pop up in this thread despite your prior promised absence, Sol, is that you have doubts about your own conclusions. (Not so unusual or unhealthy a sentiment at all.)

As previously discussed the only reason that buy and hold indexing is so damned popular around here (and deservedly so IMO)  has little to do with its theoretical underpinnings and everything to do with its statistically significant outperformance over everything else over the last 45 years.

(This is also why Buffet is so admired.)

For a more fleshed out argument for those statements see here (again): 

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

Buy and holders are performance chasers too, but they are smart ones because they pay attention to reality. Always a good idea in my book. Then they tell themselves pretty stories after the fact about their being "willing to accept the returns of the market."

A better argument for buy and hold is that there is a longer history and more data in support of it. A larger N is always good.

As to the question about whether or not DM will continue to outperform passive indexing into the future: I'm agnostic.

But I'm quite comfortable that it will have smaller drawdowns, and a higher sharpe ratio, and I'm almost sure it will beat my portfolio that I would have owned if I had continued to buy and hold with a 75%/25% portfolio.

Which is why I'm long DM in my tax protected accounts.
Title: Re: Dual Momentum Investing
Post by: sol on August 25, 2015, 09:16:11 PM
This is too smug by quite a bit.

Hah, that's probably an adequate assessment of my entire forum posting history.

As for the rest, I'm not doubting my buy and hold strategy in the slightest.  If anything, these market swings have made me question momentum strategies even more.  It sure looks like market prices are randomly gyrating wildly in both directions, and I think momentum traders are more likely to get burned in that environment than buy and hold investors.  I hope I'm wrong, of course, and we all make heaps of money, but I at least want to keep everyone honest about what they're doing.
Title: Re: Dual Momentum Investing
Post by: forummm on August 26, 2015, 07:32:50 AM
If anything, these market swings have made me question momentum strategies even more.  It sure looks like market prices are randomly gyrating wildly in both directions

I don't know what you're talking about, Sol. Clearly the fundamentals of the 500 largest U.S. based companies dropped dramatically (5%) over the weekend, then improved dramatically (5%) over the course of Monday morning (all the firms made a whole lot of sales of their products that morning?) and then worsened dramatically over the course of Monday afternoon (all the firms had a whole lot of returns from the morning's purchases?) and then the fundamentals significantly improved (2%) again around 3:30 (a huge afternoon productivity boost for the multinational workforce) and then worsened (2%) again around 3:50 (all those lazy workers around the world left early for the day). And then overnight the fundamentals shot way up (3%) (all those workers came back to pull all-nighters) and stayed there until around 3pm when they dramatically worsened (4%) (it turns out all that productivity from the all-nighter was wasted because everyone forgot to save their documents and accidentally kicked the power cords out from the backs of their computers all around the world). It just makes total sense.
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on August 26, 2015, 08:12:37 AM
If anything, these market swings have made me question momentum strategies even more.  It sure looks like market prices are randomly gyrating wildly in both directions

I don't know what you're talking about, Sol. Clearly the fundamentals of the 500 largest U.S. based companies dropped dramatically (5%) over the weekend, then improved dramatically (5%) over the course of Monday morning (all the firms made a whole lot of sales of their products that morning?) and then worsened dramatically over the course of Monday afternoon (all the firms had a whole lot of returns from the morning's purchases?) and then the fundamentals significantly improved (2%) again around 3:30 (a huge afternoon productivity boost for the multinational workforce) and then worsened (2%) again around 3:50 (all those lazy workers around the world left early for the day). And then overnight the fundamentals shot way up (3%) (all those workers came back to pull all-nighters) and stayed there until around 3pm when they dramatically worsened (4%) (it turns out all that productivity from the all-nighter was wasted because everyone forgot to save their documents and accidentally kicked the power cords out from the backs of their computers all around the world). It just makes total sense.

Momentum is partly predicated on irrational human behavior and groupthink.

The past few days have only served to strengthen the compelling arguments supporting Dual Momentum.

Efficient and rational markets? Lol
 
Title: Re: Dual Momentum Investing
Post by: thepokercab on August 26, 2015, 09:03:46 AM
Momentum is partly predicated on irrational human behavior and groupthink.

The past few days have only served to strengthen the compelling arguments supporting Dual Momentum.

Efficient and rational markets? Lol

Could you elaborate on this?  Not trying to be snarky, just curious? 

This strategy just confuses me because while buy and holders are just all pretty much on the same page right now (i.e. don't sell, just keep steady, and hope the market continues to rise in the future) one dual momentum investor can be looking for something completely different from another. 

For instance, the s&p is down like 10%.  Dual Momentum investor A lookback period happened over the last few days and is now ALL in on bonds or cash.  She's seen this as confirmation of her signal to get out of one asset class and into another.  Where as dual momentum investor B is 2 months away from his lookback, and wouldn't you know it, the market goes ahead and rebounds and because of that rebound Investor B stays in stocks, where as investor A is probably feeling more than a bit burned at that moment. 

Or, let's say over the next two months the market drops another 10%.  In that case Investor A is now patting herself on the back because she got out 'early' and got less of the downside than Investor B.

To me this just seems pretty random. One person, by virtue of their lookback period, seems to have timed the market better than another.   
Title: Re: Dual Momentum Investing
Post by: K-ice on August 26, 2015, 09:48:27 AM
As someone currently debating my look back period I will give my 2 cents.

First I have only seen look backs of 3,6,9 or 12 months. Also 200 days.

So 1 & 2 months would be too short & volatile.

Now picking between 6 vs 12 months. Over the past year, for my assets, it doesn't matter.

With the current volatility it does make a difference.

A 6 month would probably trigger a  trade.

Looking at this paper on page 18 there is not much difference in the long term from the different look back periods.

http://www.optimalmomentum.com/RiskPremiaHarvesting.pdf

I don't find the look back choice any more random than when I am trying to select my bond:stock allocation of 20:80 vs 40:60. Or deciding how often I rebalance said allocation.

As with any asset allocation or strategy, I guess the best advise is to pick one and stick with it so you can sleep at night. 

Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 26, 2015, 10:21:35 AM

Momentum is partly predicated on irrational human behavior and groupthink.

The past few days have only served to strengthen the compelling arguments supporting Dual Momentum.

Efficient and rational markets? Lol

Could you elaborate on this?  Not trying to be snarky, just curious? 

This strategy just confuses me because while buy and holders are just all pretty much on the same page right now (i.e. don't sell, just keep steady, and hope the market continues to rise in the future) one dual momentum investor can be looking for something completely different from another. 

For instance, the s&p is down like 10%.  Dual Momentum investor A lookback period happened over the last few days and is now ALL in on bonds or cash.  She's seen this as confirmation of her signal to get out of one asset class and into another.  Where as dual momentum investor B is 2 months away from his lookback, and wouldn't you know it, the market goes ahead and rebounds and because of that rebound Investor B stays in stocks, where as investor A is probably feeling more than a bit burned at that moment. 

Or, let's say over the next two months the market drops another 10%.  In that case Investor A is now patting herself on the back because she got out 'early' and got less of the downside than Investor B.

To me this just seems pretty random. One person, by virtue of their lookback period, seems to have timed the market better than another.   

You seemed confused on the look back period.

No matter what your look back period is, you check your signal once a month. So if your look back period is six months, then once a month you calculate the total returns of the past 6 months. If your look back is 12 months then once a month you check total returns for the prior 12 months.

Hope that clears up your question.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 26, 2015, 10:30:45 AM

If anything, these market swings have made me question momentum strategies even more.  It sure looks like market prices are randomly gyrating wildly in both directions

I don't know what you're talking about, Sol. Clearly the fundamentals of the 500 largest U.S. based companies dropped dramatically (5%) over the weekend, then improved dramatically (5%) over the course of Monday morning (all the firms made a whole lot of sales of their products that morning?) and then worsened dramatically over the course of Monday afternoon (all the firms had a whole lot of returns from the morning's purchases?) and then the fundamentals significantly improved (2%) again around 3:30 (a huge afternoon productivity boost for the multinational workforce) and then worsened (2%) again around 3:50 (all those lazy workers around the world left early for the day). And then overnight the fundamentals shot way up (3%) (all those workers came back to pull all-nighters) and stayed there until around 3pm when they dramatically worsened (4%) (it turns out all that productivity from the all-nighter was wasted because everyone forgot to save their documents and accidentally kicked the power cords out from the backs of their computers all around the world). It just makes total sense.

Momentum is partly predicated on irrational human behavior and groupthink.

The past few days have only served to strengthen the compelling arguments supporting Dual Momentum.

Efficient and rational markets? Lol

100% right.

Arguing that the market is inefficient as you have done here Forummm is supportive of the central thesis of momentum investing, and counter to the random walk theory from which buy and hold indexing is originated.

And don't take my word for it. Take Sol's. Here is his quote from 8/22 in another thread.

"Quote from: Pooperman on August 22, 2015, 10:05:22 AM
If markets were rational, there would never be sales or spikes.

I'm not so sure about this.  People always talk about the 2000 tech bubble/crash as an obvious example of irrational markets, but it seemed to make perfect sense at the time.  Prices are based on people's expectations of future profits, so when expectations change prices change.  Expectations can change for all sorts of reasons.

Last month, the prevailing view in the financial pages was that megacorp tech firms were dominating the markets because they are so insanely profitable.  Apple is worth more than Exxon/Mobil but it has 200 billion in cash and a P/E of only 13, so it must still be a good value, right?  Fast forward a month and China devalues their currency and Iran is dumping oil during a glut and the fed is raising interest rates, and suddenly everyone's expectations for the future are not so rosy anymore.

Nothing really changed over that month other than how people think the future will unfold, given some new information.  It seems perfectly rational to me for people one month ago to expect Apple and Google and Amazon and Facebook to continue to mint their own money.  It also seems perfectly rational to me for people today to think profits will mean-revert.  A 10% price swing on those rational expectations doesn't strike me as anything freakishly unusual."
Title: Re: Dual Momentum Investing
Post by: thepokercab on August 26, 2015, 10:43:54 AM

Momentum is partly predicated on irrational human behavior and groupthink.

The past few days have only served to strengthen the compelling arguments supporting Dual Momentum.

Efficient and rational markets? Lol

Could you elaborate on this?  Not trying to be snarky, just curious? 

This strategy just confuses me because while buy and holders are just all pretty much on the same page right now (i.e. don't sell, just keep steady, and hope the market continues to rise in the future) one dual momentum investor can be looking for something completely different from another. 

For instance, the s&p is down like 10%.  Dual Momentum investor A lookback period happened over the last few days and is now ALL in on bonds or cash.  She's seen this as confirmation of her signal to get out of one asset class and into another.  Where as dual momentum investor B is 2 months away from his lookback, and wouldn't you know it, the market goes ahead and rebounds and because of that rebound Investor B stays in stocks, where as investor A is probably feeling more than a bit burned at that moment. 

Or, let's say over the next two months the market drops another 10%.  In that case Investor A is now patting herself on the back because she got out 'early' and got less of the downside than Investor B.

To me this just seems pretty random. One person, by virtue of their lookback period, seems to have timed the market better than another.   

You seemed confused on the look back period.

No matter what your look back period is, you check your signal once a month. So if your look back period is six months, then once a month you calculate the total returns of the past 6 months. If your look back is 12 months then once a month you check total returns for the prior 12 months.

Hope that clears up your question.

Ahh, i see.  That does make more sense.  Thanks. 
Title: Re: Dual Momentum Investing
Post by: ChaseJuggler on August 26, 2015, 12:19:57 PM
For what it's worth, my lookback is 6 months and my day to check is Monday. VTI needs to shoot up about 7% by then, or I'm switching to 100% bonds.

I love what  innerscorecard said. The fact that this is difficult to do is a big part of why I think it will work. But only time will tell!
Title: Re: Dual Momentum Investing
Post by: brooklynguy on August 26, 2015, 12:24:52 PM
Arguing that the market is inefficient as you have done here Forummm is supportive of the central thesis of momentum investing, and counter to the random walk theory from which buy and hold indexing is originated.

And don't take my word for it. Take Sol's. Here is his quote from 8/22 in another thread.

"Quote from: Pooperman on August 22, 2015, 10:05:22 AM
If markets were rational, there would never be sales or spikes.

I'm not so sure about this.  People always talk about the 2000 tech bubble/crash as an obvious example of irrational markets, but it seemed to make perfect sense at the time.  Prices are based on people's expectations of future profits, so when expectations change prices change.  Expectations can change for all sorts of reasons.

Last month, the prevailing view in the financial pages was that megacorp tech firms were dominating the markets because they are so insanely profitable.  Apple is worth more than Exxon/Mobil but it has 200 billion in cash and a P/E of only 13, so it must still be a good value, right?  Fast forward a month and China devalues their currency and Iran is dumping oil during a glut and the fed is raising interest rates, and suddenly everyone's expectations for the future are not so rosy anymore.

Nothing really changed over that month other than how people think the future will unfold, given some new information.  It seems perfectly rational to me for people one month ago to expect Apple and Google and Amazon and Facebook to continue to mint their own money.  It also seems perfectly rational to me for people today to think profits will mean-revert.  A 10% price swing on those rational expectations doesn't strike me as anything freakishly unusual."

Huh?  Forummm's point and Sol's point (in the quoted text from the other thread) seem to be diametrically opposed.  Forummm's point seemed to be that these wild market gyrations were irrational, having no basis in any underlying change in material information (which, as you pointed out, is inconsistent with the efficient market hypothesis), while Sol's point was that even market gyrations that might appear to be irrational are in fact not so, because they can be explained by the incorporation of new material information into the market's expectations (which is consistent with the EMH).
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 26, 2015, 12:40:02 PM

Arguing that the market is inefficient as you have done here Forummm is supportive of the central thesis of momentum investing, and counter to the random walk theory from which buy and hold indexing is originated.

And don't take my word for it. Take Sol's. Here is his quote from 8/22 in another thread.

"Quote from: Pooperman on August 22, 2015, 10:05:22 AM
If markets were rational, there would never be sales or spikes.

I'm not so sure about this.  People always talk about the 2000 tech bubble/crash as an obvious example of irrational markets, but it seemed to make perfect sense at the time.  Prices are based on people's expectations of future profits, so when expectations change prices change.  Expectations can change for all sorts of reasons.

Last month, the prevailing view in the financial pages was that megacorp tech firms were dominating the markets because they are so insanely profitable.  Apple is worth more than Exxon/Mobil but it has 200 billion in cash and a P/E of only 13, so it must still be a good value, right?  Fast forward a month and China devalues their currency and Iran is dumping oil during a glut and the fed is raising interest rates, and suddenly everyone's expectations for the future are not so rosy anymore.

Nothing really changed over that month other than how people think the future will unfold, given some new information.  It seems perfectly rational to me for people one month ago to expect Apple and Google and Amazon and Facebook to continue to mint their own money.  It also seems perfectly rational to me for people today to think profits will mean-revert.  A 10% price swing on those rational expectations doesn't strike me as anything freakishly unusual."

Huh?  Forummm's point and Sol's point (in the quoted text from the other thread) seem to be diametrically opposed.  Forummm's point seemed to be that these wild market gyrations were irrational, having no basis in any underlying change in material information (which, as you pointed out, is inconsistent with the efficient market hypothesis), while Sol's point was that even market gyrations that might appear to be irrational are in fact not so, because they can be explained by the incorporation of new material information into the market's expectations (which is consistent with the EMH).

Exactly Brooklyn. That was the point.

Forummm is inexplicably arguing against DM  by arguing against efficient markets. Everything about this argument is counterproductive.

Sol, IMO, is wrong. But at least he is internally consistent.
Title: Re: Dual Momentum Investing
Post by: forummm on August 26, 2015, 01:00:03 PM

Arguing that the market is inefficient as you have done here Forummm is supportive of the central thesis of momentum investing, and counter to the random walk theory from which buy and hold indexing is originated.

And don't take my word for it. Take Sol's. Here is his quote from 8/22 in another thread.

"Quote from: Pooperman on August 22, 2015, 10:05:22 AM
If markets were rational, there would never be sales or spikes.

I'm not so sure about this.  People always talk about the 2000 tech bubble/crash as an obvious example of irrational markets, but it seemed to make perfect sense at the time.  Prices are based on people's expectations of future profits, so when expectations change prices change.  Expectations can change for all sorts of reasons.

Last month, the prevailing view in the financial pages was that megacorp tech firms were dominating the markets because they are so insanely profitable.  Apple is worth more than Exxon/Mobil but it has 200 billion in cash and a P/E of only 13, so it must still be a good value, right?  Fast forward a month and China devalues their currency and Iran is dumping oil during a glut and the fed is raising interest rates, and suddenly everyone's expectations for the future are not so rosy anymore.

Nothing really changed over that month other than how people think the future will unfold, given some new information.  It seems perfectly rational to me for people one month ago to expect Apple and Google and Amazon and Facebook to continue to mint their own money.  It also seems perfectly rational to me for people today to think profits will mean-revert.  A 10% price swing on those rational expectations doesn't strike me as anything freakishly unusual."

Huh?  Forummm's point and Sol's point (in the quoted text from the other thread) seem to be diametrically opposed.  Forummm's point seemed to be that these wild market gyrations were irrational, having no basis in any underlying change in material information (which, as you pointed out, is inconsistent with the efficient market hypothesis), while Sol's point was that even market gyrations that might appear to be irrational are in fact not so, because they can be explained by the incorporation of new material information into the market's expectations (which is consistent with the EMH).

Exactly Brooklyn. That was the point.

Forummm is inexplicably arguing against DM  by arguing against efficient markets. Everything about this argument is counterproductive.

Sol, IMO, is wrong. But at least he is internally consistent.

Forummm was just being funny. The markets are both rational and irrational. You have lots of people trying to get an edge and guess where things are going. You have lots of people who jump in and out of positions. You have lots of people reacting and overreacting to news. In the long run if you B&H you make the market return, and don't care about all this gaming. If you DM, it's unclear what happens to you, and you are part of this attempt at gaming. Maybe your signals point in the right direction, maybe they lead you astray.

My illustration of the short term (hours) seemingly random fluctuations is not necessarily instructive of a 6 or 12 month long lookback period. However, I think that there is clearly some momentum that does take place from time to time. But being able to capitalize on it using a backtested formula is another question. Especially when that formula lags B&H half the decades.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on August 26, 2015, 01:05:55 PM
Exactly Brooklyn. That was the point.

Ah, I missed that.

Quote
Forummm is inexplicably arguing against DM  by arguing against efficient markets. Everything about this argument is counterproductive.

Well, I think forummm's point was not only that the market can be irrational, but that it can be totally random.  For the DM technical trading scheme to work, the market needs to be nonrandom in a predictable way (so that you can exploit the nonrandom trends).

Quote
Sol, IMO, is wrong.

In my opinion too (and I've had extended debates with him about it, particularly this discussion (http://forum.mrmoneymustache.com/investor-alley/before-the-crash-increasing-cash-holdings/msg636103/#msg636103), which he described as having turned into an "ouroboros" of back and forth circularity), but note that strict adherence to the EMH is not a prerequisite for subscription to a passive buy and hold indexing investment philosophy.  I think the idea of the stock market as a short-term voting machine and a long-term weighing machine is more accurate than strong versions of the EMH, but I still use an indexing strategy to capture the average market performance minus costs.  As long as the market's long-term trend is up, that strategy will work.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 26, 2015, 01:42:43 PM
Absolutely. Don't disagree with any of that.

This was a limited point:  arguing that the market is irrational only strengthens the underlying justification for momentum strategy, so it is counterproductive for Forumm (assuming he is still a strong DM skeptic) to make that point (ie it is internally inconsistent.)

I also believe that the market is inefficient, but very hard to beat.
Title: Re: Dual Momentum Investing
Post by: sol on August 26, 2015, 04:30:18 PM
For what it's worth, my lookback is 6 months and my day to check is Monday. VTI needs to shoot up about 7% by then, or I'm switching to 100% bonds.

You're halfway there today.  Back up 7% from yesterday seems like a real possibility.  So does down another 5%.

So how many DM traders here have actually switched asset classes?  It sure looks like some lookback periods suggest you should, but I don't have enough faith in continued declines to adhere to such a strategy.  Not when the overall economy looks so strong and the market price declines look like panic selling.
Title: Re: Dual Momentum Investing
Post by: ChaseJuggler on August 26, 2015, 04:48:34 PM
Crazy stuff. Ironically, I saved about $300 in losses by being a teacher. Haven't had a paycheck in 85 days, so I had nothing to invest with!

Better to be lucky than smart, I guess. (Although both would be pretty convenient.)

Speaking of that, people are always floored when they hear that I wanted 10 paychecks per year instead of 12. As if going 90 days without income makes me a superhero or something...


Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 26, 2015, 07:20:25 PM


Arguing that the market is inefficient as you have done here Forummm is supportive of the central thesis of momentum investing, and counter to the random walk theory from which buy and hold indexing is originated.

And don't take my word for it. Take Sol's. Here is his quote from 8/22 in another thread.

"Quote from: Pooperman on August 22, 2015, 10:05:22 AM
If markets were rational, there would never be sales or spikes.

I'm not so sure about this.  People always talk about the 2000 tech bubble/crash as an obvious example of irrational markets, but it seemed to make perfect sense at the time.  Prices are based on people's expectations of future profits, so when expectations change prices change.  Expectations can change for all sorts of reasons.

Last month, the prevailing view in the financial pages was that megacorp tech firms were dominating the markets because they are so insanely profitable.  Apple is worth more than Exxon/Mobil but it has 200 billion in cash and a P/E of only 13, so it must still be a good value, right?  Fast forward a month and China devalues their currency and Iran is dumping oil during a glut and the fed is raising interest rates, and suddenly everyone's expectations for the future are not so rosy anymore.

Nothing really changed over that month other than how people think the future will unfold, given some new information.  It seems perfectly rational to me for people one month ago to expect Apple and Google and Amazon and Facebook to continue to mint their own money.  It also seems perfectly rational to me for people today to think profits will mean-revert.  A 10% price swing on those rational expectations doesn't strike me as anything freakishly unusual."

Huh?  Forummm's point and Sol's point (in the quoted text from the other thread) seem to be diametrically opposed.  Forummm's point seemed to be that these wild market gyrations were irrational, having no basis in any underlying change in material information (which, as you pointed out, is inconsistent with the efficient market hypothesis), while Sol's point was that even market gyrations that might appear to be irrational are in fact not so, because they can be explained by the incorporation of new material information into the market's expectations (which is consistent with the EMH).

Exactly Brooklyn. That was the point.

Forummm is inexplicably arguing against DM  by arguing against efficient markets. Everything about this argument is counterproductive.

Sol, IMO, is wrong. But at least he is internally consistent.

Forummm was just being funny. The markets are both rational and irrational. You have lots of people trying to get an edge and guess where things are going. You have lots of people who jump in and out of positions. You have lots of people reacting and overreacting to news. In the long run if you B&H you make the market return, and don't care about all this gaming. If you DM, it's unclear what happens to you, and you are part of this attempt at gaming. Maybe your signals point in the right direction, maybe they lead you astray.

My illustration of the short term (hours) seemingly random fluctuations is not necessarily instructive of a 6 or 12 month long lookback period. However, I think that there is clearly some momentum that does take place from time to time. But being able to capitalize on it using a backtested formula is another question. Especially when that formula lags B&H half the decades.

I've already addressed the internal inconsistency of your "being funny", so i'll ignore that.

Which data are you referring to when you say that Dual momentum lags B&H for half of decades?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 26, 2015, 07:26:16 PM

For what it's worth, my lookback is 6 months and my day to check is Monday. VTI needs to shoot up about 7% by then, or I'm switching to 100% bonds.

You're halfway there today.  Back up 7% from yesterday seems like a real possibility.  So does down another 5%.

So how many DM traders here have actually switched asset classes?  It sure looks like some lookback periods suggest you should, but I don't have enough faith in continued declines to adhere to such a strategy.  Not when the overall economy looks so strong and the market price declines look like panic selling.

My day is next week. Odds are I go to short term treasuries for the month and I'm comfortable with that.

No faith required. If I thought that my opinion of where the market was going to go had any relevance to my likelihood of investment success, then neither buy and hold, nor DM would be my choice of strategies.  In that case I would choose to be an active stock picker who took advantage of my superior foretelling ability.
Title: Re: Dual Momentum Investing
Post by: forummm on August 26, 2015, 07:57:28 PM


Arguing that the market is inefficient as you have done here Forummm is supportive of the central thesis of momentum investing, and counter to the random walk theory from which buy and hold indexing is originated.

And don't take my word for it. Take Sol's. Here is his quote from 8/22 in another thread.

"Quote from: Pooperman on August 22, 2015, 10:05:22 AM
If markets were rational, there would never be sales or spikes.

I'm not so sure about this.  People always talk about the 2000 tech bubble/crash as an obvious example of irrational markets, but it seemed to make perfect sense at the time.  Prices are based on people's expectations of future profits, so when expectations change prices change.  Expectations can change for all sorts of reasons.

Last month, the prevailing view in the financial pages was that megacorp tech firms were dominating the markets because they are so insanely profitable.  Apple is worth more than Exxon/Mobil but it has 200 billion in cash and a P/E of only 13, so it must still be a good value, right?  Fast forward a month and China devalues their currency and Iran is dumping oil during a glut and the fed is raising interest rates, and suddenly everyone's expectations for the future are not so rosy anymore.

Nothing really changed over that month other than how people think the future will unfold, given some new information.  It seems perfectly rational to me for people one month ago to expect Apple and Google and Amazon and Facebook to continue to mint their own money.  It also seems perfectly rational to me for people today to think profits will mean-revert.  A 10% price swing on those rational expectations doesn't strike me as anything freakishly unusual."

Huh?  Forummm's point and Sol's point (in the quoted text from the other thread) seem to be diametrically opposed.  Forummm's point seemed to be that these wild market gyrations were irrational, having no basis in any underlying change in material information (which, as you pointed out, is inconsistent with the efficient market hypothesis), while Sol's point was that even market gyrations that might appear to be irrational are in fact not so, because they can be explained by the incorporation of new material information into the market's expectations (which is consistent with the EMH).

Exactly Brooklyn. That was the point.

Forummm is inexplicably arguing against DM  by arguing against efficient markets. Everything about this argument is counterproductive.

Sol, IMO, is wrong. But at least he is internally consistent.

Forummm was just being funny. The markets are both rational and irrational. You have lots of people trying to get an edge and guess where things are going. You have lots of people who jump in and out of positions. You have lots of people reacting and overreacting to news. In the long run if you B&H you make the market return, and don't care about all this gaming. If you DM, it's unclear what happens to you, and you are part of this attempt at gaming. Maybe your signals point in the right direction, maybe they lead you astray.

My illustration of the short term (hours) seemingly random fluctuations is not necessarily instructive of a 6 or 12 month long lookback period. However, I think that there is clearly some momentum that does take place from time to time. But being able to capitalize on it using a backtested formula is another question. Especially when that formula lags B&H half the decades.

I've already addressed the internal inconsistency of your "being funny", so i'll ignore that.

Which data are you referring to when you say that Dual momentum lags B&H for half of decades?

Analysis we did several hundred posts ago on this thread using 140 years of Schiller market data.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 26, 2015, 08:04:23 PM
Post number?
Title: Dual Momentum Investing
Post by: milesdividendmd on August 26, 2015, 10:44:31 PM
Fellow DMers.

Here's an interesting article for those who feel confident that the market will recover from here.  (my basic assumption.)

This article is neither Bearish Nor bullish. (What's the correct animal for ambivalent? Platypus-ish)

But the Bearish comments of Joel Greenblatt certainly make me feel better about my probable eminent move to short-term treasuries.

http://m.huffpost.com/us/entry/8039312
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on August 26, 2015, 10:59:37 PM
The decade by decade analysis was AM not DM.

Thanks for the article. I've been expecting to move out of equities for a while now as they have been flat all year and therefore showing very little positive momentum.  It seems like the market just needed a reason for a sell off and China gave one.  This part of the article basically talks about momentum:

"Buyers always appear ready to step in looking for an opportunity. What makes this time a little different is that the market was showing signs of fatigue. The S&P 500 made its all-time high on May 19, and on several occasions failed to make a new high after rebounding from short-term sell-offs. Also, the Chinese problems are serious and not going away."


Sent from my iPhone using Tapatalk
Title: Dual Momentum Investing
Post by: milesdividendmd on August 26, 2015, 11:09:59 PM
Duplicate
Title: Dual Momentum Investing
Post by: milesdividendmd on August 26, 2015, 11:19:36 PM

The decade by decade analysis was AM not DM.

Thanks for the article. I've been expecting to move out of equities for a while now as they have been flat all year and therefore showing very little positive momentum.  It seems like the market just needed a reason for a sell off and China gave one.  This part of the article basically talks about momentum:

"Buyers always appear ready to step in looking for an opportunity. What makes this time a little different is that the market was showing signs of fatigue. The S&P 500 made its all-time high on May 19, and on several occasions failed to make a new high after rebounding from short-term sell-offs. Also, the Chinese problems are serious and not going away."


Sent from my iPhone using Tapatalk

Yeah. That makes more sense about the decade by decade analysis, since DM Backtesting does not support this assertion at all at least going back to 1971.

Absolute momentum is all about downside protection so it only outperforms when there are bear markets (but always diminishes drawdowns over long time horizons.) So bullish decades are almost sure to sport mild underperformance.

That being said, since the the over performance in bear markets far eclipses the small loss of upside of in bull markets  even absolute momentum alone is a good deal over long time horizons.  DM is just better.
Title: Re: Dual Momentum Investing
Post by: forummm on August 27, 2015, 10:40:50 AM
The decade by decade analysis was AM not DM.

Thanks for the article. I've been expecting to move out of equities for a while now as they have been flat all year and therefore showing very little positive momentum.  It seems like the market just needed a reason for a sell off and China gave one.  This part of the article basically talks about momentum:

"Buyers always appear ready to step in looking for an opportunity. What makes this time a little different is that the market was showing signs of fatigue. The S&P 500 made its all-time high on May 19, and on several occasions failed to make a new high after rebounding from short-term sell-offs. Also, the Chinese problems are serious and not going away."

So what's the explanation now that the market has gone up about 7% in the past 30 hours? No more fatigue? The momentum was down, and now is it up again?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 27, 2015, 10:58:52 AM
The momentum is still negative on a 6 month lookback, and not by a little bit.

You seem to be under the opinion that one must have an opinion about why the market moves in the way it does in order to practice DM. You don't, any more than you need such knowledge for buy and hold.

In fact as previously discussed buy and hold is much more rooted in the EMH.  DM is the other side of efficient market hypothesis.
Title: Re: Dual Momentum Investing
Post by: Chuck on August 27, 2015, 11:51:58 AM
I look forward to reexamining this thread over time. I am very curious to see how a DM approach handles this increased volatility.
Title: Re: Dual Momentum Investing
Post by: sol on August 27, 2015, 12:01:02 PM
I look forward to reexamining this thread over time. I am very curious to see how a DM approach handles this increased volatility.

I think it will be hard to say much because of the details of implementation.  If your decision date was a few days ago and your lookback period was short, you definitely switched to Tbills or cash or something.  If your date is next week and your lookback is short you probably sit tight.  If your lookback is long you probably switch eventually, but the performance result you get after that decision will strongly depend on exactly when you make the call, since volatility is so high right now.

Even if somebody switches and then gets whipsawed, I think a die hard will just swallow hard and accept it as par for the strategy, slight underperformance as the cost of trying to reduce big drawdowns.  Buy and holders do the same thing in a big drop, telling themselves the losses are an expected part of their strategy and that they too just need to stick it out.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 27, 2015, 12:26:54 PM
This is mostly right Sol.

One small point:  If today were your trading day, your lookback could be anything from 3 to 12 months and you would still move to short term treasuries.  This nicely illustrates why the particular lookback  period is not terribly important.  A significant downturn causes a surprisingly consistent signal regardless of the lookback you choose.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on August 27, 2015, 02:10:58 PM
The decade by decade analysis was AM not DM.

Thanks for the article. I've been expecting to move out of equities for a while now as they have been flat all year and therefore showing very little positive momentum.  It seems like the market just needed a reason for a sell off and China gave one.  This part of the article basically talks about momentum:

"Buyers always appear ready to step in looking for an opportunity. What makes this time a little different is that the market was showing signs of fatigue. The S&P 500 made its all-time high on May 19, and on several occasions failed to make a new high after rebounding from short-term sell-offs. Also, the Chinese problems are serious and not going away."

So what's the explanation now that the market has gone up about 7% in the past 30 hours? No more fatigue? The momentum was down, and now is it up again?

This strategy is not a heavy trading strategy.  Most years have less than a handful of trades.

A 3-12 month lookback period and only monthly changes is key to keeping trading costs down and avoiding whipsawing.  This is not that different than looking at the smooth 200 day moving average compared to the ragged daily or hourly data but you don't look at the average every second of every day, just once per month.

I'm really not interested in intra-day or even intra-week moves.  My time horizon is 10 years and I am trying to avoid multi-month bear markets. 

Through my reading and self-performed backtesting I am convinced of the value and downside protection of this type of rules based dual momentum and will follow the 6 month signals once a month on the third Friday of each month. 
Title: Re: Dual Momentum Investing
Post by: forummm on August 27, 2015, 04:58:33 PM
The decade by decade analysis was AM not DM.

Thanks for the article. I've been expecting to move out of equities for a while now as they have been flat all year and therefore showing very little positive momentum.  It seems like the market just needed a reason for a sell off and China gave one.  This part of the article basically talks about momentum:

"Buyers always appear ready to step in looking for an opportunity. What makes this time a little different is that the market was showing signs of fatigue. The S&P 500 made its all-time high on May 19, and on several occasions failed to make a new high after rebounding from short-term sell-offs. Also, the Chinese problems are serious and not going away."

So what's the explanation now that the market has gone up about 7% in the past 30 hours? No more fatigue? The momentum was down, and now is it up again?

This strategy is not a heavy trading strategy.  Most years have less than a handful of trades.

A 3-12 month lookback period and only monthly changes is key to keeping trading costs down and avoiding whipsawing.  This is not that different than looking at the smooth 200 day moving average compared to the ragged daily or hourly data but you don't look at the average every second of every day, just once per month.

I'm really not interested in intra-day or even intra-week moves.  My time horizon is 10 years and I am trying to avoid multi-month bear markets. 

Through my reading and self-performed backtesting I am convinced of the value and downside protection of this type of rules based dual momentum and will follow the 6 month signals once a month on the third Friday of each month. 

I get that DM is a longer term lookback. I was just asking about the specific explanation you quoted in the article. I find it interesting that humans have a need to sort of anthropomorphise* the market and explain why it did this or that because of its feelings about this or that. But oftentimes their explanations aren't very consistent from hour to hour.

*yeah it's shorthand for the people and machines doing the trades based on whatever feelings, but a funny (to me) practice nonetheless.
Title: Re: Dual Momentum Investing
Post by: Chuck on August 28, 2015, 02:33:27 PM
This is mostly right Sol.

One small point:  If today were your trading day, your lookback could be anything from 3 to 12 months and you would still move to short term treasuries.  This nicely illustrates why the particular lookback  period is not terribly important.  A significant downturn causes a surprisingly consistent signal regardless of the lookback you choose.
I disagree. I examined the performance of DM over the past 25 years, using a tool posted early in the thread, and your lookback period had a massive effect. The difference between a 3, 6 and 12 month lookback was considerable (with 3 month being the best performer, and 12 month the worst).

This difference, and the apparent arbitrary nature of it, is the reason that I initially chose not to employ this strategy.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 28, 2015, 02:51:10 PM

This is mostly right Sol.

One small point:  If today were your trading day, your lookback could be anything from 3 to 12 months and you would still move to short term treasuries.  This nicely illustrates why the particular lookback  period is not terribly important.  A significant downturn causes a surprisingly consistent signal regardless of the lookback you choose.
I disagree. I examined the performance of DM over the past 25 years, using a tool posted early in the thread, and your lookback period had a massive effect. The difference between a 3, 6 and 12 month lookback was considerable (with 3 month being the best performer, and 12 month the worst).

This difference, and the apparent arbitrary nature of it, is the reason that I initially chose not to employ this strategy.

Interesting claim. Please share your data.
Title: Re: Dual Momentum Investing
Post by: sol on August 28, 2015, 03:14:00 PM
Interesting claim. Please share your data.

He said he only did 25 years.  I'm sure the true believers can safely ignore his results as insufficiently robust, if they disagree with the conclusions.
Title: Dual Momentum Investing
Post by: milesdividendmd on August 28, 2015, 03:24:51 PM
I'd prefer to see the data before commenting.

Did all lookbacks outperform B and H?, were transaction costs included? Were drawdowns similar? Were drawdowns all superior to B and H?

The description in the post in question tells me nothing but that Chuck thought the results were different.

But I do agree 25 years is a short time period for Backtesting.
Title: Re: Dual Momentum Investing
Post by: brainfart on August 28, 2015, 03:53:21 PM
Hi, I'm a European investor, and I'm considering this strategy for part of my invested money.

Does anyone have recommendations for international investors? Is there anyone already using this strategy?
I'm specifically looking for info on which funds, ETFs or indices I should use, and which lookback periods seem appropriate. Any ideas? Since US and European markets are pretty correlated, does it make sense to e.g. choose S&P500 and EuroStoxx600 (plus some emerging markets for example)?
Due to currency valuations there was quite a different performance this year, so maybe the correlation isn't that big after all if one considers the currency exchange ratios.

I know Mr. Antonacci has a post on his blog about how to implement this as a Canadian, Australian or Japanese investor, which I'm not. I will read that thing again more carefully.

One big problem is that I don't have any tax advantaged account, every transaction is a potential taxable event, but losses can be used to reduce gains, carried over indefinitely, and while the capital gains tax is about 25% (automatic withholding) my personal tax rate is most likely lower and I will eventually get some of the money back.

If anyone has any recommendations, links, ideas how to use this strategy in my situation that would be great.
Title: Re: Dual Momentum Investing
Post by: Chuck on August 28, 2015, 04:02:57 PM

This is mostly right Sol.

One small point:  If today were your trading day, your lookback could be anything from 3 to 12 months and you would still move to short term treasuries.  This nicely illustrates why the particular lookback  period is not terribly important.  A significant downturn causes a surprisingly consistent signal regardless of the lookback you choose.
I disagree. I examined the performance of DM over the past 25 years, using a tool posted early in the thread, and your lookback period had a massive effect. The difference between a 3, 6 and 12 month lookback was considerable (with 3 month being the best performer, and 12 month the worst).

This difference, and the apparent arbitrary nature of it, is the reason that I initially chose not to employ this strategy.

Interesting claim. Please share your data.
I took the link to the resource you posted for me on page 5 and I ran a few tests. At first I was kinda impressed with the results, but after forummm pointed out lookback volatility I started screwing with lookback times one month at a time.

The short of it which I posted on page 9: Absolute momentum underperforms the S&P buy and hold back to 1983 if there is a 6 month loopback. However, it outperforms (CRAZY outperforms) with a 3 month loopback.

This led a discussion of "why" and the conclusion was "dunno".
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 28, 2015, 04:29:32 PM
You must have made an error.

I just tested absolute momentum going back to 83 with 3 and 6 month lookbacks and ....

Both lookbacks beat the S&P. Both have smaller drawdowns.  Both have higher sharpe ratios.

Having difficulty sharing the images at work, sorry.

Again.  please share your data.
Title: Re: Dual Momentum Investing
Post by: dungoofed on August 28, 2015, 05:52:43 PM
I know Mr. Antonacci has a post on his blog about how to implement this as a Canadian, Australian or Japanese investor, which I'm not. I will read that thing again more carefully.

Hi - any link for this blog post please?
Title: Re: Dual Momentum Investing
Post by: hiddenace on August 28, 2015, 07:41:54 PM
I'm late to the party on this thread, but has anyone tried this theorymore actively on a much shorter time frame?

I mean momentum exists on an intra-day basis, so why not just look back at momentum on a 3-12 minute basis and apply this strategy to s&p futures?  Or a 3-12 second basis for that matter. Why are we arbitrarily choosing a long, multiple month time frame?

I guess what I'm asking is if this strategy is so good then why not apply it rapidly in day trading futures and truly maximize gains over a buy and hold?  Has anyone done it?   I may have to try it out on a paper account.
Title: Re: Dual Momentum Investing
Post by: sol on August 28, 2015, 07:56:02 PM
I'm late to the party on this thread, but has anyone tried this theorymore actively on a much shorter time frame?

Yes, they're called high speed traders and they use supercomputers and billions of dollars to do it.  But good luck with your paper.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 28, 2015, 08:33:14 PM

I'm late to the party on this thread, but has anyone tried this theorymore actively on a much shorter time frame?

I mean momentum exists on an intra-day basis, so why not just look back at momentum on a 3-12 minute basis and apply this strategy to s&p futures?  Or a 3-12 second basis for that matter. Why are we arbitrarily choosing a long, multiple month time frame?

I guess what I'm asking is if this strategy is so good then why not apply it rapidly in day trading futures and truly maximize gains over a buy and hold?  Has anyone done it?   I may have to try it out on a paper account.

There's not a lot of evidence that momentum  as it is defined here exists on a weekly or minute timeframe. In fact there's evidence that it doesn't.

There is plenty of evidence of mean reversion on short Time frames which is called "short term reversals."  This is the opposite of momentum. It is a bet that recent winners will start to lose as newinformation becomes digested by traders.

High speed traders are a different beast entirely. The premise (at least as described in flash boys) is built on front running publicly available information, and front running orders themselves. It's a form of temporal arbitrage. Not momentum trading.

Plus there is the problem of reliable price information. Haven't you noticed that different brokers will have different quotes for the same stock/etf at the same time?

Finally more trading means more trading costs and more taxes.

Not a winning formula in my book.
Title: Re: Dual Momentum Investing
Post by: brainfart on August 28, 2015, 11:24:39 PM
I know Mr. Antonacci has a post on his blog about how to implement this as a Canadian, Australian or Japanese investor, which I'm not. I will read that thing again more carefully.

Hi - any link for this blog post please?

http://www.dualmomentum.net/2015/06/dual-momentum-for-non-us-investors.html
Title: Re: Dual Momentum Investing
Post by: dungoofed on August 28, 2015, 11:59:02 PM
Thanks
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 29, 2015, 01:19:24 AM

Hi, I'm a European investor, and I'm considering this strategy for part of my invested money.

Does anyone have recommendations for international investors? Is there anyone already using this strategy?
I'm specifically looking for info on which funds, ETFs or indices I should use, and which lookback periods seem appropriate. Any ideas? Since US and European markets are pretty correlated, does it make sense to e.g. choose S&P500 and EuroStoxx600 (plus some emerging markets for example)?
Due to currency valuations there was quite a different performance this year, so maybe the correlation isn't that big after all if one considers the currency exchange ratios.

I know Mr. Antonacci has a post on his blog about how to implement this as a Canadian, Australian or Japanese investor, which I'm not. I will read that thing again more carefully.

One big problem is that I don't have any tax advantaged account, every transaction is a potential taxable event, but losses can be used to reduce gains, carried over indefinitely, and while the capital gains tax is about 25% (automatic withholding) my personal tax rate is most likely lower and I will eventually get some of the money back.

If anyone has any recommendations, links, ideas how to use this strategy in my situation that would be great.

I know that Antonacci argues that dual momentum is extremely tax efficient since it tends to result in short-term capital losses and long-term capital gains.

Even in America, however, where I have a basic understanding of how the tax system works, I find it very difficult to model dual momentum after taxes. It is for this reason that I am strictly buy and hold in my taxable accounts,  and dual momentum in my retirement/tax-sheltered accounts.

As to the fund choices, for global equities momentum I would recommend either toggling between the S&P 500 and foreign developed markets, or US total market, and all world ex US. Any short-term high-quality treasury fund should work well for your cash position.

I hope that helps.

Title: Re: Dual Momentum Investing
Post by: hiddenace on August 29, 2015, 04:20:53 AM
I'm late to the party on this thread, but has anyone tried this theorymore actively on a much shorter time frame?

Yes, they're called high speed traders and they use supercomputers and billions of dollars to do it.  But good luck with your paper.

I'll assume you weren't trying to sound snarky there, but I wasn't talking about HFT where companies use the fastest possible connection to take advantage of news events in fractions of a second.

I'm just saying if this method is using technical analysis to determine entry and exit points why not pick shorter time frames.

I didn't mention anything about competing with multi-billion dollar computers and fiber optics.

Can someone point me to the evidence that momentum doesn't exist intra-day? 
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 29, 2015, 11:39:38 AM

I'm late to the party on this thread, but has anyone tried this theorymore actively on a much shorter time frame?

Yes, they're called high speed traders and they use supercomputers and billions of dollars to do it.  But good luck with your paper.

I'll assume you weren't trying to sound snarky there, but I wasn't talking about HFT where companies use the fastest possible connection to take advantage of news events in fractions of a second.

I'm just saying if this method is using technical analysis to determine entry and exit points why not pick shorter time frames.

I didn't mention anything about competing with multi-billion dollar computers and fiber optics.

Can someone point me to the evidence that momentum doesn't exist intra-day?

Proving the absence of something is always a tall order, and I would even go so far as to say that both momentum, and mean reversion probably do exist intraday.

But whether momentum trading exists as an actionable approach for the retail investor is another question entirely. After taxes, fees, friction, and accounting for imperfect price information I would guess not.

One thing is for certain.  momentum as originally defined by jagadheesh and titman and used as described in Dual Momentum, is a mid term effect existing for periods between 3 and 12 months.  In longer periods momentum is not predictive of future price movements and mean reversion (value investing) is.   
Title: Re: Dual Momentum Investing
Post by: hiddenace on August 29, 2015, 11:47:27 AM
Ok fair enough, I suppose I should have asked for something highlighting the optimal length of time for implementing this strategy. In my naivete I assumed it could apply to shorter time frames like weeks, days, hours, or minutes instead of just months. I'm just trying to see why it only applies to months. It's a fascinating concept and I'm seeing if it can be applied in different scenarios.  But I guess it doesn't work that way...
Title: Re: Dual Momentum Investing
Post by: dungoofed on August 29, 2015, 09:09:27 PM
I know Mr. Antonacci has a post on his blog about how to implement this as a Canadian, Australian or Japanese investor, which I'm not. I will read that thing again more carefully.

Hi - any link for this blog post please?

http://www.dualmomentum.net/2015/06/dual-momentum-for-non-us-investors.html

Actually I don't think that's much of an analysis at all as it misses out the most likely case ie investing in one's home economy, in one's home currency. I assume that is the portfolio you are trying to put together, right? ie
$HOMECOUNTRY Index Tracking ETF
ex-$HOMECOUNTRY Index Tracking ETF
$HOMECOUNTRY Treasury Bills ETF
$HOMECOUNTRY Bond ETF

Good luck with your back testing!
Title: Re: Dual Momentum Investing
Post by: brainfart on August 30, 2015, 12:48:52 PM
I know that Antonacci argues that dual momentum is extremely tax efficient since it tends to result in short-term capital losses and long-term capital gains.

Unfortunately for me there is no difference in both short and long term gains, both are taxed the same. Used to be different, but not anymore.

Quote
As to the fund choices, for global equities momentum I would recommend either toggling between the S&P 500 and foreign developed markets, or US total market, and all world ex US.

Haven't found any ex-US funds yet, they seem to be pretty rare here. That's currently my biggest hurdle. I'd like to do this with locally available funds, and without having to trade abroad.

Quote
Any short-term high-quality treasury fund should work well for your cash position.

I think I'd go straight to cash. I get higher interest rates for cash than local short term treasuries.

Quote
I hope that helps.

Sure, thanks.

Actually I don't think that's much of an analysis at all as it misses out the most likely case ie investing in one's home economy, in one's home currency.

That is home bias. Very common on this forum with US investors overweighting US, but I don't really like home bias. Too risky long term (at least if you're a buy and hold investor).

Quote
I assume that is the portfolio you are trying to put together, right? ie
$HOMECOUNTRY Index Tracking ETF
ex-$HOMECOUNTRY Index Tracking ETF
$HOMECOUNTRY Treasury Bills ETF
$HOMECOUNTRY Bond ETF

No, If I wanted to do this it would be extremely easy. Ex-homecountry index ETF would simply be MSCI World since my home country is a very small part of the world economy. But I'd like to do Antonacci's original GEM.

I could modify GEM and use Eurostoxx600, and then  MSCI World ex EU. I can get these.

So if any other European investor has any ideas I'm all ears.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 30, 2015, 01:14:55 PM
Can you list the funds available to you? Do you have  EAFE funds and S&P funds?
Title: Re: Dual Momentum Investing
Post by: brainfart on August 30, 2015, 03:30:49 PM
Quote
Can you list the funds available to you?

Too many to list.
I trade on the local stock markets, www.justetf.com lists 1052 ETFs, among them 739 for equities and 242 for bonds, representing 668 different indices. I think I can trade most if not all of them. None from Vanguard btw.

Quote
Do you have  EAFE funds and S&P funds?

13 different ones for the pure S&P500, and another 13 for hedged, equal weight, volatility, max. dividend etc. variants.
No EAFE funds as far as I can see. I would have to use at least 3 or 4 different funds to build my own?

Title: Re: Dual Momentum Investing
Post by: ChaseJuggler on August 31, 2015, 09:55:32 AM
Pulled the trigger! For the next 30 days, my portfolio is 100% bonds.

Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 31, 2015, 11:43:10 AM
Me too.  trade goes through t close.

AZ
Title: Re: Dual Momentum Investing
Post by: Chuck on August 31, 2015, 12:32:29 PM
This is exciting. Real time proof of concept.

Was the method only tuned to satisfy past data, or is it a viable strategy that stands the test of a volatile market? LET'S FIND OUT
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 31, 2015, 12:37:59 PM

This is exciting. Real time proof of concept.

Was the method only tuned to satisfy past data, or is it a viable strategy that stands the test of a volatile market? LET'S FIND OUT

In past data there were periods of underperformance lasting months or even years. So nothing can really be proved either way here other than the behavioral ease or difficulty of the approach.

Title: Re: Dual Momentum Investing
Post by: Chuck on August 31, 2015, 12:49:36 PM

This is exciting. Real time proof of concept.

Was the method only tuned to satisfy past data, or is it a viable strategy that stands the test of a volatile market? LET'S FIND OUT

In past data there were periods of underperformance lasting months or even years. So nothing can really be proved either way here other than the behavioral ease or difficulty of the approach.
Well... That's not satisfying at all. Or conclusive.

I'm still gonna watch and pretend that it is.

Title: Re: Dual Momentum Investing
Post by: milesdividendmd on August 31, 2015, 01:49:15 PM
Spend some time looking at this chart detailing month by month returns for GEM...  and yearly performance vs ACWI.


http://www.optimalmomentum.com/trackrecord3.html
Title: Re: Dual Momentum Investing
Post by: hodedofome on August 31, 2015, 02:12:34 PM
This is exciting. Real time proof of concept.

Was the method only tuned to satisfy past data, or is it a viable strategy that stands the test of a volatile market? LET'S FIND OUT

1 data point (1 month) won't tell you anything about a strategy. At all.

I too am in bonds in my retirement accounts, and mostly cash (SHY) in my trading account.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on September 01, 2015, 11:18:22 AM
Its a weird feeling watching the market do poorly today, after having switched to short term treasuries yesterday.

It makes me feel smart, which is stupid.  I had no idea yesterday what the market would do today.  And I have no clue now what it will do tomorrow.  And of course the flip side of this feeling smart is that if the market had shot up today I would've felt stupid.

Logically I know that the DM approach is one that I am comfortable with, but I do not experience the market in real time with my deliberative "system 2" brain.  I experience it with my primordial "system 1" impulsive brain.

Which all helps to remind me that no matter what approach we choose, we are generally wiser to stick to our system through thick and thin...
Title: Re: Dual Momentum Investing
Post by: hodedofome on September 01, 2015, 11:40:39 AM
A little off topic but I think you mean System 1 is your impulsive brain and System 2 is your logical brain. At least that's what I read in Thinking Fast and Slow. :)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on September 01, 2015, 11:45:56 AM
A little off topic but I think you mean System 1 is your impulsive brain and System 2 is your logical brain. At least that's what I read in Thinking Fast and Slow. :)

Thanks!  and amended.
Title: Re: Dual Momentum Investing
Post by: starguru on September 01, 2015, 11:59:17 AM
Its a weird feeling watching the market do poorly today, after having switched to short term treasuries yesterday.

It makes me feel smart, which is stupid.  I had no idea yesterday what the market would do today.  And I have no clue now what it will do tomorrow.  And of course the flip side of this feeling smart is that if the market had shot up today I would've felt stupid.

Logically I know that the DM approach is one that I am comfortable with, but I do not experience the market in real time with my deliberative "system 2" brain.  I experience it with my primordial "system 1" impulsive brain.

Which all helps to remind me that no matter what approach we choose, we are generally wiser to stick to our system through thick and thin...

I thought the procedure was to look AFTER the last trading of the month, and then the next trading day to move to the indicated asset -- so you should be selling today, not yesterday.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: yoda34 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.
Title: Re: Dual Momentum Investing
Post by: kvaruni 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!
Title: Dual Momentum Investing
Post by: milesdividendmd 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
Title: Re: Dual Momentum Investing
Post by: yoda34 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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. 
Title: Re: Dual Momentum Investing
Post by: FIPurpose 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.
Title: Re: Dual Momentum Investing
Post by: mrpercentage 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.
Title: Re: Dual Momentum Investing
Post by: mrpercentage on September 05, 2015, 09:55:02 PM
I bet regulation is coming. It might take a while but its coming.
Title: Re: Dual Momentum Investing
Post by: dungoofed on September 05, 2015, 11:43:07 PM
execrated rate

I don't think that word means what you think it does.
Title: Re: Dual Momentum Investing
Post by: mrpercentage 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.

Title: Re: Dual Momentum Investing
Post by: Zamboni 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.
Title: Re: Dual Momentum Investing
Post by: mrpercentage 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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!
Title: Re: Dual Momentum Investing
Post by: dungoofed on September 08, 2015, 01:17:06 AM
For what it's worth, Moosignal also signaled a switch this last weekend (to cash).
Title: Re: Dual Momentum Investing
Post by: sirdoug007 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.

(http://www.bikerchicknews.com/wp-content/uploads/2013/06/johncandy.jpg)
Title: Re: Dual Momentum Investing
Post by: Zacharias 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.
Title: Re: Dual Momentum Investing
Post by: brainfart 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?
Title: Re: Dual Momentum Investing
Post by: innerscorecard 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.
Title: Re: Dual Momentum Investing
Post by: Zacharias 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: brainfart 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.
Title: Re: Dual Momentum Investing
Post by: hodedofome 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.


Sent from my iPhone using Tapatalk
Title: Re: Dual Momentum Investing
Post by: sol 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.
Title: Re: Dual Momentum Investing
Post by: forummm 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.
Title: Re: Dual Momentum Investing
Post by: wienerdog 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.
Title: Re: Dual Momentum Investing
Post by: sol 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.
Title: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: sol 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?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Dual Momentum Investing
Post by: milesdividendmd 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.)
Title: Re: Dual Momentum Investing
Post by: sol 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.

Title: Re: Dual Momentum Investing
Post by: 2Birds1Stone 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!
Title: Re: Dual Momentum Investing
Post by: sol 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: forummm on September 16, 2015, 03:14:03 PM
(http://cdn.meme.am/instances/500x/58826004.jpg)
Title: Re: Dual Momentum Investing
Post by: Left 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
Title: Dual Momentum Investing
Post by: hodedofome 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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Title: Re: Dual Momentum Investing
Post by: sol on September 16, 2015, 08:02:31 PM
All things being equal, trading less in better.

Hah!
Title: Re: Dual Momentum Investing
Post by: hodedofome 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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Title: Re: Dual Momentum Investing
Post by: forummm 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?
Title: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: hodedofome 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.
Title: Re: Dual Momentum Investing
Post by: Left 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?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: Left 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
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: forummm 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.
Title: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: forummm 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: sol 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?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: RichMoose 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?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.)
Title: Re: Dual Momentum Investing
Post by: RichMoose 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?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: RichMoose 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?
Title: Re: Dual Momentum Investing
Post by: sol on September 18, 2015, 10:38:30 AM
(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.
Title: Re: Dual Momentum Investing
Post by: ChaseJuggler 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!
Title: Re: Dual Momentum Investing
Post by: brooklynguy 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?
Title: Re: Dual Momentum Investing
Post by: sol 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. 
Title: Re: Dual Momentum Investing
Post by: brooklynguy 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: brooklynguy 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.

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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).

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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.

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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.
Title: Dual Momentum Investing
Post by: milesdividendmd on September 18, 2015, 12:47:55 PM
(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.

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.
Title: Dual Momentum Investing
Post by: milesdividendmd 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.

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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.

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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.
Title: Re: Dual Momentum Investing
Post by: starguru 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. 
Title: Re: Dual Momentum Investing
Post by: sol 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.

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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. 
Title: Re: Dual Momentum Investing
Post by: smilla 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.
Title: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: sol 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.
Title: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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?
Title: Re: Dual Momentum Investing
Post by: sol 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on September 18, 2015, 08:04:23 PM
Thanks!
Title: Re: Dual Momentum Investing
Post by: Cheddar Stacker 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.

Title: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: Cheddar Stacker 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: innerscorecard 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.
Title: Re: Dual Momentum Investing
Post by: brooklynguy 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.
Title: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 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/


Sent from my iPhone using Tapatalk
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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/


Sent from my iPhone using Tapatalk

Great article. Surprised I missed it when it was published.
Title: Re: Dual Momentum Investing
Post by: brooklynguy 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).

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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 (http://forum.mrmoneymustache.com/welcome-to-the-forum/your-mustache-might-be-evil/).  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."
Title: Dual Momentum Investing
Post by: milesdividendmd on September 19, 2015, 07:54:28 PM
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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.

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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.


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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 (http://forum.mrmoneymustache.com/welcome-to-the-forum/your-mustache-might-be-evil/).  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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on September 19, 2015, 08:01:12 PM
Ps I have no idea why the formatting failed there!
Title: Re: Dual Momentum Investing
Post by: sol 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.
Title: Re: Dual Momentum Investing
Post by: dungoofed on September 19, 2015, 08:21:45 PM
also you need to use the other slash
Title: Re: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on September 19, 2015, 08:50:48 PM
It was the slash! Thanks dungoofed.
Title: Re: Dual Momentum Investing
Post by: brooklynguy 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 (http://forum.mrmoneymustache.com/investor-alley/as-more-people-index-in-index-funds/msg280556/#msg280556) 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.
Title: Dual Momentum Investing
Post by: milesdividendmd 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.
Title: Re: Dual Momentum Investing
Post by: ChaseJuggler 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?"
Title: Re: Dual Momentum Investing
Post by: Left 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
Title: Re: Dual Momentum Investing
Post by: sol on September 22, 2015, 11:11:23 AM
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

You didn't look very closely.  Some use cash, some use Tbills.

And the "stock market" means stocks, not any of the alternatives.  Most of the DM market timers here sold 100% of their stocks in September and moved to cash or cash equivalents, so they yes they totally did pull money out of market.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on September 22, 2015, 11:41:13 AM

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

You didn't look very closely.  Some use cash, some use Tbills.

And the "stock market" means stocks, not any of the alternatives.  Most of the DM market timers here sold 100% of their stocks in September and moved to cash or cash equivalents, so they yes they totally did pull money out of market.

Sol's correct.

DM investors impact the market just as all investors impact the market whenever we trade.

We just don't trade very often, so it is kind of a non issue, in practice.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on September 22, 2015, 03:18:51 PM
It's amazing how just volatile this market has been of late.

Fed doesn't tighten? Market drops.

No news today? Market drops.

It makes me wonder what would happen if there were actual bad news?

It sure seems like the market on pins and needles.

(And that observation is not worth the paper it was printed on, ((and there was no paper involved.))
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on September 30, 2015, 06:01:55 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.


In the middle of the month there was some speculation ( after an up day for the market) about what would happen at months end for DM investors.  My argument at the time was that such speculation was pointless and that the only rational approach was to analyze returns at the end of the month when action would be taken.

Now that the end of the month has arrived, here is how it played out for me.

My 3 options in my retirement accounts VBITX (short bonds), FSPNX (Developed international) and VIIIX (S&P)

On 8/31 I sold out of FSPNX and bought into VBITX

Here are the returns for september

VBITX  8/31 close  10.51    9/30 close  10.54  (return +0.03%)
FSPNX 8/31 close  37.31    9/30 close  35.57  (return -4.7%)
VIIIX   8/31 close  180.85    9/30 close  175.41  (return -3.0%)

So my returns were helped in September by the DM strategy.   But I'm not implying that that one data point means anything.  It doesn't.

Has DM correctly identified an early bear market?  who knows?

But my sense (based on the market's volatility and large negative reactions to non news) is that it has successfully recognized a market with increased downside risk.  It sure seems like we are one market shock away from badness...

Either way, I'm all in DM in my tax shelterred accounts and will remain so.

Based on a 6 month look back I made no trades this month and remain 100% invested with VBITX.
Title: Re: Dual Momentum Investing
Post by: boarder42 on October 01, 2015, 06:30:46 AM
lets just hope it has.  i'm going all in on this now with my 401k accounts.
Title: Dual Momentum Investing
Post by: milesdividendmd on October 01, 2015, 06:43:43 AM
lets just hope it has.  i'm going all in on this now with my 401k accounts.

You have a lot of balls in the air right now Boarder.

Make sure you do your due diligence.
Title: Re: Dual Momentum Investing
Post by: boarder42 on October 01, 2015, 06:48:04 AM
i've been all in on it since the first switch to developed international 4-5 months ago.  i guess i should have stated that differently.

and as to my other "ball" as you call it thats in the air.  i have invested 850 dollars and turned that into 8k realized profit.  the risk in that realm is sub zero right now.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 01, 2015, 10:06:29 PM
You know I'm rooting for you boarder.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 14, 2015, 06:45:18 PM
This was a pretty nice little post with some Asness quotes that seems relevant to some of the above discussion about whether or not DM investing adds to market volatility.

http://blog.alphaarchitect.com/2015/10/14/cliff-asness-quick-hits-quant-land/
Title: Re: Dual Momentum Investing
Post by: innerscorecard on October 15, 2015, 12:38:04 AM
The thought that you have to altruistically avoid impacting the smooth ride up of "the market" through the investment choices of how you allocate your hard-earned money is absurd.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 15, 2015, 01:40:33 AM

The thought that you have to altruistically avoid impacting the smooth ride up of "the market" through the investment choices of how you allocate your hard-earned money is absurd.

100% agree. The whole ethical purity of indexing argument and the destructive nature of momentum investment argument has always struck me as absurd as well.

On the other hand the question of whether or not trend following (DM)  necessarily increases volatility, price swings, and market "mispricing" prompted some interesting discussion above.

I thought Asness' point about trend following  sometimes allowing assets to revert to their intrinsic value quicker was an interesting one not articulated before in this thread.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 15, 2015, 07:48:03 AM
The thought that you have to altruistically avoid impacting the smooth ride up of "the market" through the investment choices of how you allocate your hard-earned money is absurd.

I don't recall anyone in this thread arguing that you do, and, in post # 839 (http://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/msg811422/#msg811422) above, I specifically expressed my view that you do not.

On the other hand the question of whether or not trend following (DM)  necessarily increases volatility, price swings, and market "mispricing" prompted some interesting discussion above.

I thought Asness' point about trend following  sometimes allowing assets to revert to their intrinsic value quicker was an interesting one not articulated before in this thread.

This is the salient quote from the Alpha Architect post:

Quote from: Asness as quoted in Alpha Architect Post
Second of all, trend following strategies, strategies that buy when things are going up and sell when things are going down, almost definitely do what the critics say: exacerbate near-term volatility, make things move more. That doesn’t mean that they’re crazy. That doesn’t mean that they move the price in the wrong direction…I’m an old University of Chicago guy so this is a major admission for me. We do not live in a world of perfect capital markets. Price is not always exactly equal to value. If price is below value, and it starts to trend back towards value, a trend follower will buy it. They will make it move more herky-jerky. They will make it move faster. They’ll also make it move towards, not away from true value. So when you hear people talk about trend following, sometimes it can make things crazy, but sometimes it can also be helping restore prices. It’s not always making prices more crazy.

Asness seems to have no problem recognizing the unassailable truth that piling onto current price trends will, as a matter of logic, amplify those trends (which you have thus far refused to do, and which the other participants in this thread have apparently not been the first to do (since I highly doubt that Sol and I are the critics Agness refers to)).

Yes, if the market happens to be "incorrectly" valued, and a pricing trend begins back in the direction towards "correct" value, the presence of momentum traders in the market will hasten its reversion to "correctness."  However, like passive indexing, momentum trading completely ignores market fundamentals, so, as we've been arguing all along (and as you've been resisting), whenever the market is headed away from its "correct" intrinsic value, momentum traders will necessarily contribute to pushing the market even further away.  Said differently, in Sol's original words:

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.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 15, 2015, 08:41:23 AM
Right Brooklyn, Asness is arguing that trend following makes the market both more efficient and less efficient depending on which way the market itself happens to be moving.

I thought it was an interesting point not raised before. I stand by that.

I argued above that we don't even know if dual momentum trading increases or decreases volatility until we know on balance the direction of the market's movement at the time momentum traders make their trades.

You nor anyone else ever answered that point which means that the observation that DM "unassailably" amplifies price trends is in fact very debatable.

Sol's quote strikes me as every bit as unsupported and flighty as the day it was penned.

No support for his claims that DM traders are a "force of chaos", who "seek to disrupt",  or who "effectively short" stocks when they are down. It goes on.

Sol and you have a feeling about momentum's effects on the market, but no evidence that your feelings are based in reality.

No need to  debate the merits of that quote again it's been well dissected already.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 15, 2015, 09:13:58 AM
Right Brooklyn, Asness is arguing that trend following makes the market both more efficient and less efficient depending on which way the market itself happens to be moving.

I thought it was an interesting point not raised before. I stand by that.

Yep, I agree.

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I argued above that we don't even know if dual momentum trading increases or decreases volatility until we know on balance the direction of the market's movement at the time momentum traders make their trades.

You nor anyone else ever answered that point which means that the observation that DM "unassailably" amplifies price trends is in fact very debatable.

This was my answer:

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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?

You then responded that the bank run analogy is flawed because a bank run's root cause is a loss of confidence in the banking system (which may or may not likewise be true with respect to the stock market in the case of any given pricing trend).  But the purpose of the bank run analogy was only to demonstrate the mechanics of how momentum trading is self-reinforcing.  Momentum traders identify a directional price movement, pile on to it, and thereby enhance it.  I don't need to cite any evidence to demonstrate the truth of this statement (and, as I said, I suspect none may exist, because momentum trading may not currently make up a significant enough percentage of the market to have a meaningful effect), because it is true on an a priori basis.  In other words, I'm not arguing that momentum traders have in fact increased market volatility.  I'm arguing that momentum trading does, by its nature, necessarily contribute to market volatility, and if enough market participants took up momentum trading, they would in fact increase market volatility.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 15, 2015, 09:33:05 AM
I don't agree that your view of momentum's impact on price movement is true a priori.

In my view of how the market works there are only 2 ways for an individual to effect price movement:  to trade or to convince others to trade. And price movement is amplified only if the market is moving in the same direction of the trade at the moment it is executed.

Unless you can conceive of another way for an individual to effect  price movement, your model is not true a priori.

And if you are not concerned with an individual's impact "at the moment" he trades, then what time period are you speaking about exactly when you speak about volatility?
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 15, 2015, 10:22:27 AM
In my view of how the market works there are only 2 ways for an individual to effect price movement:  to trade or to convince others to trade. And price movement is amplified only if the market is moving in the same direction of the trade at the moment it is executed.

Right.  And momentum traders trade in the same direction the market has been moving, thereby adding to the momentum.

If a run on my local bank has started, and I rush over to withdraw my deposits, I am contributing to the run on the bank (which, as you said earlier, may be a smart thing to do (at least in the absence of FDIC protection), but that's beside the point).  What you seem to be arguing is that I am not contributing to the bank run if, on that day, sentiment happens to shift and other depositors come to the bank to make additional deposits.  On balance, the decline in total deposits may have slowed (analogous to a reduction in volatility), but it was those other depositors who caused it, not me.  My activity had the effect of contributing to decline in deposits (the analog of contributing to an ongoing directional price movement in the stock market) -- it just happened to be counterbalanced by other depositors.

Quote
And if you are not concerned with an individual's impact "at the moment" he trades, then what time period are you speaking about exactly when you speak about volatility?

I'm not speaking about any specific time period in particular, but, like you, I'm speaking about price trends, which only occur over time.  It's meaningless to talk about a "trend" at an instant in time.  A trend only happens over a period of time (which could be an hour, a day, a week, or a decade).

Momentum trading involves identifying a pricing trend, over some period, that is already underway, and then following that trend.  The momentum trader executes a trade in the same direction as the trend.  That trade has the effect of amplifying the trend.  The amplification effect may be minimal (and, in the case of a typical trade executed by individual trader like yourself, infinitesimal), and the activity of other traders may counteract the amplification effect, but that is the effect.  It has to be, as a matter of logic.  And the bigger the share of the market momentum traders make up, the stronger the overall effect will be.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 15, 2015, 10:32:00 AM
Then you would agree that buying and holding equities also accentuates the long term trend of the stock market. Both the price and and the mean earnings multiple have increased over time after all.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 15, 2015, 10:36:16 AM
And what we are discussing right now, you should remember is whether or not DM increases volatility.

Volatility refers to the amplitude and velocity of price movements, I think you will agree.

You still haven't articulated even a plausible theory about how trading against the price movement of the security being traded at the moment it is traded can increase either the velocity or amplitude of that security's price movement.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 15, 2015, 11:00:08 AM
If your point is that trend following follows trends then we are in agreement.

That was not Sol's point at all of course.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 15, 2015, 11:04:36 AM
Then you would agree that buying and holding equities also accentuates the long term trend of the stock market.

Of course.  As the author of Philosophical Economics (http://www.philosophicaleconomics.com/2013/12/the-single-greatest-predictor-of-future-stock-market-returns/) has put it, "ultimately, the price of equity is determined in the same way that the price of everything is determined--via the forces of supply and demand."  If a trader comes into the market to purchase stock, that will put upward pressure on its price.

And what we are discussing right now, you should remember is whether or not DM increases volatility.

Do you mean DM as opposed to a generic broader category (if one exists) of "momentum trading" in general?  What I've been talking about is the specific strategy of piling on to a directional pricing trend that is already underway, which I understand is only one part of DM.

Quote
You still haven't articulated even a plausible theory about how trading against the price movement of the security being traded at the moment it is traded can increase either the velocity or amplitude of that security's price movement.

I don't follow this.  Would you mind elaborating?

In any event, whatever plausible theory I have failed to elaborate, was the following assertion somehow inaccurate in any way?

Momentum trading involves identifying a pricing trend, over some period, that is already underway, and then following that trend.  The momentum trader executes a trade in the same direction as the trend.  That trade has the effect of amplifying the trend.  The amplification effect may be minimal (and, in the case of a typical trade executed by individual trader like yourself, infinitesimal), and the activity of other traders may counteract the amplification effect, but that is the effect.  It has to be, as a matter of logic.  And the bigger the share of the market momentum traders make up, the stronger the overall effect will be.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 15, 2015, 11:14:37 AM
What I am saying is that the only way the price trend is amplified is if a security when bought is moving upwards in price at that instant (or the converse when it comes to selling).

There is no other way to effect the "trend" of price movement.

A trend follower does follow the price trend for a specific look back period. That's self evident.

But It does not follow that this increases or decreases overall volatility in the market.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 15, 2015, 11:24:10 AM
What I am saying is that the only way the price trend is amplified is if a security when bought is moving upwards in price at that instant (or the converse when it comes to selling).

Why?  If the trend over the given lookback period was down, but in the minutes before the trader executes the trade the price started trending up, the trade still had the effect of contributing to the downward price movement (or amplifying the downward trend).

Quote
A trend follower does follow the price trend for a specific look back period. That's self evident.

But It does not follow that this increases or decreases overall volatility in the market.

Because that depends on what other market participants are doing, right?  But it does follow that this contributes to the amplification of the directional pricing trend that led the momentum trader to make the trade.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 15, 2015, 01:26:59 PM

What I am saying is that the only way the price trend is amplified is if a security when bought is moving upwards in price at that instant (or the converse when it comes to selling).

Why?  If the trend over the given lookback period was down, but in the minutes before the trader executes the trade the price started trending up, the trade still had the effect of contributing to the downward price movement (or amplifying the downward trend).



Because every trade goes against the trend for some lookback periods and with the trend for others.

So In your given example the trader is trading with the trend of his lookback period and against the trend of the past few minutes.

He is also decreasing the volatility of price movement in that security  as long as the price is going up at the moment he sells, which is the only time he can directly effect volatility.
Title: Dual Momentum Investing
Post by: milesdividendmd on October 15, 2015, 06:29:55 PM
In other words.....

Saying that a trend follower perpetuates the trend of his own lookback period is axiomatic. But that fact tells you literally nothing about the trend follower's contribution to overall market volatility.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on October 16, 2015, 10:34:03 AM
I don't really want to jump back in this thread, but I am not following miles line of reasoning.  He seems to be engaging in some weird semantics.  The strategy has momentum in it's name.  By definition the strategy makes you follow the momentum of the market, thus amplifying that momentum.   The entire premise is to get in when the gettin' is good, and get out when it's not.  In order for the strategy to work, it necessarily has to amplify the volatility. 
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 16, 2015, 01:56:17 PM
Frugal nacho.

It's not semantics.

In order to understand whether or not DM increases the volatility of the market you must understand

1. how any trade can increase or decrease overall market volatility.

2.  Whether or not DM trades are more likely to be volatility increasing trades.

Until you have concrete answers to those questions, the only intellectually honest answer is that you don't know whether DM increases or decreases volatility.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on October 16, 2015, 03:01:44 PM
It is semantics.  I don't have to know the exact impact of individual trades to know that overall a strategy that causes you to follow a trend will exacerbate that trend.  It seems to make sense to several other people too.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 16, 2015, 03:53:55 PM
"Exacerbating that trend" and increasing market volatility are not the same thing.

This might be the source of your confusion.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 17, 2015, 06:05:07 AM
This might be the source of your confusion.

Yes, this is without a doubt the source of the confusion, because I just spent the lion's share of the past two pages of this thread trying to make the point that momentum trading has the effect of "exacerbating that trend" (after Sol and others spent the preceding six pages trying to make the same point), which you disputed at every turn, and, having just reread those eight pages, I find it impossible to believe that you did not know that that is exactly the point we were trying to make until now.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 17, 2015, 10:42:57 AM
That's hilarious.

I found it equally hard to believe that you couldn't understand that "exacerbating the trend," and increasing market volatility were not the same and not necessarily even related.

For fun you should go back and count the number of times I made that very point.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 17, 2015, 10:48:10 AM
I used quotes around "exacerbating the trend" because that phrase is unnecessarily judgmental.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 17, 2015, 11:08:06 AM

This might be the source of your confusion.

Yes, this is without a doubt the source of the confusion, because I just spent the lion's share of the past two pages of this thread trying to make the point that momentum trading has the effect of "exacerbating that trend" (after Sol and others spent the preceding six pages trying to make the same point), which you disputed at every turn, and, having just reread those eight pages, I find it impossible to believe that you did not know that that is exactly the point we were trying to make until now.

Oh and a small correction.  I don't believe that I ever made the point that trend following doesn't  perpetuate the trend of its chosen lookback period.

In fact I made the opposite point numerous times, that it does (and that this is not necessarily related to increased market volatility.)

It seems to me now, that this whole discussion, starting with Sol's original quote, was just the case of your side conflating these 2 separate claims.

Title: Re: Dual Momentum Investing
Post by: frugalnacho on October 21, 2015, 07:56:24 AM
How is exacerbating the trend and volatility not the same thing?  Your strategy by definition increases the downward trend when the market is dropping, and increases the upward trend when it's rising.  How could that possibly not increase volatility?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 21, 2015, 09:49:36 AM
Frugal I just want to point out that I have answered that question multiple times in the past pages. Despite that this the question keeps on getting asked.

I point this out simply to emphasize that I am not playing semantic games, and am not arguing in bad faith.

This is an important distinction and I'm happy to try to answer the question again.

Let's go slow.

How would you define an "increase in market volatility?"

I would define it as an increase in the size and speed of market price movements.

Agree or disagree?
Title: Re: Dual Momentum Investing
Post by: frugalnacho on October 21, 2015, 10:41:39 AM
I would define it as the total variance from the average.  Isn't that how it's commonly defined in reference to an investment? It doesn't necessarily have to increase the speed of price movements, but will still add to the magnitude of the price movement. 
Title: Dual Momentum Investing
Post by: milesdividendmd on October 21, 2015, 11:36:45 AM
I would define it as the total variance from the average.  Isn't that how it's commonly defined in reference to an investment? It doesn't necessarily have to increase the speed of price movements, but will still add to the magnitude of the price movement.

If that's your definition, then why must the look back period necessarily direct the DM trader to trade in a direction away from the average?  If an overvalued (relative to average value) asset is trending down, or if an undervalued asset is trending up for the lookback period then wouldn't the DM trader be decreasing, not increasing volatility?
Title: Re: Dual Momentum Investing
Post by: brainfart on October 21, 2015, 12:13:59 PM
Sheesh... this is getting old.

Can't we just agree that dual momentum investing will most likely cause the total collapse of the world's financial system (and not some real threat like a humongous derivatives bubble), and move on to more interesting topics?

Like e.g. how this can be implemented by non-USians without access to tax advantaged 401ks, EAFE funds etc? Thanks.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on October 21, 2015, 12:36:44 PM
I would define it as the total variance from the average.  Isn't that how it's commonly defined in reference to an investment? It doesn't necessarily have to increase the speed of price movements, but will still add to the magnitude of the price movement.

If that's your definition, then why must the look back period necessarily direct the DM trader to trade in a direction away from the average?  If an overvalued (relative to average value) asset is trending down, or if an undervalued asset is trending up for the lookback period then wouldn't the DM trader be decreasing, not increasing volatility?

I'm saying the overall cumulative effect of all DM traders necessarily increases volatility.  At times some trades may be driving the price back toward the mean, thus decreasing volatility, but the overall cumulative effect of all DM trades must be towards increasing volatility. Otherwise the strategy wouldn't work.

And because the strategy doesn't call for you to only sell when the price is trending down, but still overvalued.  It calls for you to sell when it's trending down, period.  That includes times when it's over valued and undervalued (or even accurately valued).  I just don't see how the cumulative effect could be anything but increasing volatility. 
Title: Re: Dual Momentum Investing
Post by: frugalnacho on October 21, 2015, 12:49:54 PM
To explain it a bit further....

The trades a DMer makes when the asset is over valued and trending back down towards the mean will cancel out with the trades that are made when the asset is under valued and trending back towards the mean.  But when it's over valued and trending up your trades will push the price even higher from the mean.   When it's undervalued and trending down your trades will drive it further down.  The price will still average out to the same mean, but the highs and lows will be exacerbated - the very definition of volatility. 
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 21, 2015, 02:04:30 PM

I would define it as the total variance from the average.  Isn't that how it's commonly defined in reference to an investment? It doesn't necessarily have to increase the speed of price movements, but will still add to the magnitude of the price movement.

If that's your definition, then why must the look back period necessarily direct the DM trader to trade in a direction away from the average?  If an overvalued (relative to average value) asset is trending down, or if an undervalued asset is trending up for the lookback period then wouldn't the DM trader be decreasing, not increasing volatility?

I'm saying the overall cumulative effect of all DM traders necessarily increases volatility.  At times some trades may be driving the price back toward the mean, thus decreasing volatility, but the overall cumulative effect of all DM trades must be towards increasing volatility. Otherwise the strategy wouldn't work.

And because the strategy doesn't call for you to only sell when the price is trending down, but still overvalued.  It calls for you to sell when it's trending down, period.  That includes times when it's over valued and undervalued (or even accurately valued).  I just don't see how the cumulative effect could be anything but increasing volatility.

The DM strategy calls for you to buy when the security price is trending up relative to other securities for your lookback period and sell when the total returns are less than t bills for your lookback period.

If you can demonstrate that prices are more likely to be "above average" for the first instance and "below average" for the second then you would be correct, but this is not necessarily the case at all.

Incidentally my definition of volatility was referring to volatility as captured in the VIX fear index, in other words rapid and unexpected price movements reflective of investor fear/sentiment.  I believe this is what Sol was referring to in his original argument, but I could be wrong.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 21, 2015, 02:07:01 PM

Sheesh... this is getting old.

Can't we just agree that dual momentum investing will most likely cause the total collapse of the world's financial system (and not some real threat like a humongous derivatives bubble), and move on to more interesting topics?

Like e.g. how this can be implemented by non-USians without access to tax advantaged 401ks, EAFE funds etc? Thanks.

Sorry man!

What do you have access to in terms of low cost index funds, and what are your tax liabilities where you live?
Title: Re: Dual Momentum Investing
Post by: arebelspy on October 24, 2015, 02:51:31 AM
Oh boy, catching up on this thread was a fun read.  :P

A meta comment for miles:
Frugal I just want to point out that I have answered that question multiple times in the past pages. Despite that this the question keeps on getting asked.

If it keeps getting asked, you may want to consider that the people asking feel that it hasn't been answered.

You say you've answered it, but either your point didn't come across, or they feel like it wasn't answered at all (sidestepped, or whatever).

When a question gets answered, it may come up again, but rarely over and over in the same short time/space period.  You may want to understand that those questioning are not having their questions answered, despite you claiming you have.

Quote
I point this out simply to emphasize that I am not playing semantic games, and am not arguing in bad faith.

As the saying goes:
Quote
"The first time someone calls you a horse you punch him on the nose, the second time someone calls you a horse you call him a jerk but the third time someone calls you a horse, well then perhaps it's time to go shopping for a saddle."

You feel like you aren't, but considering this keeps happening, it may be time to consider why.  :)

------------------------------------

On topic, I agree that it seems obvious that a momentum strategy leads to more momentum. Whether or not you find that problematic in terms of sol's quote, it certainly doesn't lead to a stability of markets.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 24, 2015, 09:48:06 AM

Oh boy, catching up on this thread was a fun read.  :P

A meta comment for miles:
Frugal I just want to point out that I have answered that question multiple times in the past pages. Despite that this the question keeps on getting asked.

If it keeps getting asked, you may want to consider that the people asking feel that it hasn't been answered.

You say you've answered it, but either your point didn't come across, or they feel like it wasn't answered at all (sidestepped, or whatever).

When a question gets answered, it may come up again, but rarely over and over in the same short time/space period.  You may want to understand that those questioning are not having their questions answered, despite you claiming you have.

Quote
I point this out simply to emphasize that I am not playing semantic games, and am not arguing in bad faith.

As the saying goes:
Quote
"The first time someone calls you a horse you punch him on the nose, the second time someone calls you a horse you call him a jerk but the third time someone calls you a horse, well then perhaps it's time to go shopping for a saddle."

You feel like you aren't, but considering this keeps happening, it may be time to consider why.  :)

------------------------------------

On topic, I agree that it seems obvious that a momentum strategy leads to more momentum. Whether or not you find that problematic in terms of sol's quote, it certainly doesn't lead to a stability of markets.

ARS,

Welcome back.

I was obviously more than happy to keep on answering the same question over and over.

It's also obvious that I wasn't doing a very good job answering it, since your side kept on asking the same question.

From my perspective I spent several Pages arguing that 2+2 does in fact equal four.  And the other side kept on arguing that it equaled three because 3 = 4.

Would you now like to start a several page argument on whether or not 2 +2 equals five?

(I.e. would you now like to start a new argument that "momentum" and "volatility" are the same thing? I would argue that they are not, and the dictionary would back me up, I think.)
Title: Re: Dual Momentum Investing
Post by: starguru on October 24, 2015, 10:55:55 AM
I would agree that momentum and volatility are NOT the same thing.  But they are connected.  It seems logical to me that *frequent* changes in momentum could contribute to volatility. 

But DM traders would only trade once per month max.  I don't think that counts as frequent.  And I don't think any DM contribution to volatility makes it an invalid strategy.   Would we consider BH invalid because it contributes to volatility when people get paid and contribute to their 401ks twice a month (typically), once a month more than DM investors? 

It seems to me that emotion based investing, what many individual investors do, contributes much more to volatility.  Same for technical trading, and automated trading.

DM is a strategy that has strict rules, takes emotion out of the equation, and historically would lead to few trades a year.  We can argue if its better than B&H, but invalidating it because of its effects on volatility seems senseless to me.

I say this as a B&H follower.
Title: Re: Dual Momentum Investing
Post by: arebelspy on October 24, 2015, 11:39:49 AM
(I.e. would you now like to start a new argument that "momentum" and "volatility" are the same thing? I would argue that they are not, and the dictionary would back me up, I think.)

They may not be exactly the same, but sure, enlighten me on the major differences.  I don't need a dictionary definition, but a simple example to answer the following question should suffice.

How would more momentum lead to less volatility?
Title: Dual Momentum Investing
Post by: milesdividendmd on October 24, 2015, 11:55:24 AM
Why on earth would I argue that more momentum leads to less volatility?

That's an argument that I certainly never made. (Nor did anyone else that I recall off hand.)

(You may want to read the thread again.  It's been a while and you may be rusty :) )

To bring you up to speed, the only argument that I have made is that DM trading does not necessarily lead to increased volatility. Some trades will lead to more volatility and some trades will lead to less volatility (by either definition).  And on balance it is completely unclear whether DM increases or decreases volatility as a whole.

What is quite obvious to anyone with a brain, is that DM on the scale at which it is practiced by me or any other individual investor on this forum has no measurable effect on overall market volatility.
Title: Re: Dual Momentum Investing
Post by: sol on October 24, 2015, 12:02:18 PM
What is quite obvious to anyone with a brain, is that DM on the scale at which it is practiced by me or any other individual investor on this forum has no measurable effect on overall market volatility.

I have a brain, and it's not obvious to me.

Volatility is just short term momentum.  Lots of momentum traders, trading on different dates in the same direction that the market is moving on that day, will increase short term momentum, which is volatility.  The next day if the market direction reverses for some reason unrelated to momentum traders, all of the momentum traders who trade that day will trade again in the new direction, increasing short term momentum again.  Two days, two different groups of momentum traders with different trade dates, amplifying the market gyrations.  Creating volatility.

Seems obvious to anyone with a brain, right?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 24, 2015, 12:08:04 PM

What is quite obvious to anyone with a brain, is that DM on the scale at which it is practiced by me or any other individual investor on this forum has no measurable effect on overall market volatility.

I have a brain, and it's not obvious to me.

Volatility is just short term momentum.  Lots of momentum traders, trading on different dates in the same direction that the market is moving on that day, will increase short term momentum, which is volatility.  The next day if the market direction reverses for some reason unrelated to momentum traders, all of the momentum traders who trade that day will trade again in the new direction, increasing short term momentum again.  Two days, two different groups of momentum traders with different trade dates, amplifying the market gyrations.  Creating volatility.

Seems obvious to anyone with a brain, right?

The last comment wasn't  to say that a DM trader can't under some circumstances make a trade that microscopically increases (or decreases) volatility.

It was simply an observation of scale.

If you or I trade our entire portfolio at any one time it effects the global capital markets much as a tear drop effects the salinity of the ocean.

We have no measurable market impact by virtue of our small size.
Title: Re: Dual Momentum Investing
Post by: arebelspy on October 24, 2015, 12:11:38 PM
I'm confused--are you saying momentum trading does not lead to volatility, or that it does, but your portfolio is too small for it to be significant?  Which one are you arguing for now?
Title: Dual Momentum Investing
Post by: milesdividendmd on October 24, 2015, 12:14:31 PM
Sol,

I tend to agree generally with your definition that "volatility is just short term momentum", but I would be more specific.

Volatility is instantaneous momentum.

What has not been successfully argued yet by you or anyone, is that there is any relationship between the price momentum of a specific look back period between 3 and 12 months and the price movement at the moment that a DM trader places his trade.
Title: Dual Momentum Investing
Post by: milesdividendmd on October 24, 2015, 12:20:49 PM
I'm confused--are you saying momentum trading does not lead to volatility, or that it does, but your portfolio is too small for it to be significant?  Which one are you arguing for now?

You are aren't you? :)

I am arguing (and have been for many pages) that It is unknown whether DM trading increases or decreases overall market volatility.

I am also arguing that even in a world in which it could be proven that for every trade I made, I was trading with the dominant price movement of the moment that I traded, my effect on overall market volatility would be essentially zero by virtue of the small size of my portfolio.
Title: Re: Dual Momentum Investing
Post by: arebelspy on October 25, 2015, 01:07:03 AM
So we'll just tragedy of the commons away the problem?
Title: Re: Dual Momentum Investing
Post by: brainfart on October 25, 2015, 04:21:26 AM
Aren't there much bigger problems in the markets that we let happen?

Please milesmd, admit defeat so we can  discuss more important stuff.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 25, 2015, 04:48:41 AM

So we'll just tragedy of the commons away the problem?

No idea what you are trying to say here.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 25, 2015, 04:50:29 AM

Aren't there much bigger problems in the markets that we let happen?

Please milesmd, admit defeat so we can  discuss more important stuff.

Why on earth would I admit defeat when the other side of the argument is clearly failing to make a cogent point?
Title: Re: Dual Momentum Investing
Post by: brainfart on October 25, 2015, 05:17:40 AM
> Why on earth would I admit defeat

So we can move on.

> when the other side of the argument is clearly failing to make a cogent point?

Because they will hopefully stop. Otherwise this fruitless discussion will go on for another 19 pages. Waste of time and energy.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 25, 2015, 05:46:26 AM
I tend to agree generally with your definition that "volatility is just short term momentum", but I would be more specific.

Volatility is instantaneous momentum.

Why?  This definition would make sense only if you are measuring volatility over correspondingly short time spans.  If you zoom out in your perspective, the "short term" momentum that matters gets correspondingly longer.

If you chart continuous price movements, intraday prices could gyrate wildly even if the closing price ends up exactly where it started.  On a chart plotting daily prices at market close, that intraday volatility disappears--the price line from one day to the next becomes a straight line rather than an oscillating zig-zag.  And the same is true with respect to intraweek volatility on a chart plotting only week-end prices, and so on.

Quote
What has not been successfully argued yet by you or anyone, is that there is any relationship between the price momentum of a specific look back period between 3 and 12 months and the price movement at the moment that a DM trader places his trade.

This the fundamental disconnect we've been having.  If you're talking about volatility over periods of time equaling the momentum trader's lookback period, then we've already established that we all agree that momentum trading increases volatility (since momentum trading axiomatically amplifies any price swings occurring over those periods).  We don't need to demonstrate any relationship between the price trend over the lookback period and the price trend over the moments before the trade is executed, because we haven't been arguing that momentum trading increases second-by-second volatility (though, in a microcosm of the phenomenon that nicely illustrates our point, a momentum trader using a one-second lookback period would do exactly that (and in that scenario, a micro version of milesdividendmd would argue that no, this micro-momentum trader is not amplifying volatility, because the momentum trade does not necessarily follow the trend in effect in the nanoseconds leading up to its execution)).

so we can discuss more important stuff.

Who's stopping you?
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 25, 2015, 09:09:20 AM

I tend to agree generally with your definition that "volatility is just short term momentum", but I would be more specific.

Volatility is instantaneous momentum.

Why?  This definition would make sense only if you are measuring volatility over correspondingly short time spans.  If you zoom out in your perspective, the "short term" momentum that matters gets correspondingly longer.

If you chart continuous price movements, intraday prices could gyrate wildly even if the closing price ends up exactly where it started.  On a chart plotting daily prices at market close, that intraday volatility disappears--the price line from one day to the next becomes a straight line rather than an oscillating zig-zag.  And the same is true with respect to intraweek volatility on a chart plotting only week-end prices, and so on.

Quote
What has not been successfully argued yet by you or anyone, is that there is any relationship between the price momentum of a specific look back period between 3 and 12 months and the price movement at the moment that a DM trader places his trade.

This the fundamental disconnect we've been having.  If you're talking about volatility over periods of time equaling the momentum trader's lookback period, then we've already established that we all agree that momentum trading increases volatility (since momentum trading axiomatically amplifies any price swings occurring over those periods).  We don't need to demonstrate any relationship between the price trend over the lookback period and the price trend over the moments before the trade is executed, because we haven't been arguing that momentum trading increases second-by-second volatility (though, in a microcosm of the phenomenon that nicely illustrates our point, a momentum trader using a one-second lookback period would do exactly that (and in that scenario, a micro version of milesdividendmd would argue that no, this micro-momentum trader is not amplifying volatility, because the momentum trade does not necessarily follow the trend in effect in the nanoseconds leading up to its execution)).

so we can discuss more important stuff.

Who's stopping you?

Now we're getting somewhere Brooklyn. Well argued.

The reason I (and Sol) argue that volatility is (very) short term momentum is simply because I (we?) believe this definition to be true.

When people talk about the market being "volatile" or "unstable" they are almost universally talking about large and fast price swings that are readily apparent to market participants in real time.

Do you deny that...

A. This is the "volatility" which Sol was describing in his original critique?

And

B. This is the dominant usage of the phrase "market volatility?"

When the market drops 2 percent and then reverses course and rises 4 percent, we would all describe that as "volatile."

When the market rises by a compounding 7% over the course of decades, that slow course is really never described as "volatile" though the intraday fluctuations invisible on the long term chart and underlying that long term trend may well be.

More to the point, if you honestly believe that long term price movements are "volatility," then wouldn't you concede that buy and holders, whose only possible trades in the accumulation phase are to buy more securities contribute more than DM traders (who after all occasionally exit their positions) to "volatility?"
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 25, 2015, 02:10:47 PM
A. This is the "volatility" which Sol was describing in his original critique?

Yes, I think the "volatility" that Sol referred to in his original critique of momentum trading (and the "volatility" the rest of us have been referring to in our subsequent posts that built upon that original critique) is the same "volatility" that necessarily gets amplified by momentum trading, as I think the content of his post made clear (and which is why some of us were having such difficulty understanding your resistance to that critique).

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B. This is the dominant usage of the phrase "market volatility?"

I think the measurement period people have in mind when they generally speak of the "volatility" of the stock market is not any precise time span in particular but just a vague, loosely-defined notion of "the short term," which has no bright-line cut-off but which generally includes multi-month and multi-year periods (long enough to contain the market swings that get amplified by momentum trading strategies that use lookback periods in the 3-12 month range) but would not include, say, multi-century periods.  For example, owing to the stock market's "volatility," people often caution against investing in it if your time horizon is less than "five years" or "several years" as a general rule of thumb.

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More to the point, if you honestly believe that long term price movements are "volatility," then wouldn't you concede that buy and holders, whose only possible trades in the accumulation phase are to buy more securities contribute more than DM traders (who after all occasionally exit their positions) to "volatility?"

As I've said, buy and hold investing puts upward pressure on prices and therefore does contribute to the long-term upward trend of the market.  Any investing strategy that involves the purchase or sale of investments (which is to say, every investing strategy) puts either upward or downward pressure on the price of those investments at the time of the purchase or sale and, in that sense, "contributes to volatility" in one way or another.  What is distinct about momentum trading is that price itself serves as the trading signal.  B&H investing pushes the market up, while momentum trading pushes the market in whatever direction it happens to have moved over the applicable lookback period.  And the shorter the lookback period is, the "shorter term" the volatility-amplification is.  Versions of momentum trading that use a one-second, one-month or one-year lookback period can all be said to amplify "volatility" consistent with general usage of the term (that is, volatility over time horizons that generally matter to investors in the stock market).  A version of momentum trading that uses a one-century lookback period, on the other hand, can only be said to amplify volatility over centuries-long time horizons, which is not consistent with general usage of the term because it is (at least at the present time) beyond the concern of virtually all investors actually participating in the market.
Title: Dual Momentum Investing
Post by: milesdividendmd on October 25, 2015, 05:38:50 PM
Brooklyn,

I have literally never heard anyone use volatility as you have defined it, unless they were incorrectly conflating it with another word.

For instance the VIX volatility index does not seek to measure the price movement of the stock market in the timeframe of years or months. It seeks to measure rapid intraday price swings, reflective of investor fear.

Another example to illustrate how your definition of "volatility" is in no way credible.

I have literally never heard someone say anything along the lines of , "the S&P has risen 12% points in the last six month, whereas usually it only rises 3.5%. The stock market sure is volatile."

Since Sol himself defined volatility as "short term momentum" I find it quite apparent that when he describes "volatility" and "unstable markets" he is not talking about price movements of months or years.

Furthermore look at how Sol makes his recent argument here....

"Volatility is just short term momentum.  Lots of momentum traders, trading on different dates in the same direction that the market is moving on that day, will increase short term momentum, which is volatility.  The next day if the market direction reverses for some reason unrelated to momentum traders, all of the momentum traders who trade that day will trade again in the new direction, increasing short term momentum again.  Two days, two different groups of momentum traders with different trade dates, amplifying the market gyrations.  Creating volatility."

Note how he specifies, that the momentum traders are making trades in the same direction of market price movement "ON THAT DAY."  Notice how focused he is on readily apparent "market gyrations."

He is and was always talking about fast changes in price (as in flash crashes.) This likely is why he originally claimed that DM led to market "instability."

So you can claim that you all simultaneously were using "volatility" in a manner in which literally no one else uses it including the person who brought it up here originally, but Occam's razor tells me that the more likely explanation that you were all conflating "volatility" with "momentum."

An easy mistake to make, I've improperly used words before and admitted it to you on this very forum, and probably this very thread.

We all use language imprecisely at times so instead of doubling down with a novel and absurd definition of "volatility",  the wiser course is probably to just admit you are human, subject to errors of language, and move on.
Title: Re: Dual Momentum Investing
Post by: MDM on October 25, 2015, 06:52:26 PM
I have literally never heard anyone use volatility as you have defined it, unless they were incorrectly conflating it with another word.
Reading only this much, I went searching for how VIX is calculated.

Then came back here, only to see in the very next line:
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For instance the VIX volatility index does not seek to measure the price movement of the stock market in the timeframe of years or months. It seeks to measure rapid intraday price swings, reflective of investor fear.
As noted above, my "in depth" VIX knowledge is limited to a quick internet search, and we all know how (un)reliable Wikipedia can be, etc.  But in https://en.wikipedia.org/wiki/VIX it does say
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The VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the upcoming 30-day period, which is then annualized. "VIX" is a registered trademark of the CBOE.
Is it then correct to say that the VIX measures monthly volatility?

And there is also https://en.wikipedia.org/wiki/Volatility_%28finance%29 - haven't read this thread in enough detail to know "whose side" that supports....
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 25, 2015, 07:07:33 PM

I have literally never heard anyone use volatility as you have defined it, unless they were incorrectly conflating it with another word.
Reading only this much, I went searching for how VIX is calculated.

Then came back here, only to see in the very next line:
Quote
For instance the VIX volatility index does not seek to measure the price movement of the stock market in the timeframe of years or months. It seeks to measure rapid intraday price swings, reflective of investor fear.
As noted above, my "in depth" VIX knowledge is limited to a quick internet search, and we all know how (un)reliable Wikipedia can be, etc.  But in https://en.wikipedia.org/wiki/VIX it does say
Quote
The VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the upcoming 30-day period, which is then annualized. "VIX" is a registered trademark of the CBOE.
Is it then correct to say that the VIX measures monthly volatility?

And there is also https://en.wikipedia.org/wiki/Volatility_%28finance%29 - haven't read this thread in enough detail to know "whose side" that supports....


Uh oh, another semantic sidetrack, and I introduced it this time...

In all honestly I  believe it's a touch more meta than your definition.

My understanding is that it measures investors current expectations for future volatility in the coming 30 day period.

It is of course commonly referred to as "the fear index."
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 25, 2015, 10:13:35 PM
So you can claim that you all simultaneously were using "volatility" in a manner in which literally no one else uses it including the person who brought it up here originally, but Occam's razor tells me that the more likely explanation that you were all conflating "volatility" with "momentum."

Unlike you, I don't claim to be able to see inside sol's mind.  I can only tell you how I interpreted his posts based on the words they contained.  And I can tell you with certainty what I intended with my own posts.  In both cases, it was that momentum trading strategies amplify the very market movements on which they trade.  Given that (i) you alone have been resisting this argument as expressed by him and me, (ii) other posters have chimed in to express confusion about your resistance, and (iii) according to the dictionary, there is nothing incorrect (let alone absurd) about my definition of "volatility," Occam's razor tells me that you've got things exactly backwards.
Title: Dual Momentum Investing
Post by: milesdividendmd on October 25, 2015, 11:06:33 PM
I never claimed to be able to see into Sol's mind. But I can certainly read his words.

Since he defines "volatility" in writing in his own words as "short term momentum," and he takes pains to point out how a DM trader could make a trade in the same direction of price movement on the day he trades thereby increasing "volatility," how can you possibly imagine that he is using "volatility" to mean anything other than short term momentum?

That's a question I have now asked you many times in many different forms. Why not answer it?
Title: Re: Dual Momentum Investing
Post by: arebelspy on October 26, 2015, 12:28:02 AM

Brooklyn,

I have literally never heard anyone use volatility as you have defined it, unless they were incorrectly conflating it with another word.

For instance the VIX volatility index does not seek to measure the price movement of the stock market in the timeframe of years or months. It seeks to measure rapid intraday price swings, reflective of investor fear.

Another example to illustrate how your definition of "volatility" is in no way credible.

I have literally never heard someone say anything along the lines of , "the S&P has risen 12% points in the last six month, whereas usually it only rises 3.5%. The stock market sure is volatile."


Wait, wait.. You're saying volatility is only daily? 

So if the market is up 14% over a two week period (1% per day), and down 14% the next two weeks, then back up, etc. you'd say that it wasn't volatile, because it was only 1% per day?

I'd sure as heck call that volatile.  My definition would be much closer to BG's than the super narrow "daily"--yes, I think we could have a volatile market over months.

You may not say it's volatile if it's only gone up over the last six months, but if it's spiked up, and down, and up, peak to trough several times, yes, absolutely I'd say "the market's been volatile over the last six months" even if there were 0 daily huge swings, or flash crashes.

To further prove the point: have you ever heard someone say "short term volatility"?  If so, and it made sense, clearly there's volatility over a longer term. Otherwise that phrase is redundant nonsense.

Short term volatility is the daily, like flash crashes. We are talking about over weeks, or months. Or, as you call it, momentum.

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So you can claim that you all simultaneously were using "volatility" in a manner in which literally no one else uses it including the person who brought it up here originally, but Occam's razor tells me that the more likely explanation that you were all conflating "volatility" with "momentum."

Wouldn't Occam's razor not be that we were all simultaneously using it incorrectly, but rather than your definition was incorrect and we were all using it just fine?

In any case, it appears now we have the heart of the disagreement.  We're saying momentum trading leads to volatility, rather than stability, in the markets over various time periods. Not necessarily on a single day, leading to a flash crash (though it might do that too), but in general in the markets.
Title: Re: Dual Momentum Investing
Post by: arebelspy on October 26, 2015, 12:29:45 AM

I never claimed to be able to see into Sol's mind. But I can certainly read his words.

Since he defines "volatility" in writing in his own words as "short term momentum," and he takes pains to point out how a DM trader could make a trade in the same direction of price movement on the day he trades thereby increasing "volatility," how can you possibly imagine that he is using "volatility" to mean anything other than short term momentum?

That's a question I have now asked you many times in many different forms. Why not answer it?

Probably because your "short term" is different than ours. I don't know what sol's is, but when I read his quote, I'm thinking days, weeks, or even months. You're apparently thinking hours, or maybe a single day.

We're reading the same quote, but with different definitions of short term.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 26, 2015, 12:56:53 AM


I never claimed to be able to see into Sol's mind. But I can certainly read his words.

Since he defines "volatility" in writing in his own words as "short term momentum," and he takes pains to point out how a DM trader could make a trade in the same direction of price movement on the day he trades thereby increasing "volatility," how can you possibly imagine that he is using "volatility" to mean anything other than short term momentum?

That's a question I have now asked you many times in many different forms. Why not answer it?

Probably because your "short term" is different than ours. I don't know what sol's is, but when I read his quote, I'm thinking days, weeks, or even months. You're apparently thinking hours, or maybe a single day.

We're reading the same quote, but with different definitions of short term.

Then why does Sol bother to specify that a DM trader could increase volatility by making a trade in the same direction as the price movement of the day that he trades?  If Sol is thinking "weeks or even months" then what is the possible significance of the price direction on the day the trader trades?
Title: Dual Momentum Investing
Post by: milesdividendmd on October 26, 2015, 01:20:53 AM
And the problem with your's and Brooklyn's definition of market volatility, as opposed to Sol's, by the way, is that it is so non specific as to be rendered meaningless.

If a trader buys an S&P index fund in a moment when it's price is going up on a day when it's price is going down, during a week when it's price is going up, during a month when it's price is going down, during a six month period when it's price is going up, then is he increasing or decreasing volatility?

Do you see the problem there? How can you argue DM's effect either way if you can't even define whether a simple trade increases or decreases volatility?
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 26, 2015, 10:25:42 AM
I never claimed to be able to see into Sol's mind. But I can certainly read his words.

Since he defines "volatility" in writing in his own words as "short term momentum," and he takes pains to point out how a DM trader could make a trade in the same direction of price movement on the day he trades thereby increasing "volatility," how can you possibly imagine that he is using "volatility" to mean anything other than short term momentum?

In that particular post (post # 896), I thought sol was saying that a momentum trader who trades on a single-day price swing (i.e., using a one-day lookback period) would amplify day-by-day volatility.  Why else would there be traders necessarily trading with the new direction of the market when it shifted directions on day two?

Having now reread that post, I see that he was not talking about momentum traders re-entering the market because of the single-day market movement, but a different group of momentum traders executing their trades on day two.  So, like you, I don't understand what sol's point was in that post.  If the day-two traders are not using a single-day lookback period, their trades would not necessarily be in the same direction that the market moved over that single day.

I'd be interested in hearing sol's explanation of what point he was trying to make in that post, because I had been interpreting all of his previous posts on this subject as arguing that momentum trading is self-amplifying in that the piling on to market gyrations will amplify those gyrations (which is what his posts had been saying).  Given that sol seems to have less appetite for continuing to engage in this debate than you and I do, we may not get the benefit of hearing sol explain his own posts.  In any event, I would suggest that we stop engaging in the Talmudic construction of the Words of Sol and focus instead on the argument that I myself am actually making (and have been making), whether or not it is identical to the argument sol has been making.

And the problem with...Brooklyn's definition of market volatility...is that it is so non specific as to be rendered meaningless.

My definition of volatility is no different than your definition, except that I'm saying it can occur over any given time period rather than only extremely short-term time periods.  In the following chart, I would say MilesDividendMD, Inc. has higher volatility than BrooklynGuy Corp.:

(http://i.imgur.com/lS290sR.jpg)

And that is true without knowing the specific time intervals for the y-axis.  Whether the chart is displaying prices over a one-minute time span or a one-decade time span, one asset has high volatility in relation to the other for the period in question.

You say that you have literally never heard anyone speak of the stock market's volatility over a measurement period extending over months or years and find it absurd that I'm using the word "volatility" to describe market gyrations over month- or year-long periods.  I strongly disagree that my usage of the word is any way incorrect (let alone absurd) or inconsistent with general usage of the word as it pertains to the stock market (again, consider my example of widespread disclaimers against using the stock market as a wealth-building tool for time horizons less than five years or so due to the stock market's volatility, not to mention the use of the term in sources like those MDM cited above), but let's just put aside this purely semantic argument because it is a distraction from the central debate.

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If a trader buys an S&P index fund in a moment when it's price is going up on a day when it's price is going down, during a week when it's price is going up, during a month when it's price is going down, during a six month period when it's price is going up, then is he increasing or decreasing volatility?

Do you see the problem there? How can you argue DM's effect either way if you can't even define whether a simple trade increases or decreases volatility?

The only "problem there" is that in your question you are using "volatility" as an absolute term rather than a relative term--the word has no meaning except in reference to a given measurement period.  It's no different than asking whether your hypothetical trader is following a trend or diverging from a trend (or adding to momentum or detracting from momentum).  Depending on the period in question, the answer differs.  You are laser-focused on what you have called "instantaneous momentum"--the volatility occurring in the instant leading up to the trade--which you seem to believe is the only measurement period for volatility that can legitimately be called "short term" and can therefore legitimately be called "volatility" at all.  Again, a micro-version of the argument you are making would dispute that even second-by-second market gyrations qualify as "volatility," because the trends occurring over periods as long as a full second are way too "long-term" to matter to an investor who is only focused on trends occurring over billionths of a second.

Here, once again, is my argument in a nutshell (which thankfully did not use the word "volatility"):

Momentum trading involves identifying a pricing trend, over some period, that is already underway, and then following that trend.  The momentum trader executes a trade in the same direction as the trend.  That trade has the effect of amplifying the trend.  The amplification effect may be minimal (and, in the case of a typical trade executed by individual trader like yourself, infinitesimal), and the activity of other traders may counteract the amplification effect, but that is the effect.  It has to be, as a matter of logic.  And the bigger the share of the market momentum traders make up, the stronger the overall effect will be.

You agree with this argument because, as you have said, it is axiomatically correct.  Momentum trading contributes to the amplification of the very market gyrations that lead the momentum trader to make his trades.  If the lookback period is three months, market gyrations occurring over three month periods will be amplified.  If the lookback period is twelve months, market gyrations occurring over twelve month periods will be amplified.  If you don't want to call market gyrations over these time periods "short term volatility," so be it.  Let's call them "medium term volatility" or "long term volatility."  The label does not matter.  But the substance of the argument is that momentum trading using a 3-12 month lookback period amplifies market gyrations over corresponding periods, in a manner totally unrelated to market fundamentals.  Whether or not you want to call this effect on 3-12 month market gyrations an effect on "volatility," I find it to be disruptive to the market in a way that, say, amplification of market gyrations over 100-year time spans would not be.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 26, 2015, 10:59:27 AM
Every trade including buy and hold amplifies some gyrations and diminishes others depending on the time period that you look at. In this sense every trade both increases and decreases volatility. To make a claim that one strategy increases volatility over another you really have to specify a time frame.

I will agree that in your graph md2 stock is more volatile than Brooklyn stock. But I would simply point out that this use of "volatile" is a very different usage of the word "volatile" from when someone says "of late there has been increased market volatility."  Volatility used in this manner is used to denote unusually rapid high amplitude price movements.

Importantly, in Sol's claim that DM increased volatility and market instability he was almost assuredly using "volatility" in this second meaning of the word, based on his own words and context.

Do a google search for "increased market volatility" and you will find that the articles that come are about rapid high amplitude price movements that are readily apparent to market participants in real time. You will also find that these articles pop up at times of market tumult as is September 2015.

Importantly what you have not demonstrated, is that the DM strategy increases the likelihood that the stock market will behave more like my stock and less like yours.

That's a different argument, but one that I am also happy to engage in.

If you like, please make the argument for why you feel that DM is more likely to lead to "volatility" in this second definition of the word.

I am dubious.

And what's wrong with getting "Talmudic", by the way?
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 26, 2015, 11:10:37 AM
I'm afraid I've neglected my day job in favor of participating in the forum enough for one day so I'm going to have to wait until I have more time to give a full response, but I want to respond to this bit now just in case you thought I might have been implying something nefarious:

And what's wrong with getting "Talmudic", by the way?

All I meant is that we were starting to dissect sol's posts to discern their meaning (the way a Talmudic scholar would the Talmud) instead of debating the merits of the argument I am actually making (regardless of whether or not that argument is consistent with the argument sol was actually making).
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 26, 2015, 11:33:31 AM
I don't believe 2 sides can actually debate the merits of an argument unless they can agree on what they are arguing about. That's the genius of Talmudic thinking. (I imagine you engage in this sort of thinking  every day in your day job.)
Title: Dual Momentum Investing
Post by: milesdividendmd on October 26, 2015, 11:36:41 AM
And the importance of Sol's original argument is that he is the one who made the original claim. So that is what we should have been arguing about, until we chose to move on to a new point of disagreement.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 26, 2015, 02:06:50 PM
Ok, I couldn't help myself -- I'm back.  My name is brooklynguy and I am a forum addict...

I don't believe 2 sides can actually debate the merits of an argument unless they can agree on what they are arguing about. That's the genius of Talmudic thinking. (I imagine you engage in this sort of thinking  every day in your day job.)

And the importance of Sol's original argument is that he is the one who made the original claim. So that is what we should have been arguing about, until we chose to move on to a new point of disagreement.

Fair enough.  I thought we had already established that you and I, at least, were arguing about different things, because we interpreted sol's original claim differently.  Rebs and frugalnacho seem to have understood "our side" of the debate in the same way I did.  If sol decides to reengage and shed light on his understanding of his own argument, then we'll get more insight into whether or not he did too.  But now that we recognize that we in fact did not agree on what we were arguing about, shouldn't we move on to argue over the point of disagreement about which we (hopefully) do agree that we indeed disagree?

Every trade including buy and hold amplifies some gyrations and diminishes others depending on the time period that you look at. In this sense every trade both increases and decreases volatility. To make a claim that one strategy increases volatility over another you really have to specify a time frame.

Yes, I agree -- this was exactly my point.

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I will agree that in your graph md2 stock is more volatile than Brooklyn stock. But I would simply point out that this use of "volatile" is a very different usage of the word "volatile" from when someone says "of late there has been increased market volatility."  Volatility used in this manner is used to denote unusually rapid high amplitude price movements.

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Do a google search for "increased market volatility" and you will find that the articles that come are about rapid high amplitude price movements that are readily apparent to market participants in real time. You will also find that these articles pop up at times of market tumult as is September 2015.

It's a different usage only in the time period in question, right?  If "of late" means "in the last few days," then it's referring to market gyrations over the space of the last few days.  If "of late" means "the last few months," then it's referring to market gyrations over the space of the last few months.

Again, it's no different than usage of the phrase "of late the market has trended up."  If "of late" means the last few days, it's referring to an upward trend over the last few days.  If "of late" means the last few months, it's referring to an upward trend over the last few months.

I definitely agree with you that when people generically refer to market volatility (without specifying the precise time period to which they are referring), they are more likely to be referring to time frames on the shorter end of the spectrum.  Price swings over the space of a day or a week or a month get much more attention in the financial press and at cocktail parties than price swings occurring over longer periods .  But I do not agree that price swings occurring over the course of a year or even several years cannot be, and never are, described as market volatility.

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Importantly, in Sol's claim that DM increased volatility and market instability he was almost assuredly using "volatility" in this second meaning of the word, based on his own words and context.

Is the "second meaning" what I just described above?  The same as the first meaning, except as to the relevant time span?  Market swings occurring over periods short enough to qualify for some unspecified cutoff, but not market swings occurring over longer periods?

My reading of sol's original claim, and all of his subsequent posts except for the one you cited above (post # 896, which I am confused by), is that the "volatility" he was referring to is the same "volatility" that actually gets amplified by momentum trading--namely, the market gyrations that occur over whatever lookback period the momentum traders are using.  That is was he repeatedly claimed, isn't it?  That piling on to every price swing magnifies the amplitude of those price swings?

If that is not what sol intended to claim, so be it, but that is what I am claiming and have been claiming.

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If you like, please make the argument for why you feel that DM is more likely to lead to "volatility" in this second definition of the word.

If I'm understanding you correctly, here you mean the argument that momentum trading using a lookback period in the 3-12 month range contributes to volatility over shorter periods (days? weeks?) (that is, the argument I understand that you think/thought sol was making, and that you previously thought I was making).  I would not make that argument, because I don't think it is true.  I think momentum trading contributes to volatility over periods containing subperiods equal to the relevant lookback period, not shorter periods.

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Importantly what you have not demonstrated, is that the DM strategy increases the likelihood that the stock market will behave more like my stock and less like yours.

That's a different argument, but one that I am also happy to engage in.

If the time period covered by the chart above is long enough to include multiple lookback periods, then momentum trading necessarily causes the market to behave more like your stock than my stock because (as I think we all agree) momentum trading has the self-reinforcing effect of amplifying the price trends it trades on.  Momentum traders will pile on to every price swing occurring over the lookback periods contained within the overall time period covered by the chart and thereby amplify those price swings.  Let's suppose the chart covers a two year period, and we're talking about momentum traders who use a three-month lookback.  At the end of three months, if the market has trended up, those traders will pile on (by purchasing shares) and thereby push the market further up.  Over the next three months, if the market has trended down, they will pile on (by selling shares) and thereby push the market further down.

Now, as I believe everyone on all sides of this debate has explicitly recognized, this effect requires sufficient presence of momentum trading in the market in order to be meaningful and it can be counteracted by other forces in the market.  But the greater the share of the market that momentum traders make up, the stronger the gyration-amplification effect will be, and the less susceptible it will be to counteraction by other market participants.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 26, 2015, 03:51:54 PM
Ok, I couldn't help myself -- I'm back.  My name is brooklynguy and I am a forum addict...

It's an epidemic, and I've got it bad.

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If the time period covered by the chart above is long enough to include multiple lookback periods, then momentum trading necessarily causes the market to behave more like your stock than my stock because (as I think we all agree) momentum trading has the self-reinforcing effect of amplifying the price trends it trades on.  Momentum traders will pile on to every price swing occurring over the lookback periods contained within the overall time period covered by the chart and thereby amplify those price swings.  Let's suppose the chart covers a two year period, and we're talking about momentum traders who use a three-month lookback.  At the end of three months, if the market has trended up, those traders will pile on (by purchasing shares) and thereby push the market further up.  Over the next three months, if the market has trended down, they will pile on (by selling shares) and thereby push the market further down.

Now, as I believe everyone on all sides of this debate has explicitly recognized, this effect requires sufficient presence of momentum trading in the market in order to be meaningful and it can be counteracted by other forces in the market.  But the greater the share of the market that momentum traders make up, the stronger the gyration-amplification effect will be, and the less susceptible it will be to counteraction by other market participants.

While I agree that a DM trader trading with a 6 month lookback period will only make trades that reflect the prior 6 months price momentum of the securities he tracks, I do not agree that there will necessarily be increased market volatility (using your definition of volatility here)  for the coming 6 months because of those trades.  A trade made based on the prior 6 month lookback period can either increase or decrease the subsequent 6 month volatility, depending on what the price movement of the for the security in question in following 6 months turns out to be.

 ie.  If I buy into the S&P because of its superlative performance for the prior past 6 months, and over the subsequent 6 months the S&P goes down, won't I have decreased the S&P's forward 6 month volatility?

Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 26, 2015, 08:02:55 PM
It's an epidemic, and I've got it bad.

We must have it worse than the others, because we seem to be the only ones still here.

Quote
While I agree that a DM trader trading with a 6 month lookback period will only make trades that reflect the prior 6 months price momentum of the securities he tracks, I do not agree that there will necessarily be increased market volatility (using your definition of volatility here)  for the coming 6 months because of those trades.  A trade made based on the prior 6 month lookback period can either increase or decrease the subsequent 6 month volatility, depending on what the price movement of the for the security in question in following 6 months turns out to be.

ie.  If I buy into the S&P because of its superlative performance for the prior past 6 months, and over the subsequent 6 months the S&P goes down, won't I have decreased the S&P's forward 6 month volatility?

Yes, at the execution of each trade, it will only be the past trend (the one that occurred over the trader's 6 month lookback period) that gets amplified, not the future trend that has, at that point in time, yet to occur.  But 6 months later, the same thing will happen, and again 6 months after that, and so on, so that every market swing that occurs over each of the rolling 6 month periods gets amplified by the momentum trader's trading activity, with the cumulative effect being an increase in semi-annual volatility.

To borrow an analogy from your day job, it's as if someone is watching the output of an old-fashioned EKG machine as it's being drawn and, at regular time intervals, gives the needle a nudge in whichever direction the line trended over each interval.  After several of these intervals have elapsed, the line drawing produced by the EKG will show more volatility (it will have more pronounced spikes and dips).
Title: Dual Momentum Investing
Post by: milesdividendmd on October 26, 2015, 10:14:57 PM
To borrow your analogy if at the moment that you push the ECG needle upwards, (because of your measurement of its net prior movement) the needle has already started moving downwards then you will have decreased the velocity of the movement of the needle with your action. You will have decreased volatility.

The effect of your action on the velocity of price movement is completely dependent on the movement of the needle at the moment you interact with it.

And if your concern is a different time period (or distance on the rhythm strip) then your actions effect on volatility is totally dependent on that subsequent movement which you have no influence on.

So the question is really what does intermediate term momentum really predict? Does it predict price movement at the moment that you trade? (I honestly think not.) Does it predict price movement for the subsequent month? (I sure hope so), does it predict price movement for the following 2 months? (No idea.)

Either way it has to enhance that price movement for some periods and detract from it for others. 

So it is very difficult to imagine that you can really know whether or not it increases the volatility of the market as a whole (whatever that means.)

And I would still argue, that the only way  that a trader can effect whether a market chart ends up looking  more like MD2 corp or more like Brooklyn corp is whether or not he increases the velocity of the price movement at the moment he interacts with the market.
Title: Re: Dual Momentum Investing
Post by: brainfart on October 27, 2015, 01:05:33 AM
I can't implement the Global Equity Momentum strategy at the moment because I haven't found a suitable EAFE fund yet.
Of course I don't want to build my own EAFE by buying three or more different ETFs, the trading costs would be too high.

So I need another fund combination to try this out.
I was considering an European index fund (e.g. Eurostoxx 600), MSCI World ex Europe or S&P500, MSCI EM. But I am not quite satisfied with this. Does anyone have any better ideas?

How do I perform backtesting of my desired fund combination? Do I have to find and download the historical index data and then manually compare the numbers?
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 27, 2015, 07:13:08 AM
To borrow your analogy if at the moment that you push the ECG needle upwards, (because of your measurement of its net prior movement) the needle has already started moving downwards then you will have decreased the velocity of the movement of the needle with your action. You will have decreased volatility.

You will have decreased volatility over the short-term period in which the needle was moving downwards, but if you zoom out in your perspective to the longer-term period that includes the period in which the needle's overall movement was upward, you will have increased volatility.  If you rip off a short piece of the rhythm strip (is that what it's called?) showing only the shorter term period, you will see a downward dip whose amplitude was reduced by your action.  But if you rip off a longer piece showing the longer time period, you will see an overall upward spike (with a small reversal downward near the end) whose amplitude was magnified by your action.

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And if your concern is a different time period (or distance on the rhythm strip) then your actions effect on volatility is totally dependent on that subsequent movement which you have no influence on.

So the question is really what does intermediate term momentum really predict? Does it predict price movement at the moment that you trade? (I honestly think not.) Does it predict price movement for the subsequent month? (I sure hope so), does it predict price movement for the following 2 months? (No idea.)

No, you can affect volatility without knowing the future.  As I've explained (and as Sol originally explained), it is the self-reinforcing amplification of past trends that magnifies volatility, not the amplification of future trends that are yet to be.  If you pile on to every price swing, you amplify them, and over time thereby cause the trajectory of the price chart to look more like MilesDividendMD, Inc. than BrooklynGuy Corp.

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The effect of your action on the velocity of price movement is completely dependent on the movement of the needle at the moment you interact with it.

Neither the needle nor the price of an asset can have a velocity (or momentum or a trend of motion) at a literal instant in time.  This is the essence of the point I've been trying to make.  It is only over a given period of time (which could be minutes or days or years or billionths of a second, but some period of time it must be) that these properties and patterns exist.

When you say what matters is only the movement at the "moment" you nudge the needle/execute the trade (which, again, can't literally mean the snapshot in time when it happens, but rather must mean some exceeding small period of time before the trade is executed approaching--but not reaching--zero), you are just reverting to the use of a shorter-term period for your measurement of volatility.  No matter how short you define that period, I can posit an even-more-micro version of milesdividendmd who similarly protests that no, your so-called effect on "instantaneous" volatility was actually not so, because it was not instantaneous enough, because that micro-version of you is adopting a trillionths-of-a-second perspective instead of the billionths-of-a-second (or whatever) perspective actual-you is using.

So a DM trader's trade does amplify volatility at the zoom-level that is high enough to see that trader's own lookback period, even if the trade goes against the price trend that occurred in the seconds, or minutes, or days leading up to the trade.  And volatility over the months- and year-long time periods impacted by momentum traders using lookback periods in the 3-12 month range (unlike volatility over, say, centennial time periods) does matter to the average stock market investor, and amplifying that volatility therefore can fairly be described as disruptive to the market market or contributory towards market instability.

Of course, once again, this disruptive effect would be meaningful only if there is enough momentum trading to cause it in non-negligible way.  It is a gross understatement to say that the effect of milesdividendmd's own puny trades in the market, like the blowback of a gnat's wings on an EKG needle, is negligible.  But the cumulative effect of sufficient numbers of momentum traders, like sufficient numbers of sheep grazing on the common grounds, is a different story.
Title: Dual Momentum Investing
Post by: milesdividendmd on October 27, 2015, 08:50:12 AM
Brooklyn,

We are going in circles here, but we are getting closer to an actual understanding I think.  We obviously have to get a bit more Talmudic.

I am not arguing that you can not effect volatility without knowing the future. I am arguing that you can not know whether your action will increase or decrease volatility without knowing the future.

I think the argument will be more productive if we ignore investing for a minute and just discuss our model (the ecg) to keep it simple.

I will make some statements. Tell me which you think are wrong.

In our metaphor "price movement" is the instantaneous velocity of the needle, and "volatility" is the average velocity of the needle over some time period/strip length.

My essential argument has always been that you can only effect the instantaneous velocity of the needle at the moment you interact with it.

You are arguing that you can effect the average velocity of the needle for different time periods regardless of which way the the needle is moving at the moment you effect it (and I agree.)

But I argue that the determination of whether or not you have increased or decreased the average velocity of the needle is completely dependent on the length of the strip you select. If you select a length of strip where the net positional movement of the needle is in the same direction as your push, you will have increased the average velocity, but if you select a different strip length where the net positional movement of the needle is in the opposite direction to your push you will have decreased the needles average velocity.

Same action, same movement trajectory, different effects on average velocity.

And since this average velocity is an unfixed (time period dependent) variable, I am arguing that the only way that it makes sense to measure whether or not a needle pusher increases or decreases the average velocity of the needle is to measure the average effect of his needle pushing actions at the moment they are committed.

(I am purposefully ignoring the scale argument for now, but I'm happy to engage in it later once we have come to some sort of consensus on this essential issue.)
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 27, 2015, 09:35:22 AM

I can't implement the Global Equity Momentum strategy at the moment because I haven't found a suitable EAFE fund yet.
Of course I don't want to build my own EAFE by buying three or more different ETFs, the trading costs would be too high.

So I need another fund combination to try this out.
I was considering an European index fund (e.g. Eurostoxx 600), MSCI World ex Europe or S&P500, MSCI EM. But I am not quite satisfied with this. Does anyone have any better ideas?

How do I perform backtesting of my desired fund combination? Do I have to find and download the historical index data and then manually compare the numbers?

I think you would do well if you had access to a low-cost S&P 500 fund, Developed Europe fund, and developed Asia fund.

Assuming you do not have to pay for transactions, the cost difference would be negligible. If you do have to pay for transactions, then you will need a lot of money to overcome that price drag on the strategy.

You could implement the strategy one of two ways. Allocate to S&P 500, or developed Europe, or developed Asia, or short term treasuries, depending on the results of your Lookback period.

OrAllocate to S&P 500, or developed Europe PLUS developed Asia (50/50), or short term treasuries, depending on the results of your Lookback period.

In terms of making your measurements at the end of the month, I use the perfcharts function on this site.

Www.Stockcharts.com.

Before implementing my strategy I did a lot of back testing on…

Portfoliovisualizer.com.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 27, 2015, 10:29:14 AM
but we are getting closer to an actual understanding I think.

Yes, I think so too.  This phase of the discussion is, in my view, a perfect illustration of the type of productive discourse often to be had in this unique corner of the internet.  But, given how we seem to have cleared the room, at this point you and I may be the only ones benefiting from it.

Quote
I will make some statements. Tell me which you think are wrong.

In our metaphor "price movement" is the instantaneous velocity of the needle, and "volatility" is the average velocity of the needle over some time period/strip length.

My essential argument has always been that you can only effect the instantaneous velocity of the needle at the moment you interact with it.

You are arguing that you can effect the average velocity of the needle for different time periods regardless of which way the the needle is moving at the moment you effect it (and I agree.)

But I argue that the determination of whether or not you have increased or decreased the average velocity of the needle is completely dependent on the length of the strip you select. If you select a length of strip where the net positional movement of the needle is in the same direction as your push, you will have increased the average velocity, but if you select a strip length where the net positional movement of the needle is in the opposite direction to your push you will have decreased the needles average velocity.

Same action, same movement trajectory, different effects on average velocity.

I agree with absolutely everything in the quoted text above (subject to the philosophical clarification that, as in physics, the term "instantaneous velocity" cannot, I think, literally be taken as a measure of velocity at a frozen instant in time, but must instead refer to the velocity over an exceedingly small period of time that is close enough to zero to render it beyond the scope of concern), and I think it rearticulates exactly what I've been trying to say.

So isn't it at odds with the following statement from the beginning of your post?

Quote
I am arguing that you can not know whether your action will increase or decrease volatility without knowing the future.

As you just explained, you can know whether you have increased (or decreased) volatility without knowing the future.  And the "volatility" you are increasing (or decreasing) depends on the time frame under consideration.  If the person interfering with the EKG (or ECG?  are they the same thing?) needle is using a lookback period short enough to matter in light of the strip length under consideration, his actions will increase volatility in a way that matters.

Consider this rhythm strip (which no needle-pusher interfered with):

(http://i.imgur.com/2oCEdrX.jpg)

If a needle-pusher had interfered with the needle using a one-second lookback period, his action would have caused the dips and spikes to be more pronounced, correct?  If you look at the same rhythm strip reflecting his actions, wouldn't you see higher volatility in the strip?

If, on the other hand, he used a one-minute lookback period (and his needle push happened to occur in the space of this strip), we have no way of knowing what effect his action would have on the volatility covered by this short strip (but his actions would have a known effect on longer-term volatility over a strip length showing, say, a five minute period (but the repetitive, non-random pattern of this strip probably makes it a bad example for illustrating that point)).

Quote
And since this average velocity is an unfixed (time period dependent) variable, I am arguing that the only way that it makes sense to measure whether or not a needle pusher increases or decreases the average velocity of the needle is to measure the average effect of his needle pushing actions at the moment they are committed.

Yes, but you still have to choose a time period in order to calculate the "average effect" of his needle pushing actions.  And if you choose a time period equal to the lookback period, the needle pushing action will always have the effect of increasing the average effect over that period.  And if the lookback period is short enough for this amplification effect to occur over time periods/strip lengths that actually matter (which would not be the case if the lookback period were, say, 24 hours, if we only care about a one minute strip length), then the needle pushing actions will in turn also matter.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 27, 2015, 12:01:19 PM

I agree with absolutely everything in the quoted text above (subject to the philosophical clarification that, as in physics, the term "instantaneous velocity" cannot, I think, literally be taken as a measure of velocity at a frozen instant in time, but must instead refer to the velocity over an exceedingly small period of time that is close enough to zero to render it beyond the scope of concern), and I think it rearticulates exactly what I've been trying to say.

Physics tells us that you can have a velocity at a single moment in time, though you will not be able to measure it in a snapshot, but that doesn't really matterfor the purposes of our discussion.

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So isn't it at odds with the following statement from the beginning of your post?


I am arguing that you can not know whether your action will increase or decrease volatility without knowing the future.

No I don't think its at odds at all.  Your effect on subsequent average velocity is completely dependant on the position of the tracing at the point in the future at which you measure the position of the tracing.

Quote
As you just explained, you can know whether you have increased (or decreased) volatility without knowing the future.  And the "volatility" you are increasing (or decreasing) depends on the time frame under consideration.  If the person interfering with the EKG (or ECG?  are they the same thing?) needle is using a lookback period short enough to matter in light of the strip length under consideration, his actions will increase volatility in a way that matters.

A couple points of disagreement here.

1.You can know the whether or not you have increased the velocity of the needle at the moment you interact with it.
2. You can not know how you have effected the average velocity of the needle until you know the position of the needle (and hence the net dorection of movement of the needle) at some point in the future.
3.  The only significance of the lookback period for the purposes of this discussion is that it determines what direction you push the needle.  (This direction will change depending on the length of your lookback period.)

Quote

Consider this rhythm strip (which no needle-pusher interfered with):

(http://i.imgur.com/2oCEdrX.jpg)

If a needle-pusher had interfered with the needle using a one-second lookback period, his action would have caused the dips and spikes to be more pronounced, correct?  If you look at the same rhythm strip reflecting his actions, wouldn't you see higher volatility in the strip?

No!  Either he will increase or decrease the velocity of the needle depending on his lookback period's signal and the direction of the needle's movement at the moment he interacts with it!  And either he will increase or decrease average velocity based on the position he pushes and the net direction of needle movement at the time you decide to measure it. This is important.  Why do you think you  would necessarily see higher "average velocity" of the needle?  what if he pushes against the needle?  What if he pushes in a direction opposite to the net movement of the needle at whatever point you choose to measure it in the future?


Quote
If, on the other hand, he used a one-minute lookback period (and his needle push happened to occur in the space of this strip), we have no way of knowing what effect his action would have on the volatility covered by this short strip (but his actions would have a known effect on longer-term volatility over a strip length showing, say, a five minute period (but the repetitive, non-random pattern of this strip probably makes it a bad example for illustrating that point)).

Again, the only effect that the size of your lookback period has is that it determines which direction you push the needle.  There is no obvious relationship between the size of your lookback period and the direction of movement of the needle at the moment you interact with the needle or the net direction of movement at any time point the future.

Quote
And since this average velocity is an unfixed (time period dependent) variable, I am arguing that the only way that it makes sense to measure whether or not a needle pusher increases or decreases the average velocity of the needle is to measure the average effect of his needle pushing actions at the moment they are committed.

Yes, but you still have to choose a time period in order to calculate the "average effect" of his needle pushing actions.  And if you choose a time period equal to the lookback period, the needle pushing action will always have the effect of increasing the average effect over that period.  And if the lookback period is short enough for this amplification effect to occur over time periods/strip lengths that actually matter (which would not be the case if the lookback period were, say, 24 hours, if we only care about a one minute strip length), then the needle pushing actions will in turn also matter.
[/quote]

Why do you think that "if you choose a time period equal to the lookback period, the needle pushing action will always have the effect of increasing the average effect over that period?"

I see no reason for this statement to be true.  What if you choose a one month lookback which gives you the signal to push up, and one month later the needle is in a position lower than it was at the moment you interacted with it?  Obviously in this scenario, your action would have decreased the average velocity of the needle for that time period.

Please make your case, because I am truly baffled by this claim.  I think this is the essential point of our disagreement.

PS I still suck at formatting quotes.  Sorry!
Title: Re: Dual Momentum Investing
Post by: brainfart on October 27, 2015, 01:44:48 PM
Quote
In terms of making your measurements at the end of the month, I use the perfcharts function on this site.

Www.Stockcharts.com.

Before implementing my strategy I did a lot of back testing on…

Portfoliovisualizer.com.

Thanks, but unfortunately unusable for me since these sites only show American stocks and funds, in US currency. Which is a big issue, e.g. S&P500 is up "only" about 48% in the last three years in US currency, but +80% in Euros.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 27, 2015, 01:59:37 PM
Physics tells us that you can have a velocity at a single moment in time

There are philosophical arguments that it doesn't.  Because one of the components of velocity is a rate (a function of time), velocity cannot exist in the absence of time.  Some googling revealed the following claim, which, in substance, is the same as my "philosophical clarification" above:

Quote from: Epimethean Imaginings: Philosophical and Other Meditations on Everyday Light
When mathematicians talk about instantaneous velocity, they are not really talking about movement in no time.  In the case of uniform motion in a straight line, it is simply derived from the measured total distance travelled over a measured period of time.  In speaking of "instantaneous" velocity, mathematicians are not mobilizing a self-contradictory notion that somehow manages to combine being at an instantaneous position with passing through that position at a certain speed.  In the case of variable velocity (as in uniformly or non-uniformly accelerated motion), "instantaneous velocity" is an idea--an unreachable goal--of ever more precise tracking of velocity over smaller and smaller intervals of time to the point at which inaccuracies are unimportant.

I'm not sure whether or not this subtopic matters for purposes of this discussion (it's definitely relevant, but perhaps not dispositive), but either way it is fun to discuss :)

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Why do you think that "if you choose a time period equal to the lookback period, the needle pushing action will always have the effect of increasing the average effect over that period?"

Because the direction of the needle-push will always be in the same direction as the trend over that period (given that the trend itself is what determined which direction to push).

Quote
I see no reason for this statement to be true.  What if you choose a one month lookback which gives you the signal to push up, and one month later the needle is in a position lower than it was at the moment you interacted with it?  Obviously in this scenario, your action would have decreased the average velocity of the needle for that time period.

At the "one month later" point, another push is due.  The signal will tell you to push in whichever direction average velocity took over that month.  So, over the two month period, the "swing" of each of those single months got amplified by your push, meaning that overall volatility over the two-month period got amplified.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 27, 2015, 02:13:09 PM
Physics tells us that you can have a velocity at a single moment in time


Quote
Why do you think that "if you choose a time period equal to the lookback period, the needle pushing action will always have the effect of increasing the average effect over that period?"


Because the direction of the needle-push will always be in the same direction as the trend over that period (given that the trend itself is what determined which direction to push).


No.  That is simply not true. an example to illustrate why this is so.

 Imagine on Day 0 that your signal is "1," then on day 25 your signal is "100" then on day 30 your signal is "75".  Your signal will then be to push "up"  (since the movement for the lookback period is +75) but at the moment you push up the needle is already moving down.

30 days later the price could be greater than or less than or equal to 75, which will determine whether or not your effect on the average price of that 30 day period was to increase or decrease the price movement.  If it is greater than 75 you will have increased the average price movement, and if it is less than 75 you will have decreased it.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 27, 2015, 02:29:24 PM
No.  That is simply not true. an example to illustrate why this is so.

 Imagine on Day 0 that your signal is "1," then on day 25 your signal is "100" then on day 30 your signal is "75".  Your signal will then be to push "up"  (since the movement for the lookback period is +75) but at the moment you push up the needle is already moving down.

30 days later the price could be greater than or less than or equal to 75, which will determine whether or not your effect on the average price of that 30 day period was to increase or decrease the price movement.  If it is greater than 75 you will have increased the average price movement, and if it is less than 75 you will have decreased it.

I think you may have misunderstood me.  I was saying that your effect at each trade will always be to amplify the trend that occurred in the lookback period that preceded the trade, not the trend that will occur in the lookback period that will succeed the trade.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 27, 2015, 02:43:37 PM
No.  That is simply not true. an example to illustrate why this is so.

 Imagine on Day 0 that your signal is "1," then on day 25 your signal is "100" then on day 30 your signal is "75".  Your signal will then be to push "up"  (since the movement for the lookback period is +75) but at the moment you push up the needle is already moving down.

30 days later the price could be greater than or less than or equal to 75, which will determine whether or not your effect on the average price of that 30 day period was to increase or decrease the price movement.  If it is greater than 75 you will have increased the average price movement, and if it is less than 75 you will have decreased it.

Of course your action will be in the same direction as the average price movement for the prior 30 days, but this is a post facto event.  Your prior 30 day period determined the direction of your action, but your action had absolutely nothing to do with the causation of the prior 30 days price movement.

In other words an action cannot cause a change that has already happened.  Actions can effect subsequent events but not previous events

So to make the claim that an action causes a change of any kind, you must by definition be talking about a time period that includes events after the event.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 27, 2015, 03:03:57 PM
Of course your action will be in the same direction as the average price movement for the prior 30 days, but this is a post facto event.  Your prior 30 day period determined the direction of your action, but your action had absolutely nothing to do with the causation of the prior 30 days price movement.

In other words an action cannot cause a change that has already happened.  Actions can effect subsequent events but not previous events

Of course; I have not been trying to argue that you can magically retroactively affect occurrences in the past through actions in the present.

Quote
So to make the claim that an action causes a change of any kind, you must by definition be talking about a time period that includes events after the event.

Yes.  I am saying the same thing that sol originally said -- that piling on to every price swing will amplify each price swing.

We were getting so close to understanding one another, but there now seems to be another disconnect and I'm not sure what it is.

We've probably long ago lost all spectators to this conversation, but, in the off chance that anyone out there is still reading along and can identify the source of the disconnect that we both seem to be missing, I think it would be helpful to get a fresh pair of eyes looking at this.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 27, 2015, 03:52:13 PM
This exercise falls apart when we start to use imprecise language like "piling on to every price swing."  Such claims muddy your elegant ECG model.  Let's stay disciplined and stick to the model.

Why don't I make an series of claims.  You can tell me which one you believe to be false.

1.  An action can only cause a change subsequent to the action.
2.  The only way for an agent to effect change directly is through action.
3.  the only action possible to effect the average needle velocity is to push the needle up or down.
4.  Pushing the needle up or down can have no effect on any event that has transpired prior to the push.
5.  The only relevance of the lookback period is that it defines which direction the needle is pushed.
6.  The direction that the needle is pushed does not predict whether the needle will be higher or lower at any later time.
7.  Whether or not pushing the needle increases instantanious needle movement depends only on the direction of the push and the direction of the needle at the moment it is pushed.
8.  Whether or not the needle being pushed increases average needle movement depends only on the direction of the push and the subsequent position of the needle at some point in the future.
9.  The direction of the push can not predict the direction of movement of the needle at the moment it is pushed.
10.  The position of the push can not predict the future position of the needle at any future time.
11.  Because the lookback period can only effect the position of the push, but cannot predict price movement subsequent to the push, there is no predictable positive or negative relationship between the direction of the push and any subsequent velocity or position of the needle.
12.  The period of the lookback period tells you nothing about future needle positions regardless of the time period of the lookback or the time period of the subsequent measurement.
13.  Because the future position of the needle is a variable that is independant of the direction of the push, and the determination of whether or not the average price movement of the needle is dependant only upon the direction of the push and the direction of subsequent price movement, it can not be said that there is any relationship between the lookback period (which effects nothing but the direction of the push,)and the average needle velocity, regardless of the time period of the lookback, or the subsequent point of measurement.

 
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on October 27, 2015, 04:14:36 PM
I can't even bring myself to read this stuff anymore. 

Any trade by anyone who types anything on this board is pissing into the ocean.  Let's remember that just the NYSE, which is a subset of all tradable shares, has billions of shares change hands every day! 

(http://www.ritholtz.com/blog/wp-content/uploads/2012/12/stocks-volume.png)

High frequency trading is a much bigger issue that DM will ever be. 

In other news, the market has made quite a run recently off the September lows.  Will this mean a whipsaw for the 11/1 6 month lookback DM trade?  It's looking damn close!

Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 27, 2015, 04:23:44 PM
I can't even bring myself to read this stuff anymore. 

Any trade by anyone who types anything on this board is pissing into the ocean.  Let's remember that just the NYSE, which is a subset of all tradable shares, has billions of shares change hands every day! 

(http://www.ritholtz.com/blog/wp-content/uploads/2012/12/stocks-volume.png)

High frequency trading is a much bigger issue that DM will ever be. 

In other news, the market has made quite a run recently off the September lows.  Will this mean a whipsaw for the 11/1 6 month lookback DM trade?  It's looking damn close!

Don't read it!  Brooklyn and I enjoy this stuff.

As of yesterday I would stay in SHY, had about a 1.5 % margin.  We'll see!
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 27, 2015, 06:15:18 PM
No.  That is simply not true. an example to illustrate why this is so.

 Imagine on Day 0 that your signal is "1," then on day 25 your signal is "100" then on day 30 your signal is "75".  Your signal will then be to push "up"  (since the movement for the lookback period is +75) but at the moment you push up the needle is already moving down.

30 days later the price could be greater than or less than or equal to 75, which will determine whether or not your effect on the average price of that 30 day period was to increase or decrease the price movement.  If it is greater than 75 you will have increased the average price movement, and if it is less than 75 you will have decreased it.

I think you may have misunderstood me.  I was saying that your effect at each trade will always be to amplify the trend that occurred in the lookback period that preceded the trade, not the trend that will occur in the lookback period that will succeed the trade.

I am not sure what you were saying here,  maybe you can redefine what you meant by this.

Quote
I was saying that your effect at each trade will always be to amplify the trend that occurred in the lookback period that preceded the trade, not the trend that will occur in the lookback period that will succeed the trade.

You don't really believe that making a trade can amplify a trend in the past if you agree that it has no effect on past price movements.  or if "volatility" means "average price movement over a period of time" as we had previously agreed, and you also agree that a trade cannot have an effect on past price movement, then you should also agree that a trade can not possibly "amplify" ( or diminish) past volatility, only future volatility.

Final try: if you argue that  a trade increases volatility, by definition the past price trend is wholly irrelevant to this determination, since a trade can never effect past price volatility.

Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 27, 2015, 07:35:31 PM
13.  Because the future position of the needle is a variable that is independant of the direction of the push, and the determination of whether or not the average price movement of the needle is dependant only upon the direction of the push and the direction of subsequent price movement, it can not be said that there is any relationship between the lookback period (which effects nothing but the direction of the push,)and the average needle velocity, regardless of the time period of the lookback, or the subsequent point of measurement.

I'm thoroughly confused by this one, but if I'm understanding it correctly I disagree with at least two aspects of it.  First, the future position of the needle is not independent of the direction of the push, because the push is a cause whose effect is upward or downward pressure on the needle (so, in the absence of counteracting forces, the needle's future position will be higher or lower as a direct result of the push).  And second, the determination of "average movement" or "average velocity" will depend on the given time period (because that will determine the range of movements or velocities whose average is being determined).

I am not sure what you were saying here,  maybe you can redefine what you meant by this.

Quote
I was saying that your effect at each trade will always be to amplify the trend that occurred in the lookback period that preceded the trade, not the trend that will occur in the lookback period that will succeed the trade.

This was just a restatement of the same observation that was recognized as being "axiomatically correct" earlier in the thread -- the trade will always be in the same direction as the overall trend that occurred during the lookback period.

Quote
You don't really believe that making a trade can amplify a trend in the past if you agree that it has no effect on past price movements.  or if "volatility" means "average price movement over a period of time" as we had previously agreed, and you also agree that a trade cannot have an effect on past price movement, then you should also agree that a trade can not possibly "amplify" ( or diminish) past volatility, only future volatility.

Final try: if you argue that  a trade increases volatility, by definition the past price trend is wholly irrelevant to this determination, since a trade can never effect past price volatility.

An action in the present cannot have an effect on occurrences in the past but it can cause the pattern of the those occurrences to continue.  By trading in the same direction as the overall trend that occurred during the lookback period, the trader "amplifies the trend" not by magically changing history but by contributing to the trend's persistence into the present.
Title: Re: Dual Momentum Investing
Post by: Cathy on October 27, 2015, 08:15:13 PM
Physics tells us that you can have a velocity at a single moment in time

There are philosophical arguments that it doesn't.  Because one of the components of velocity is a rate (a function of time), velocity cannot exist in the absence of time. ...

As used in physics, "instantaneous velocity" means something very specific. Here is the formal construction. Suppose that an object moves in 1D space. Its position at time t is given by x(t) where t and x are both real numbers. The object's instantaneous velocity at time t is defined to be the value v that makes the following proposition be true: For every ε > 0, there exists some δ > 0 such that for any rt satisfying |t-r| < δ, it is true that |(x(r)-x(t))/(r-t) - v| < ε. The notation |·| denotes magnitude.

The quantity given by this definition turns out to be very useful in physics. To the extent I understand the philosophical objection, it appears to be that this quantity is not really a "velocity". In other words, the complaint is purely about the name given to the quantity rather than about the utility of the quantity. However, it is a ubiquitous use of the word, and it is not especially misleading because this definition reduces to the discrete concept of velocity when the inputs are discrete.
Title: Dual Momentum Investing
Post by: milesdividendmd on October 27, 2015, 09:08:26 PM
Quote
13.  Because the future position of the needle is a variable that is independant of the direction of the push, and the determination of whether or not the average price movement of the needle is dependant only upon the direction of the push and the direction of subsequent price movement, it can not be said that there is any relationship between the lookback period (which effects nothing but the direction of the push,)and the average needle velocity, regardless of the time period of the lookback, or the subsequent point of measurement.


I'm thoroughly confused by this one, but if I'm understanding it correctly I disagree with at least two aspects of it.  First, the future position of the needle is not independent of the direction of the push, because the push is a cause whose effect is upward or downward pressure on the needle (so, in the absence of counteracting forces, the needle's future position will be higher or lower as a direct result of the push).  And second, the determination of "average movement" or "average velocity" will depend on the given time period (because that will determine the range of movements or velocities whose average is being determined).

Actually the push only effects needle movement at the moment force is exerted. So the future movement (ie the movement that occurs after the finger has lost contact with the needle) is independent of the push. But that's not actually so important. What is important is that future movement or positions of the needle are not predicted by the direction of the push.




Quote

I am not sure what you were saying here,  maybe you can redefine what you meant by this.

Quote
I was saying that your effect at each trade will always be to amplify the trend that occurred in the lookback period that preceded the trade, not the trend that will occur in the lookback period that will succeed the trade.

This was just a restatement of the same observation that was recognized as being "axiomatically correct" earlier in the thread -- the trade will always be in the same direction as the overall trend that occurred during the lookback period.


An action in the present cannot have an effect on occurrences in the past but it can cause the pattern of the those occurrences to continue.  By trading in the same direction as the overall trend that occurred during the lookback period, the trader "amplifies the trend" not by magically changing history but by contributing to the trend's persistence into the present.

I understand what you are saying here. But the disconnect is that what has occurred before (and after I would argue) the finger pushing the needle is wholly independent of the pushes momentary effect on needle velocity.

In other words in retrospect you can say that there is a single right answer to the question of whether or not the finger has increased or decreased the needles velocity at the moment of the push, but you can never say whether the finger has increased or decreased the needles average velocity definitively, because that answer is wholly dependent on the random choice of where you decide to start measuring and where you stop measuring the needles movement.

And while the trend of the lookback period can always predict what the direction of the push will be, it can never tell you what the direction of the needle movement will be at the moment you push on it.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 27, 2015, 09:39:30 PM

Physics tells us that you can have a velocity at a single moment in time

There are philosophical arguments that it doesn't.  Because one of the components of velocity is a rate (a function of time), velocity cannot exist in the absence of time. ...

As used in physics, "instantaneous velocity" means something very specific. Here is the formal construction. Suppose that an object moves in 1D space. Its position at time t is given by x(t) where t and x are both real numbers. The object's instantaneous velocity at time t is defined to be the value v that makes the following proposition be true: For every ε > 0, there exists some δ > 0 such that for any rt satisfying |t-r| < δ, it is true that |(x(r)-x(t))/(r-t) - v| < ε. The notation |·| denotes magnitude.

The quantity given by this definition turns out to be very useful in physics. To the extent I understand the philosophical objection, it appears to be that this quantity is not really a "velocity". In other words, the complaint is purely about the name given to the quantity rather than about the utility of the quantity. However, it is a ubiquitous use of the word, and it is not especially misleading because this definition reduces to the discrete concept of velocity when the inputs are discrete.

Beautiful Cathy. I wish I had the math skills to understand what you wrote.

What I do recall is that velocity is not a relative property.

I remember asking my professor why relativity tells us that time moves slower for the guy on the train when the guy on the ground is moving at the exact same speed relative to the guy on the train, and he pointed out that only the guy on the train had accelerated.
Title: Re: Dual Momentum Investing
Post by: milesdividendmd on October 27, 2015, 10:26:07 PM

Quote
In terms of making your measurements at the end of the month, I use the perfcharts function on this site.

Www.Stockcharts.com.

Before implementing my strategy I did a lot of back testing on…

Portfoliovisualizer.com.

Thanks, but unfortunately unusable for me since these sites only show American stocks and funds, in US currency. Which is a big issue, e.g. S&P500 is up "only" about 48% in the last three years in US currency, but +80% in Euros.

Of course. Great point. I'm of limited use to you.

Is there a yahoo finance or equivalent in your country?  That should work for backtesting.

Also here is a nice article for you to digest.

http://www.dualmomentum.net/2015/06/dual-momentum-for-non-us-investors.html?m=1



Title: Re: Dual Momentum Investing
Post by: brainfart on October 28, 2015, 12:32:05 AM
> Is there a yahoo finance or equivalent in your country?  That should work for backtesting.

Yes, of course. But I'm not exactly sure how to do this backtesting. Will investigate, thanks.

> Also here is a nice article for you to digest.

Thanks again, saw that one months go, read it and didn't fully understand all its details, and then forgot about it. And of course, unfortunately, it deals with all the English-language currencies and the Yen as a worst case example, but not the Euro. Guess that currency it's not that important considering only a few hundred million people use it ... ;)
Will read it again and see if it makes more sense now.

So end of month approaching. What is the momentum saying?
Title: Re: Dual Momentum Investing
Post by: arebelspy on October 28, 2015, 01:43:14 AM
MOD NOTE: miles has been temporarily banned for a few weeks for behavior in other (unrelated) threads. He will be back in a few weeks, and, I'm sure, be happy to continue any ongoing debates or answer any questions left here in the meantime.

Just a courtesy message for those involved in this thread.  :)

Please PM me or any other mod with concerns.  Cheers!
Title: Re: Dual Momentum Investing
Post by: frugalnacho on October 28, 2015, 10:13:47 AM

Actually the push only effects needle movement at the moment force is exerted. So the future movement (ie the movement that occurs after the finger has lost contact with the needle) is independent of the push. But that's not actually so important. What is important is that future movement or positions of the needle are not predicted by the direction of the push.

Wait a minute, isn't this the momentum thread? I was under the impression that several people reading the momentum of the needle and pushing it up will not only cause the needle to go up (the immediate effect while force is being exerted), but that will in turn make prices higher, which will in turn trigger more fingers pushing the needle up*, which will in turn make prices higher, etc. creating a cycle.  The future price is not independent of the push because it carries that momentum forward.

*Not necessarily from DMers, but from everyone, because this is fundamental to how momentum, and this strategy, work in the first place.
Title: Re: Dual Momentum Investing
Post by: frugalnacho on October 28, 2015, 10:19:18 AM
If you or I trade our entire portfolio at any one time it effects the global capital markets much as a tear drop effects the salinity of the ocean.

We have no measurable market impact by virtue of our small size.

No one is arguing that any individual does.  No individual rain drop feels responsible for the flood.  And it's damn near impossible to measure the magnitude with which one rain drop did contribute to the flood.  But I still know as a matter of logic that in aggregate those rain drops did indeed cause the flood.
Title: Re: Dual Momentum Investing
Post by: K-ice on October 30, 2015, 09:15:00 AM
Sorry if this has been addressed. I have skimmed through much of this thread and it is hard to pull out information.

So I have a simple question to those using DMI.

With how much of your net worth are you actually doing DMI?

I have heard it is best with tax advantaged accounts.  Also, some of us have a large amount of net worth in real-estate (prime residence & rentals).

To answer my own question.

Out of my investable assets (cash, stocks, bonds etc.)  I would consider DMI with about 50%.  Out of my total net worth it would be less than 20%.


Some of you may have a number figure like, I will try DMI with $10K $100K etc.

I am just trying to get a feel for what people are actually doing.

Thanks in advance for sharing.


Title: Re: Dual Momentum Investing
Post by: RobertMa on October 30, 2015, 03:49:12 PM
So, Miles, at the end of the month I'm showing the S&P dead even with SHY for the past six months. What's the plan for Monday? (I'm assuming you're trading on the first day of each calendar month, like me)

Title: Re: Dual Momentum Investing
Post by: The Converted on October 30, 2015, 04:14:26 PM
I need that sweet sweet end of the month update from Miles. :)

Quick Q - I have five funds i use to track for DMI purposes (ST bonds, Vanguard Domestic Large Cap Growth, DFA Large Cap International, Vanguard Small Cap, Principal SP500).

Is it stupid to have that many?   Should i bring it down to three?  I'm thinking the more you have the more often you'd be moving funds, but having trouble rationalizing removing any one of the five.

BTW i synced up with Miles and for me Domestic Large Cap Growth wins over a 6 month lookback, and hence i've moved my funds there.

Thanks
Title: Re: Dual Momentum Investing
Post by: sol on October 30, 2015, 05:03:23 PM
I need that sweet sweet end of the month update from Miles. :)

See the note above about how miles is taking an unplanned break from the forum for getting too many reports about violating forum rules.  I'm sure he'll be back soon with updates to this thread, because there are clearly (and I think unfortunately) a lot of people here who have bought into this market timing philosophy of investing.

But if I may venture a guess, the s&p500 today at 2079 is down compared to a three or six month lookback period, as it was on September 1 when miles sold all of his stocks at a market price of 1917.  The stock market is up 8.5% since he sold 60 days ago, and the strategy he is promoting suggests you should continue to avoid stocks for now, if you're using a 3 or 6 month lookback.

As a devoted buy and hold investor, I'm delighted in my 8.5% return over the past two months and secretly gloating a little bit that market timers like miles and the rest of the followers in this thread got burned by ignoring my advice.  Sorry, I know that's immature of me.  Maybe the market will crash again next month and start the long bear that miles has been warning us about?

edit:  miles is lurking here and has challenged my assertion of 8.5% return on the S&P500 over the past 2 months.  To clarify, the index price was 1917 on September 1 when he sold, and is 2079 today.  That's a diffference of 162, whicch is 8.45% of the starting price of 1917.  Maybe he's calculating the growth of the index in a different way than I am, but since he was upset enough about this to create a new account just to message me about it I figured it was worth clarifying.
Title: Re: Dual Momentum Investing
Post by: RobertMa on October 30, 2015, 07:44:08 PM
Sorry, I know that's immature of me.

Yeah, kinda.

Momentum trading has multiple past decades when I can see it working, right on the chart in front of me. And it is built on a logical framework that seems like it should work in the future years. This is why I'm testing it with about 8% of my portfolio. Sometimes new ideas work. Buy and hold is better than what came before it, which was better that whatever came before that, which was better than investing in tulips. There might be a way to improve on good ole B&H. However, yes, I concede that momentum will not beat the S&P over every rolling 60 day period.

But I'll remember to gloat when other forum members lose money and I profit that particular month. Jeez.
Title: Re: Dual Momentum Investing
Post by: sol on October 30, 2015, 09:06:55 PM
Yeah, kinda.

Sorry, couldn't help myself.  Miles and I had this discussion several pages back in this thread, when he made the trade out of stocks, and we discussed where the market would have to go in the future to make that a good vs a bad idea.  I clearly thought it seemed very unlikely that the market would crash, and he mostly seemed to agree but was sticking by the strategy based on his analysis of the historical record.  Maybe this time is different?

Quote
is built on a logical framework that seems like it should work in the future years.

This is the part I've never really understood.  Ultimately, the performance of this strategy is entirely dependent on the duration of market downturns following a predictable pattern, and then the pace of early declines at the start of a bear (within the lookback period) being smaller than the pace of early climbs a the start of a bull.  That pattern may hold in the future, but I wouldn't exactly call it "logical framework" when it's just based on empirical observations.  The entire grounding of the DM strategy as presented in this thread is agnostic of mechanics, because it times the market based solely on a price signal.  That's not logic, that's data mining.

Quote
However, yes, I concede that momentum will not beat the S&P over every rolling 60 day period.

This is really the crux of my gloating.  This particular episode turned out really bad for market timers following a DM strategy.  I only highlight that because this thread was started in the optimistic hopes that this strategy would handily beat the index, and after all arguing it about violently for a few weeks we sort of begrudgingly agreed "fine, we'll just wait and see what happens then."  Then we waited, then this happened.  You can't really expect me to pass up an opportunity to point that out when the entire argument was basically "you just wait, you'll see that we're right and DM is awesome."  In this moment, not so awesome.  Maybe next month?

Quote
I'll remember to gloat when other forum members lose money and I profit that particular month. Jeez.

Hey, if you spend 50 long posts trying to defend your investment philosophy, and people call you an idiot and then do something stupid that your philosophy would have saved them from, then you too can gloat, but only in the thread where you tried to dissuade them.  It won't be nice when you do it either, but I'll be more understanding.  I'm not gloating because I'm happy anyone lost money, and in fact I've repeated several times in this thread that I hope miles gets rich with his scheme.  But in this particular case, he would have been better off listening to me.

Not that I'm going to claim I'm a market genius for sticking with passive investing.  You don't get to start up a hedge fund just because you DIDN'T trade away a big chunk of your portfolio with poorly timed trades based on chartist voodoo.  (I'm sure that will get miles' blood to boiling.  Hi miles!)
Title: Re: Dual Momentum Investing
Post by: arebelspy on October 31, 2015, 02:51:15 AM
Quote
is built on a logical framework that seems like it should work in the future years.

This is the part I've never really understood.  Ultimately, the performance of this strategy is entirely dependent on the duration of market downturns following a predictable pattern, and then the pace of early declines at the start of a bear (within the lookback period) being smaller than the pace of early climbs a the start of a bull.  That pattern may hold in the future, but I wouldn't exactly call it "logical framework" when it's just based on empirical observations.  The entire grounding of the DM strategy as presented in this thread is agnostic of mechanics, because it times the market based solely on a price signal.  That's not logic, that's data mining.

THIS is the important part to me.

It has happened, but that doesn't mean it will continue to happen because there is no logical reason for some certain lookback period to outperform.

Miles did a whole blog post this past June trying to refute that by talking about it as needing a "story," but yes, I'd like logical reasons why something should work, and I don't see it for DM.

The fact that DM underperformed over a 60 day period?  Meh.

If it had beaten whatever index you compare it to, that wouldn't have convinced me it's great, just like it underperforming doesn't convince me it's bad--but the logical reasons behind it (or lack thereof) are the reason I don't care for DM and other forms of market timing.

What it did, or didn't do, in the short term I couldn't care less about.
Title: Re: Dual Momentum Investing
Post by: RichMoose on October 31, 2015, 08:43:55 AM
For what it's worth, being a buy and hold investor hasn't necessarily been fantastic over the past year. Hasn't been horrible either. But no matter what it's not logical to compare investment strategies based only on recent performance. Due to its nature, DM won't do particularly well in volatile up-down markets because you will generally be a little late on the move to T-bills and again be late on the move to stocks. That's the nature of this beast.

I would say that DM is an effective strategy for reducing losses during large market downturns (think 77, 81-82, 00-01 & 08-09). Not an effective strategy for navigating what I'll call blips - short term swings in the market or flash crashes (87). Of course we don't know what form market declines will take in the future... but regardless you have to give miles credit for this:

he mostly seemed to agree but was sticking by the strategy based on his analysis of the historical record
Title: Re: Dual Momentum Investing
Post by: sol on October 31, 2015, 10:21:50 AM
The fact that DM underperformed over a 60 day period?  Meh.

Of course, it's no more indicative of the strategy's value than any other 60 day long period.  It's just the first 60 day period we personally argued about in real time, so no I'm thumbing my nose at miles like an annoying child.  I'm sure he'll get the chance to return the favor some day, but today is my day to say "neener neener neener."
Title: Re: Dual Momentum Investing
Post by: darth on October 31, 2015, 10:59:27 AM
The fact that DM underperformed over a 60 day period?  Meh.

Of course, it's no more indicative of the strategy's value than any other 60 day long period.  It's just the first 60 day period we personally argued about in real time, so no I'm thumbing my nose at miles like an annoying child.  I'm sure he'll get the chance to return the favor some day, but today is my day to say "neener neener neener."

The telling thing is that you were silent last month when DM beat the S&P.

Also telling is that you don't know the difference between CAGR and arithmetic returns.  For those keeping track at home, the actual CAGR of the S&P from 8/31-10/30 was 5.7%, not 8.5%.

Easily verifiable here.

http://www.etfreplay.com/combine.aspx
Title: Re: Dual Momentum Investing
Post by: sol on October 31, 2015, 11:32:42 AM
The telling thing is that you were silent last month when DM beat the S&P.

My previous posts in this thread discussing last month's returns are apparently forgotten? 

Quote
Also telling is that you don't know the difference between CAGR and arithmetic returns.  For those keeping track at home, the actual CAGR of the S&P from 8/31-10/30 was 5.7%, not 8.5%.

I know the difference, miles.  So do you, which means you know that CAGR is a meaningless stat for a period of 2 months.  It's designed to compare annualized returns.

Look, I'll say it real slow this time so it's clear.  The Sept 1 index price was 1917.  Over the next 60 days the price rose to 2079.  That's an increase of 162, which is 8.45% higher on Oct 30th than it was on Sept 1.  Clear enough this time?
Title: Re: Dual Momentum Investing
Post by: MDM on October 31, 2015, 11:37:47 AM
edit:  miles is lurking here and has challenged my assertion of 8.5% return on the S&P500 over the past 2 months.  To clarify, the index price was 1917 on September 1 when he sold, and is 2079 today.  That's a diffference of 162, whicch is 8.45% of the starting price of 1917.
Also telling is that you don't know the difference between CAGR and arithmetic returns.  For those keeping track at home, the actual CAGR of the S&P from 8/31-10/30 was 5.7%, not 8.5%.

Apples vs. oranges vs. kumquats.

Sol:                   Oct. 30 vs. Sept. 1
Darth (miles?):  Oct. 30 vs. Aug. 31

Both are correct for the percentage increase of the index for the date range specified by each, although the date ranges are different.  There was a large drop in the S&P500 on Sept. 1.

Also, neither 8.45% nor 5.7% is the Compound Annual Growth Rate (CAGR (http://www.investopedia.com/terms/c/cagr.asp)).  Using sol's index values the CAGR from 9/1 to 10/30 was 65.2%.

On balance, seems sol wins this round.
Title: Dual Momentum Investing
Post by: darth on October 31, 2015, 11:42:46 AM
Name's Darth,

My recollection is that you were interested in the results mid month when the S&P was up, but oddly silent at the end of the month, when it was losing. Do you have evidence to the contrary?

The closing price of VOO (vanguards S&P ETF) on 8/31, when Miles exited stocks was 181.11, close yesterday was 190.56.

In what world is that an 8.5 % gain?

Show me an S&P fund with an 8.5% gain from close on 8/31 to close yesterday  (as opposed to a 5.2 % gain.)

Based on your ability to do math I am concerned for your retirement plans.
Title: Re: Dual Momentum Investing
Post by: sol on October 31, 2015, 12:02:29 PM
Darth (miles?):  Oct. 30 vs. Aug. 31

I'm assuming it's miles because the first post is almost an exact quote of a PM miles sent me making the same point, which is why I amended my post above to explain how I came up with 8.5%.

Forums are addictive.  It's hard to take a break, even when you've been banned. 

My recollection is that you were interested in the results mid month when the S&P was up, but oddly silent at the end of the month, when it was losing. Do you have evidence to the contrary?

I wasn't interested in results at any point, so much as what the future would have to bring in order for your decision to turn out well vs poorly.  The large jump in index price right after you sold sort of started you at a disadvantage, meaning that the price would have to drop quite a bit from there for you to come out ahead on that deal, right at a time when suddenly the financial press (for whatever they're worth) was prediciting the start of a recovery.  This time, looks like they guessed right.

Quote
The closing price of VOO (vanguards S&P ETF) on 8/31, when Miles exited stocks was 181.11, close yesterday was 190.56.

I've been quoting S&P500 index prices (https://www.google.com/finance?q=INDEXSP%3A.INX&sq=s%26p%20500&sp=1&ei=8wA1VrjzC8nXiwKnxo-IAg) in this thread, as a proxy.  You can of course get slightly different results if your chosen investment doesn't track the S&P500 very well.

Quote
Based on your ability to do math I am concerned for your retirement plans.

That's a good one, thanks for the laugh.  Coming from a market timer who just blew roughly 8% of his retirement by making a poorly timed trade with 100% of his portfolio into short term treasuries right before a big bull run, that's a hilariously ill-considered jab.  Got any more? 
Title: Re: Dual Momentum Investing
Post by: Retire-Canada on October 31, 2015, 12:07:30 PM
Maybe he's calculating the growth of the index in a different way than I am, but since he was upset enough about this to create a new account just to message me about it I figured it was worth clarifying.

Wow. Darth/Miles must be mad. Creating sock puppet accounts is usually grounds for being banned on most of the forums I belong to.

Let's be real. Nobody including Sol is really evaluating DM or B&H based on 2 months of data.

To everyone - Insulting people won't get the discussion moving in a positive direction. Let's take a few deep breathes.
Title: Dual Momentum Investing
Post by: darth on October 31, 2015, 12:13:31 PM
edit:  miles is lurking here and has challenged my assertion of 8.5% return on the S&P500 over the past 2 months.  To clarify, the index price was 1917 on September 1 when he sold, and is 2079 today.  That's a diffference of 162, whicch is 8.45% of the starting price of 1917.
Also telling is that you don't know the difference between CAGR and arithmetic returns.  For those keeping track at home, the actual CAGR of the S&P from 8/31-10/30 was 5.7%, not 8.5%.

Apples vs. oranges vs. kumquats.

Sol:                   Oct. 30 vs. Sept. 1
Darth (miles?):  Oct. 30 vs. Aug. 31

Both are correct for the percentage increase of the index for the date range specified by each, although the date ranges are different.  There was a large drop in the S&P500 on Sept. 1.

Also, neither 8.45% nor 5.7% is the Compound Annual Growth Rate (CAGR (http://www.investopedia.com/terms/c/cagr.asp)).  Using sol's index values the CAGR from 9/1 to 10/30 was 65.2%.

On balance, seems sol wins this round.

Great point. that explains the confusion.

So the real question becomes why Sol chose to measure from the close of the first trading day of one month to the close of the last trading day of another month. What a nonsensical interval, and completely unrelated to the actual recorded history of when the positions were changed.

Two possibilities leap to mind.

1. Curve fitting to bolster his argument.

Or

2. Sloppy thinking.

So which one is it Sol?
Title: Dual Momentum Investing
Post by: darth on October 31, 2015, 12:25:35 PM
Quote

Wow. Darth/Miles must be mad. Creating sock puppet accounts is usually grounds for being banned on most of the forums I belong to.


That was presumably the intent of Sol's original comment regarding Miles.

Mission accomplished, so presumably MD2 doesn't have much to lose.

Quote
Let's be real. Nobody including Sol is really evaluating DM or B&H based on 2 months of data.

Sol is. See his endzone dance above. It's embarrassing, but true

Quote
To everyone - Insulting people won't get the discussion moving in a positive direction. Let's take a few deep breathes.

That's true.
Title: Re: Dual Momentum Investing
Post by: sol on October 31, 2015, 12:27:15 PM
So the real question becomes why Sol chose to measure from the close of the first trading day of one month to the close of the last trading day of another month. What a nonsensical interval, and completely unrelated to the actual recorded history of when the positions were changed.

I chose Sept 1 because you told me you used the first day of the month to make your trading decisions, and I was trying to humor you.

I chose Oct 30th because November 1 isn't here yet, but is only one trading day away.  I'll happily update on Monday.  I expect you'll be re-banned by then, though.
Title: Dual Momentum Investing
Post by: darth on October 31, 2015, 12:34:44 PM
So the real question becomes why Sol chose to measure from the close of the first trading day of one month to the close of the last trading day of another month. What a nonsensical interval, and completely unrelated to the actual recorded history of when the positions were changed.

I chose Sept 1 because you told me you used the first day of the month to make your trading decisions, and I was trying to humor you.

I chose Oct 30th because November 1 isn't here yet, but is only one trading day away.  I'll happily update on Monday.  I expect you'll be re-banned by then, though.

If you want to compare performance, all that matters is when the position was actually changed and the record is clear. Miles sold out of FSPNX, after close on 8/31.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on October 31, 2015, 02:07:20 PM
I'd say this thread has now officially jumped the shark (propelled by its own momentum, of course).
Title: Re: Dual Momentum Investing
Post by: arebelspy on October 31, 2015, 03:42:38 PM
I'd say this thread has now officially jumped the shark (propelled by its own momentum, of course).

You won't be able to say that until we can look back six months or so.
Title: Re: Dual Momentum Investing
Post by: forummm on October 31, 2015, 06:31:37 PM
I'd say this thread has now officially jumped the shark (propelled by its own momentum, of course).

You won't be able to say that until we can look back six months or so.

Don't you have to compare it to the performance of other threads too? What are your alternative benchmark threads? Maybe "introduce yourself" is Treasuries equivalent?
Title: Re: Dual Momentum Investing
Post by: brainfart on October 31, 2015, 06:56:41 PM
Does anyone know any other forums where this topic can be discussed with less or even without personal attacks? Except the blogs of miles and Mr. Antonacci?
Title: Re: Dual Momentum Investing
Post by: K-ice on October 31, 2015, 10:38:34 PM
^^^^^ I agree @ brainfart

I posted a question above but there is so much fighting no one can discuss on this thread.


So I have a simple question to those using DMI.

With how much of your net worth are you actually doing DMI?

Title: Re: Dual Momentum Investing
Post by: sol on October 31, 2015, 10:53:16 PM
^^^^^ I agree @ brainfart

I posted a question above but there is so much fighting no one can discuss on this thread.


So I have a simple question to those using DMI.

With how much of your net worth are you actually doing DMI?


I didn't answer because I didn't think you'd be interested in my answer, which is zero percent because I don't believe in market timing.

There are only a handful of people here actually doing this craziness with their real money, which probably shouldn't be surprising considering hour financially savvy most people on this forum are.
Title: Re: Dual Momentum Investing
Post by: arebelspy on November 01, 2015, 02:15:07 AM

So I have a simple question to those using DMI.

With how much of your net worth are you actually doing DMI?


I don't think there are that many following DM, which is why you have a dearth of answers.  If you asked what percent people are in equities, you'd get more responses, because more people invest in equities (and I realize the groups overlap, i.e. DM is a subset of the larger group, but my point is the DM subset is small).

Doesn't investing such a small percent of your NW in DM indicate a lack of confidence?

Someone who is 80/20 equities, or 100/0, and fully invested seems pretty confident in their choice.  Someone with 8% of their portfolio in DM?  Not so much.

Does anyone know any other forums where this topic can be discussed with less or even without personal attacks? Except the blogs of miles and Mr. Antonacci?

You could contact them at their blogs and ask.

Title: Re: Dual Momentum Investing
Post by: RobertMa on November 02, 2015, 11:39:36 AM

Someone who is 80/20 equities, or 100/0, and fully invested seems pretty confident in their choice.  Someone with 8% of their portfolio in DM?  Not so much.

I am not particularly confident in DM, beyond a toe-in-the water trial amount. That's why I am *trying* it. A trial. An attempt to see what it's like with my fun money. I, unlike others, am agnostic on any strategy and I'll try interesting ideas with my Roth fun money. I now realize this violates the Core Beliefs here.

This whole thread started with such promise, then devolved into a simple religious war. There was  vitriol that I haven't seen when talking about any other strategy. Stock picking, dividend investing, seat-of-the-pants market timing, robo-advisors...all are discussed with at least some logic. However, it HAS been fun watching The Faithful react to the sight of the DM heresy. That was educational.

If anyone wants to discuss the positives and negatives of this approach any further, just hit me up with a PM and tell me where. Later.
Title: Re: Dual Momentum Investing
Post by: arebelspy on November 02, 2015, 11:44:20 AM
I certainly think it's fine having "play money" of ~5% or less of your portfolio.

But it does indicate a lack of confidence in what you're doing with that money, typically because it's riskier.
Title: Re: Dual Momentum Investing
Post by: sol on November 02, 2015, 12:02:36 PM
I certainly think it's fine having "play money" of ~5% or less of your portfolio.

But it does indicate a lack of confidence in what you're doing with that money, typically because it's riskier.

I think miles would argue that DM is less risky, because it is designed to limit drawdowns in big bear markets, but that's getting a little loose with the definition of "risk" when you're comparing returns against an index that a passive indexing strategy is guaranteed to match.

If risk means "smaller price swings over a months long time frame" then DM might qualify as less risky.  If it means "more likely to underperform the index" then I think DM is more risky.
Title: Re: Dual Momentum Investing
Post by: arebelspy on November 02, 2015, 02:15:05 PM
I meant typically when people use a small percent of their portfolio, it indicates a lack of confidence in that trading strategy, usually due to their acknowledgement of risk.

I wasn't talking about DM specifically, or how risky it is.

But I'm curious why someone with the confidence in DM would use it as a small fraction of their portfolio.  It seems like you either buy into it, or not.

The permanent portfolio is similar in that way, IMO.
Title: Re: Dual Momentum Investing
Post by: peterpatch on November 02, 2015, 06:39:47 PM
I meant typically when people use a small percent of their portfolio, it indicates a lack of confidence in that trading strategy, usually due to their acknowledgement of risk.



I don't know if it's typical of small portfolio allocations but I'd agree that there are people who dabble in small portfolio allocations that they would invest more heavily into if they had more confidence. However I wouldn't say it was typical unless I saw strong statistical evidence of that.



 It seems like you either buy into it, or not.


If you're saying that one needs to make a material investment for it to really count then I also agree.

There's nothing wrong, IMHO, with diversifying using strategies as long as it's done sensibly. For example many MMM people diversify into active real estate investing (typically renting from my experience) along with index investing. Those two things are totally different strategies. I don't see why one couldn't use DM as part of a group of investment strategies to help diversify away from risks. 

If DM works like it is proposed to work then one should have a significantly higher SWR then they would simply indexing and taking 3% or 4% SWR per year. You would also have less mental anguish about market crashes , if DM works out as expected, because they would be far less extreme. There's no guarantee any strategy will work out as expected indexing and real estate included. I think the two main reasons stock market indexing has worked so well (the third being diversification) is low fee's and the other part is a very strong US (and to a lesser degree world) economy over the last 50 or so years. The stock market basically follows returns on invested capital (including dividends) over long periods. If those earnings take a 10-20 year dive then the stock market and thus the vaunted "average" could be horrible and could take a really long time to revert to the mean. Other strategies might do much better, or much worse. I suspect strategic and sensible diversification of investing strategies (investing as defined by Ben Graham) will provide similar diversifying effects to using asset classes (better risk adjusted returns on average).

Title: Re: Dual Momentum Investing
Post by: Radagast on November 02, 2015, 10:42:49 PM
I'm not taking sides, but this is my current understanding of momentum.

(http://calvinandhobbesagain.files.wordpress.com/2012/09/ch861007.jpg)
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on November 03, 2015, 10:32:53 AM
Well it looks like anyway you slice it, S&P500 etfs beat SHY over the last 6 months on our around the end of October/beginning of November.

So I assume miles is back in US equities.  Right?

http://stockcharts.com/freecharts/perf.php?SHY,SPY,VFIAX&l=3212&r=3340&O=011000
Title: Re: Dual Momentum Investing
Post by: Lowerbills on November 03, 2015, 11:01:03 AM
Apologies for not quoting due to laziness... But one other basic, perhaps dumb question for those comparing September and October returns.

What about dividend payments?  Are these, and their compounding being factored in for the comparisons?

I hold VTI and know 10/1/2015 was a payment date for one quarter of the 2.07%.  Another poster referenced VOO which also had a quarterly dividend payment on 9/25/2015.

Small, but not inconsequential.  Bummer for the timing to coincide and miss out on the dividend payments.
Title: Re: Dual Momentum Investing
Post by: sirdoug007 on November 03, 2015, 11:26:23 AM
Apologies for not quoting due to laziness... But one other basic, perhaps dumb question for those comparing September and October returns.

What about dividend payments?  Are these, and their compounding being factored in for the comparisons?

I hold VTI and know 10/1/2015 was a payment date for one quarter of the 2.07%.  Another poster referenced VOO which also had a quarterly dividend payment on 9/25/2015.

Small, but not inconsequential.  Bummer for the timing to coincide and miss out on the dividend payments.

Dividends should be included in the return you look at.  Stockcharts.com gives you total return.  Other websites may exclude dividends.

http://stockcharts.com/docs/doku.php?id=policies:historical_price_data_is_adjusted_for_splits_dividends_and_distributions
Title: Re: Dual Momentum Investing
Post by: Cheddar Stacker on November 03, 2015, 05:50:30 PM
...Bunch of great stuff...

That's all fine but now I just want some pizza Steve!
https://youtu.be/YRQFMHRSj9I
Title: Re: Dual Momentum Investing
Post by: arebelspy on November 04, 2015, 02:13:02 AM
Great post, PizzaSteve.

Title: Re: Dual Momentum Investing
Post by: sol on November 04, 2015, 09:11:36 AM
This thread is far too boring without miles here to promote market timing.  Is there anyone else present who would like to defend dual momentum investing, or rebut PizzaSteve?
Title: Re: Dual Momentum Investing
Post by: Retire-Canada on November 04, 2015, 09:23:07 AM
The Good News
* This strategy has you in the market sometimes, in fixed or other assets sometimes.  If X is time in the market and Y time out of the market, Over time this will return X% market + Y% fixed in returns.  Your return will be proportional to your time in either asset class.  This is not a bad return and not far off from a fixed 'buy and hold' portfolio of X% stock.
* By historical returns and risk studies, this part time equities portfolio will have less volatility of returns (often called 'risk' by some), but also a lower expected return.  But not a ton less than most static portfolios.  You won't bankrupt yourself, most likely.

The Bad News
* Trading is very tax inefficient, so if you are trading taxable accounts the returns will be impacted a lot by tax inefficiencies and possible trading inefficiencies (hidden spreads)

Well I'm not a DMer and not an uber investor of any stripe, but I read these boards regularly just to stay at a functional level of understanding that supports my modest FIRE goals.

Without going back and re-reading this thread the items highlighted in Steve's post above are what I got from Miles' discussions so far. So if everyone agrees with those statements I don't see anything in Steve's post that needs rebutting.

The point of contention that made this thread go all pear shaped was whether DM increased market volatility and from that whether there was a morality issue with DMing.
Title: Re: Dual Momentum Investing
Post by: arebelspy on November 04, 2015, 09:37:20 AM
The point of contention that made this thread go all pear shaped was whether DM increased market volatility and from that whether there was a morality issue with DMing.

Someone can find a moral issue with pretty much anything, including and especially any sort of investing.  There are so many ethical viewpoints, and investing can be viewed as a sort of usery, which could be seen as unethical, etc.

It's important to raise and consider ethical issues, but just because it's a consideration doesn't necessarily make it an issue, per se.
Title: Re: Dual Momentum Investing
Post by: Retire-Canada on November 04, 2015, 09:52:44 AM
The point of contention that made this thread go all pear shaped was whether DM increased market volatility and from that whether there was a morality issue with DMing.

Someone can find a moral issue with pretty much anything, including and especially any sort of investing.  There are so many ethical viewpoints, and investing can be viewed as a sort of usery, which could be seen as unethical, etc.

It's important to raise and consider ethical issues, but just because it's a consideration doesn't necessarily make it an issue, per se.

I've got no objection to the discussion of DM volatility effects and related ethical issues in theory, but I think in practice we have proven that this is not a fruitful path in this particular thread at this moment in time.
Title: Re: Dual Momentum Investing
Post by: sol on November 04, 2015, 10:00:56 AM
The point of contention that made this thread go all pear shaped was whether DM increased market volatility and from that whether there was a morality issue with DMing.

That wasn't my impression at all.  I thought the volatility and morality issue was purely a distraction from the key point that first got me involved in this thread, which was that DM is a bad strategy because it underperforms index investing.

You seem to agree with that assessment, by agreeing with PizzaSteve, but miles definitely does not.  He argued at length that momentum investing is a persistent and exploitable inefficiency in the market that any schmuck can use to outperform the index, in some cases by huge amounts.  That same opinion cropped again in this thread just recently, with a claim that DM supports higher SWRs than an index portfolio.

Miles and the other market timers from early in this thread (you included, I think) seem to believe that data mining the historical record can reveal an investing strategy that will outperform the index in the future, though I'm not sure I've seen any evidence to support that claim other than "it should be obvious" which is why we spent like three pages arguing over a priori rationalizations.

Title: Re: Dual Momentum Investing
Post by: frugalnacho on November 04, 2015, 10:13:46 AM
The point of contention that made this thread go all pear shaped was whether DM increased market volatility and from that whether there was a morality issue with DMing.

That wasn't my impression at all.  I thought the volatility and morality issue was purely a distraction from the key point that first got me involved in this thread, which was that DM is a bad strategy because it underperforms index investing.

Pretty much.  The volatility/morality was later.  The morality issue can't even be addressed until miles admits DM increases market volatility, which appears to be a logical and self evident truth to everyone in the thread except miles. 
Title: Re: Dual Momentum Investing
Post by: sol on November 04, 2015, 10:22:59 AM
The morality issue can't even be addressed until miles admits DM increases market volatility, which appears to be a logical and self evident truth to everyone in the thread except miles.

Still a distraction, I think.  I believe that momentum trades increase volatility, but that is far from my primary objection to the idea.  It's just the one that miles took issue with.

I want everyone here to get rich, including the market timers.  I just think they're hurting their chances by abandoning a low cost index strategy that is guaranteed to track the market.
Title: Re: Dual Momentum Investing
Post by: Retire-Canada on November 04, 2015, 10:32:17 AM
That wasn't my impression at all.  I thought the volatility and morality issue was purely a distraction from the key point that first got me involved in this thread, which was that DM is a bad strategy because it underperforms index investing.

I may have got it wrong, but I thought Miles acknowledged that DM would suffer a little compared to BAH in terms of total return, but he was okay with that in exchange for reduced risk.

I'm not motivated enough about this topic to reread pages of this thread to be sure.


I got curious and reread a few of Miles' posts on performance. I was incorrect in my post above. He does seem to say that DM will outperform BAH. The post I was thinking of was referring to absolute momentum. I confused the two.
Title: Re: Dual Momentum Investing
Post by: RichMoose on November 04, 2015, 12:10:59 PM
Still a distraction, I think.  I believe that momentum trades increase volatility, but that is far from my primary objection to the idea.  It's just the one that miles took issue with.

I don't understand why this is an issue for you.

1) You have stated over and over that you are a buy and hold indexer, so momentum trading (or another other form of investing) should be of little interest to you as it won't affect your buy and hold strategy. Your strategy is entirely dependent on GDP growth and corporate profitability, in the long run. Unless the point of you being on this thread to argue to same issues repeatedly is simply to derail it into a nonsense gibberish about what Miles says and what you interpret him to say.

2) Obviously if a significant portion of investors followed a DM strategy then it would have a material impact on the market. But it doesn't, it never will, and you know that. There are too many funds that exploit market movements and way more people that believe in EMH than those that believe in DM. I would be much more concerned about hedge funds, large investors that employ stop-loss orders, flash traders, day traders, and the like than I would be about DM investors.

3) Miles has stated many times that DM does impact the market, but it doesn't impact it meaningfully. In fact, he compared a few pages back to a tear drop affecting the salinity of the ocean. I think that's a pretty fair statement. All trading impacts markets. If you look at charts for the S&P500 over the past year there is no evidence that DM amplified markets movements in any meaningful way. As Miles said before, a strategy that employs maybe one or two trades per year can hardly have a destructive effect on the market.

4) As I think you have pointed out, DM is always behind because decisions are made based on movements the market has already made. DM investors don't change their decisions from one day to the next, they make their trades (or they don't) once a month. We both know that for every 1 DM investor selling out of a position on the first market day of the month, there are countless of traders looking to take advantage of their move and buy when the market is already down (or sell when it is already up). Unless the DM investor so happens to make their trade and it is inline with that days' market fundamentals.

5) In today's information age, a crap article on Fox News or MSNBC has much more impact on the market (from a volatility perspective) than DM.

6) Much of your arguments are based on some theory that DM investing will catch on in a significant way and actually have a measurable impact on the market. While we're on this topic, let's not forget if everyone was a buy and hold investor there wouldn't be a market.
Title: Re: Dual Momentum Investing
Post by: RichMoose on November 04, 2015, 12:19:05 PM
That same opinion cropped again in this thread just recently, with a claim that DM supports higher SWRs than an index portfolio.

Not that I believe it's a smart strategy to retire sooner because you choose to adopt DM investing, but it theoretically could. One of the biggest dangers of regular withdrawals on an index-based strategy is making those withdrawals during a deep bear market. DM should avoid this as based on historical data, it would have avoided most of losses of major bear markets. This means your draw down as a percentage of your portfolio value would be reduced.

This theory is based on historical data, naturally we don't know how DM investing will perform in the future and we don't know what form bear markets will take in the future.
Title: Re: Dual Momentum Investing
Post by: brainfart on November 04, 2015, 12:23:10 PM
... the key point that first got me involved in this thread, which was that DM is a bad strategy because it underperforms index investing.

Despite historical data saying otherwise?

Quote
Miles and the other market timers from early in this thread (you included, I think) seem to believe that data mining the historical record can reveal an investing strategy that will outperform the index in the future,

So this time everything is different? Then how can you for example rationalize a 4% SWR? It's based on the same historical data.
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on November 04, 2015, 12:31:16 PM
In Miles' absence (and given that I have adopted DM with the tax advantaged portion of my savings), I will throw in my 2 cents for what little they're worth.

Regarding the argument of whether DM contributes to market volatility- I don't get it. There have to be billions sloshing around during every trading session; how any one strategy could be exacerbating any move in a particular direction is beyond my understanding. In any event, the BAH proponents believe in the Efficient (all informed) Market Theory, yes?Therefore DM trading decisions shouldn't be impacting much of anything- information is still being incorporated into the market moves.

Also, much is being made of the outsized positive equity returns in October, after the model indicated a switch to Fixed Income after August. If you recall from Miles' past blog posts (themselves derived from previous trend following research?), a sharp decline (in August) followed by a rapid recovery is one of the two scenarios under which DM will underperform (the other being "whipsaws"). The Oct '87 flash crash is cited as a previous example. I'm not sure  this detracts from Momentum theory. The DM strategy is predicated on human irrationality, and the past observations thereof. It remains to be seen whether the shift to bonds 2 months ago was wise, or whether stocks are destined to surpass their previous highs. The drop was caused by China GDP fears, yes? Have those fears been addressed? How will the herd react to further bad economic news? I find the "groupthink" basis of DM to be compelling, but admittedly I  am taking risk to test its validity.

Title: Re: Dual Momentum Investing
Post by: RichMoose on November 04, 2015, 12:42:10 PM
* This strategy has you in the market sometimes, in fixed or other assets sometimes.  If X is time in the market and Y time out of the market, Over time this will return X% market + Y% fixed in returns.  Your return will be proportional to your time in either asset class.  This is not a bad return and not far off from a fixed 'buy and hold' portfolio of X% stock.

This is a little flawed because of the timing aspect of DM investing. Let's say that historically the DM strategy has a person in stocks 80% of the time, while the other 20% would be in treasuries. If I'm understanding you correctly, you are saying over a long term a DM strategy should return the equivalent of an 80/20 balanced portfolio. I would say it won't because DM trades are not done on a random basis. Your theory would probably be accurate if on the first market day of each month Miles made his stock vs bonds decision based on a roll of dice. For example, a 5 or 9 = T-bills; anything else = stocks.

I believe you are correct to say DM probably won't give you a bad return. Although we can't predict the future, by it's nature DM should help avoid losses in prolonged bear markets. This is at the expense of missing rapid upswings in the market after the market has hit the bottom. I believe DM is a sound investment strategy if one believes in the likelihood of prolonged bear markets occurring in the future. Of course, someone that believes in EMH may argue this.
Title: Re: Dual Momentum Investing
Post by: starguru on November 04, 2015, 01:25:51 PM
In Miles' absence (and given that I have adopted DM with the tax advantaged portion of my savings), I will throw in my 2 cents for what little they're worth.

Regarding the argument of whether DM contributes to market volatility- I don't get it. There have to be billions sloshing around during every trading session; how any one strategy could be exacerbating any move in a particular direction is beyond my understanding. In any event, the BAH proponents believe in the Efficient (all informed) Market Theory, yes?Therefore DM trading decisions shouldn't be impacting much of anything- information is still being incorporated into the market moves.

I'm not sure DM contributes to volatility any more than random trades do.  A DM trader trades once a month.  Depending on the month that trade might exacerbate volatility or limit it.  I think arguing DM increases volatility and is therefore undesirable is like arguing twice-a-month 401 contributions are bad, since they can also contribute to volatility, and are hence also undesirable. 
Title: Re: Dual Momentum Investing
Post by: frugalnacho on November 04, 2015, 01:41:39 PM
In Miles' absence (and given that I have adopted DM with the tax advantaged portion of my savings), I will throw in my 2 cents for what little they're worth.

Regarding the argument of whether DM contributes to market volatility- I don't get it. There have to be billions sloshing around during every trading session; how any one strategy could be exacerbating any move in a particular direction is beyond my understanding. In any event, the BAH proponents believe in the Efficient (all informed) Market Theory, yes?Therefore DM trading decisions shouldn't be impacting much of anything- information is still being incorporated into the market moves.

I'm not sure DM contributes to volatility any more than random trades do.  A DM trader trades once a month.  Depending on the month that trade might exacerbate volatility or limit it.  I think arguing DM increases volatility and is therefore undesirable is like arguing twice-a-month 401 contributions are bad, since they can also contribute to volatility, and are hence also undesirable.

The point I think you guys are missing is that on average all DM traders will buy into the market as it starts to go up (thus driving the price up even further with their actions) and will sell out of the market as it starts to go down (thus driving the price down further with their actions).   With the ebb and flow of market prices the DM trader is always driving the price up (or has already blown his entire portfolio previously driving prices up) when long term trends are up, and vice versa.  They have to, it's the only way the strategy works. 

If trades were randomly timed I would agree they would all cancel each other out and not contribute to volatility overall, but the trades DM traders make are not random.
Title: Re: Dual Momentum Investing
Post by: starguru on November 04, 2015, 01:47:50 PM
In Miles' absence (and given that I have adopted DM with the tax advantaged portion of my savings), I will throw in my 2 cents for what little they're worth.

Regarding the argument of whether DM contributes to market volatility- I don't get it. There have to be billions sloshing around during every trading session; how any one strategy could be exacerbating any move in a particular direction is beyond my understanding. In any event, the BAH proponents believe in the Efficient (all informed) Market Theory, yes?Therefore DM trading decisions shouldn't be impacting much of anything- information is still being incorporated into the market moves.

I'm not sure DM contributes to volatility any more than random trades do.  A DM trader trades once a month.  Depending on the month that trade might exacerbate volatility or limit it.  I think arguing DM increases volatility and is therefore undesirable is like arguing twice-a-month 401 contributions are bad, since they can also contribute to volatility, and are hence also undesirable.

The point I think you guys are missing is that on average all DM traders will buy into the market as it starts to go up (thus driving the price up even further with their actions) and will sell out of the market as it starts to go down (thus driving the price down further with their actions).   With the ebb and flow of market prices the DM trader is always driving the price up (or has already blown his entire portfolio previously driving prices up) when long term trends are up, and vice versa.  They have to, it's the only way the strategy works. 

If trades were randomly timed I would agree they would all cancel each other out and not contribute to volatility overall, but the trades DM traders make are not random.

I don't accept your assertions

"all DM traders will buy into the market as it starts to go up"

and

"will sell out of the market as it starts to go down"

as universally true.

It is very possible for a DM trader to switch from a rising asset to another rising asset, or to switch to an asset that is declining. 
Title: Re: Dual Momentum Investing
Post by: RichMoose on November 04, 2015, 01:57:30 PM
The point I think you guys are missing is that on average all DM traders will buy into the market as it starts to go up (thus driving the price up even further with their actions) and will sell out of the market as it starts to go down (thus driving the price down further with their actions).   With the ebb and flow of market prices the DM trader is always driving the price up (or has already blown his entire portfolio previously driving prices up) when long term trends are up, and vice versa.  They have to, it's the only way the strategy works.

This sounds like you are saying markets will continue to go up (or down) because of DM investors entering (or exiting) stocks. This is simply not true. Let's be sensible here. We all know that markets go up and down because of forces far beyond the small percentage of DM investors. DM investors simply make a move to "ride the wave" so to speak, knowing that historically herd mentalities have push markets in their respective directions. And by herd mentality I don't mean DM investors who use a disciplined investment strategy, I mean people like my mom and dad (your average retail investor) who call their brokers as soon as they realize they've lost some money and move their portfolios to gold.
Title: Re: Dual Momentum Investing
Post by: peterpatch on November 04, 2015, 05:31:39 PM
@ PizzaSteve: That's one of the most cogent arguments on this thread against dual momentum and I thank you for putting in the effort.


My 2 cents as an experienced investor with a degree in this stuff and experience and knowledge of markets probably more than most (20+ yrs experience auditing and providing strategic advice to financial services firms (not that that means much).

Situation
* Dual momentum = market timing
* All market timers = have a theory that sounds plausible + Back testing data can always find periods where a theory performs (dog of Dow, small/value premiums, momentum, Wykoff Wave, etc).  I grew up watching my dad using charts applying the latest and greatest technical tools, at a time when prices and volume were in the daily newspaper.  He made money and lost money too.  Those days of information gaps are gone though.

My Conclusions
* Sadly the future is not predictable by back testing
* The world is a much too complex with too many factors to model
* Any theory that worked, short term, would quickly be discovered by the incredible data mining and arbitrage horsepower of hedge funds and private investors.  They are putting way more horsepower into the alchemy of trying to take advantage of inefficiency.  This theory doesn't stand a chance.  No one reading this board can ever hope to match these guys and there is a good chance they are on the opposite side of your trades nickel and diming you.



Your conclusions seem to indicate, correct me if I am wrong, that you believe the market is very efficient and one can't hope to beat it because it's the aggregate sum of market intellect and resources that the average investor has almost no way, outside of luck, of beating. There has been research that shows that is not the case. In support of momentum for example Jagadeesh and Titman wrote a paper called "Returns to buying winners and selling losers:Implications for stock market efficiency" in 1993 which found momentum existed in backtests. They then ran the same tests on out of sample data and found that the momentum was still there, even after publishing widely available results. There have been many many other academic study's (the book is very good at citing them) proving that momentum exists and persists out of sample and across times and asset classes. So the empirical evidence seems to strongly indicate that momentum is real and exists despite what the EMH theory says but doesn't have any empirical evidence to back up.

I have seen some of the charting and technical tools and I wouldn't lump those ideas in with the momentum idea and call it market timing. Maybe I am totally biased but when I see someone trying to show me the head and shoulders formation or some such I just can't help but think my god who would invest like that. Momentum is at least academically tested, replicable, peer reviewed and statistically significant. We could expand the definition of market timing to stock market indexers and say they're investing in the stock market because they think it will go up now vs something like the real estate market. Maybe something like trending would be a better fitting term then timing.



The Good News
* This strategy has you in the market sometimes, in fixed or other assets sometimes.  If X is time in the market and Y time out of the market, Over time this will return X% market + Y% fixed in returns.  Your return will be proportional to your time in either asset class.  This is not a bad return and not far off from a fixed 'buy and hold' portfolio of X% stock.
* By historical returns and risk studies, this part time equities portfolio will have less volatility of returns (often called 'risk' by some), but also a lower expected return.  But not a ton less than most static portfolios.  You won't bankrupt yourself, most likely.

The Bad News
* Trading is very tax inefficient, so if you are trading taxable accounts the returns will be impacted a lot by tax inefficiencies and possible trading inefficiencies (hidden spreads)

 I agree wholeheartedly that this strategy will work best inside tax shelters, which is where I keep mine. I'm not sure about the actual impact outside of a tax exempt account but maybe someone else has some research around that.

Also you're right that at the very least if the dual momentum theory is bunk then you'll get some diversification between bonds and stocks, we could call this time sequence diversification which is sort of like normal diversification in the long run.

Have you read the book? If so what did you think of the research that was cited regarding both forms of momentum?

Title: Re: Dual Momentum Investing
Post by: frugalnacho on November 04, 2015, 11:25:26 PM
In Miles' absence (and given that I have adopted DM with the tax advantaged portion of my savings), I will throw in my 2 cents for what little they're worth.

Regarding the argument of whether DM contributes to market volatility- I don't get it. There have to be billions sloshing around during every trading session; how any one strategy could be exacerbating any move in a particular direction is beyond my understanding. In any event, the BAH proponents believe in the Efficient (all informed) Market Theory, yes?Therefore DM trading decisions shouldn't be impacting much of anything- information is still being incorporated into the market moves.

I'm not sure DM contributes to volatility any more than random trades do.  A DM trader trades once a month.  Depending on the month that trade might exacerbate volatility or limit it.  I think arguing DM increases volatility and is therefore undesirable is like arguing twice-a-month 401 contributions are bad, since they can also contribute to volatility, and are hence also undesirable.

The point I think you guys are missing is that on average all DM traders will buy into the market as it starts to go up (thus driving the price up even further with their actions) and will sell out of the market as it starts to go down (thus driving the price down further with their actions).   With the ebb and flow of market prices the DM trader is always driving the price up (or has already blown his entire portfolio previously driving prices up) when long term trends are up, and vice versa.  They have to, it's the only way the strategy works. 

If trades were randomly timed I would agree they would all cancel each other out and not contribute to volatility overall, but the trades DM traders make are not random.

I don't accept your assertions

"all DM traders will buy into the market as it starts to go up"

and

"will sell out of the market as it starts to go down"

as universally true.

It is very possible for a DM trader to switch from a rising asset to another rising asset, or to switch to an asset that is declining.

How is selling one rising asset and buying a different an even faster rising asset make what I said any less true? If anything I feel like that strengthens my argument.  Not only are DM traders getting in on the action and driving the price up, but when multiple markets are all rising they are exacerbating the best performing asset even further.   And when the market is tanking the DM trader is getting out, or has already gotten out.   

Of course the statements aren't universally true, which is why I said "on average".  Some DM traders will be unlucky and get the wrong signal and get in/out at the wrong time.  But on average that is not the case, on average they will be buying into the best performing asset, or will continue to hold the best performing asset, and will get out of the market as it declines, or will continue to stay out of the market. 
Title: Re: Dual Momentum Investing
Post by: frugalnacho on November 04, 2015, 11:36:55 PM
The point I think you guys are missing is that on average all DM traders will buy into the market as it starts to go up (thus driving the price up even further with their actions) and will sell out of the market as it starts to go down (thus driving the price down further with their actions).   With the ebb and flow of market prices the DM trader is always driving the price up (or has already blown his entire portfolio previously driving prices up) when long term trends are up, and vice versa.  They have to, it's the only way the strategy works.

This sounds like you are saying markets will continue to go up (or down) because of DM investors entering (or exiting) stocks. This is simply not true. Let's be sensible here. We all know that markets go up and down because of forces far beyond the small percentage of DM investors. DM investors simply make a move to "ride the wave" so to speak, knowing that historically herd mentalities have push markets in their respective directions. And by herd mentality I don't mean DM investors who use a disciplined investment strategy, I mean people like my mom and dad (your average retail investor) who call their brokers as soon as they realize they've lost some money and move their portfolios to gold.

Yes that is what I am saying.  It's not the main force, but yes I believe that buying/selling changes the price and contributes to the price swing.
Title: Re: Dual Momentum Investing
Post by: brainfart on November 04, 2015, 11:44:25 PM
Quote
Not only are DM traders getting in on the action and driving the price up, but when multiple markets are all rising they are exacerbating the best performing asset even further.

Oh my. Just like millions of other institutional and private investors!!1!

Quote
And when the market is tanking the DM trader is getting out, or has already gotten out.

Isn't that cheating?!

This discussion is ridiculous. You're all barking up a little bush while there's a huge (derivatives and global high speed trading) giant sequoia growing right next to it. Which one is casting a bigger shadow?
Title: Re: Dual Momentum Investing
Post by: frugalnacho on November 04, 2015, 11:51:46 PM
Quote
Not only are DM traders getting in on the action and driving the price up, but when multiple markets are all rising they are exacerbating the best performing asset even further.

Oh my. Just like millions of other institutional and private investors!!1!

Quote
And when the market is tanking the DM trader is getting out, or has already gotten out.

Isn't that cheating?!

This discussion is ridiculous. You're all barking up a little bush while there's a huge (derivatives and global high speed trading) giant sequoia growing right next to it. Which one is casting a bigger shadow?

Yes just like millions of other all participating in the trend.  Everyone buying in is having a tiny force in driving the price higher with each transaction, whether they are buying in based on a signal from their DM strategy or buying in based on greed or any other emotion or reason.  It's not so much the intention or rationale of the purchase so much as the actual purchase itself.

I really don't understand your logic.

This strategy causes X effect.
This other factor causes X effect to a greater degree,
Therefore this strategy doesn't cause X effect.
Title: Re: Dual Momentum Investing
Post by: brainfart on November 05, 2015, 01:46:40 AM
Sorry, but if strategy A has a huge and strategy B a neglibile, probably unmeasurable effect then it really doesn't make much sense to argue about strategy B ad nauseum. A signal that hides in a huge amount of noise is indeed present but doesn't really contribute much to the overall picture.
Title: Re: Dual Momentum Investing
Post by: starguru on November 05, 2015, 05:53:41 AM
In Miles' absence (and given that I have adopted DM with the tax advantaged portion of my savings), I will throw in my 2 cents for what little they're worth.

Regarding the argument of whether DM contributes to market volatility- I don't get it. There have to be billions sloshing around during every trading session; how any one strategy could be exacerbating any move in a particular direction is beyond my understanding. In any event, the BAH proponents believe in the Efficient (all informed) Market Theory, yes?Therefore DM trading decisions shouldn't be impacting much of anything- information is still being incorporated into the market moves.

I'm not sure DM contributes to volatility any more than random trades do.  A DM trader trades once a month.  Depending on the month that trade might exacerbate volatility or limit it.  I think arguing DM increases volatility and is therefore undesirable is like arguing twice-a-month 401 contributions are bad, since they can also contribute to volatility, and are hence also undesirable.

The point I think you guys are missing is that on average all DM traders will buy into the market as it starts to go up (thus driving the price up even further with their actions) and will sell out of the market as it starts to go down (thus driving the price down further with their actions).   With the ebb and flow of market prices the DM trader is always driving the price up (or has already blown his entire portfolio previously driving prices up) when long term trends are up, and vice versa.  They have to, it's the only way the strategy works. 

If trades were randomly timed I would agree they would all cancel each other out and not contribute to volatility overall, but the trades DM traders make are not random.

I don't accept your assertions

"all DM traders will buy into the market as it starts to go up"

and

"will sell out of the market as it starts to go down"

as universally true.

It is very possible for a DM trader to switch from a rising asset to another rising asset, or to switch to an asset that is declining.

How is selling one rising asset and buying a different an even faster rising asset make what I said any less true? If anything I feel like that strengthens my argument.  Not only are DM traders getting in on the action and driving the price up, but when multiple markets are all rising they are exacerbating the best performing asset even further.   And when the market is tanking the DM trader is getting out, or has already gotten out.   

Of course the statements aren't universally true, which is why I said "on average".  Some DM traders will be unlucky and get the wrong signal and get in/out at the wrong time.  But on average that is not the case, on average they will be buying into the best performing asset, or will continue to hold the best performing asset, and will get out of the market as it declines, or will continue to stay out of the market.

I don't disagree with you.  My entire point was that criticizing DM because of its effect on volatility was pointless.  DM actors have no more or less effect on volatility than any other market actors.

And, in your second argument you argue

"But on average that is not the case, on average they will be buying into the best performing asset, or will continue to hold the best performing asset, and will get out of the market as it declines, or will continue to stay out of the market. "

Isn't that an argument that DM will outperform BH?
Title: Re: Dual Momentum Investing
Post by: frugalnacho on November 05, 2015, 07:32:38 AM
I don't disagree with you.  My entire point was that criticizing DM because of its effect on volatility was pointless.  DM actors have no more or less effect on volatility than any other market actors.

And, in your second argument you argue

"But on average that is not the case, on average they will be buying into the best performing asset, or will continue to hold the best performing asset, and will get out of the market as it declines, or will continue to stay out of the market. "

Isn't that an argument that DM will outperform BH?

Yes, if you believe DM will outperform.  That's my entire point.  I don't see how you can simultaneously hold these 2 views:

DM will outperform BH long term.
DM will not increase volatility. 

If the method works as stated (and outperforms BH) and you are moving your money at the early part of the wave then your actions have to be increasing volatility in both directions at different times.  As brooklynguy already pointed out, you are always moving towards the heavy side of the boat and you are never moving away from the heavy side. 

Even if DM doesn't outperform I still think it will increase volatility.  I am getting very tired of the volatility discussion though.
Title: Re: Dual Momentum Investing
Post by: peterpatch on November 05, 2015, 06:39:49 PM

P.S. To peterpatch.  You response is very reasonable, but I fail to see how the simple model is demonstrated as being able to capture the 'momentum premium.'   If one really believes in the theory then I would invest in one of the newer funds that are built on top of the research you mention.
https://funds.aqr.com/our-funds/alternative-investment-funds/style-premia-alternative-fund (https://funds.aqr.com/our-funds/alternative-investment-funds/style-premia-alternative-fund)

I think the DM model appears simple but is not, it is simply a clever way of encapsulating two fairly complex strategies into a simple package using resources and ideas that have only recently become available in the last 20 or so years. It requires the existence of low fee market tracker funds, tax efficient holding vehicles (debatable), low commission brokerages, liquid markets (with tight spreads) and the academic data and research necessary to draw the conclusions.

Also the funds you reference only track what Antonacci calls relative momentum (quote from AQR: "Momentum — the tendency for an asset’s recent relative performance to continue in the future"). Loosely this means buying what has been recently strong in total performance and shorting what has been weak. This has historically been volatile and difficult to manage hence the high fee's. Absolute momentum isn't included at all in those funds (as far as I could tell) so I'd say the strategies are cousins but not close relatives. Antonacci truly simplifies the relative momentum phenomenon by limiting the whole system to 4 easily obtainable broad index funds. His system harnesses many of the strengths of bogle style index investing (low fees, broad diversification, reliance on traditionally strong US markets). However the addition of absolute momentum proposes to lower drawdowns and volatility and increase safe withdrawal rates. The relative momentum proposes to bring higher returns by keeping the investor in the asset class with the most upward momentum as judged by a 12 month look back period on  total returns. It has low turnover and inside of a low commission brokerage within a tax advantaged account it really isn't expensive at all from a trading/tax cost perspective.

Title: Re: Dual Momentum Investing
Post by: arebelspy on November 15, 2015, 09:22:37 PM
Miles had a good post on his blog recapping how he's done in DM over the last 14 months.

www.milesdividendmd.com/dual-momentum-a-year-in-review/

The result is pretty bad, but he gives some interesting statistics on how DM will typically underperform or tie the benchmark. The idea is that this is okay, because when TSHTF, DM's drawdown should be less.

I think I'd have a hard time staying the course over decades of ER while underperforming regularly, but he's sticking with it. Gotta give props for that, and for the honest assessment and choice of timeframes, even though it makes DM look worse.

Title: Re: Dual Momentum Investing
Post by: Retire-Canada on November 16, 2015, 08:29:46 AM
Reading Miles' blog post the question that came to mind was at what point after losing out to significant gains to the B and Hold approach is there no further ris protection upside to DM?

Say the BandH portfolio is up  20-30% that growth will compound and a 30%+ crash down the road will still not eat into the invested capital. But if there isn't a crash or the crash recovers quickly the BandH folks will be off to the races again.

If the big crash happens early on before the portfolios diverge AND the BandH investors have to liquidate enough of their investments that they have to sell the under performing asset classes I can see the DM approach being superior.
Title: Re: Dual Momentum Investing
Post by: sol on November 16, 2015, 10:42:32 AM
If the big crash happens early on before the portfolios diverge AND the BandH investors have to liquidate enough of their investments that they have to sell the under performing asset classes I can see the DM approach being superior.

Sure, any strategy that says "sell all of your stocks right before a big crash" is going to outperform B&H.  I don't think that's a particularly useful insight, though.  Market timing totally works if you could just time the market correctly.
Title: Re: Dual Momentum Investing
Post by: Open Space on November 25, 2015, 08:50:51 PM
I'm a newcomer to the discussion, but I wanted to throw out something new... I've been following a website for a few years which appears to use a version of DM.  Their signal is proprietary and supposedly has more elements to it, but it essentially moves completely between different asset classes and cash.  They post the historical signals back to 1996.  Performance has flattened out over the last few years, but these show real numbers rather than back-testing. 

http://www.decisionmoose.com/Home_Page.html


 
Title: Re: Dual Momentum Investing
Post by: peterpatch on November 27, 2015, 08:04:23 PM
I'm a newcomer to the discussion, but I wanted to throw out something new... I've been following a website for a few years which appears to use a version of DM.  Their signal is proprietary and supposedly has more elements to it, but it essentially moves completely between different asset classes and cash.  They post the historical signals back to 1996.  Performance has flattened out over the last few years, but these show real numbers rather than back-testing. 

http://www.decisionmoose.com/Home_Page.html


 

It's not the same thing but if you want do discuss it I suggest you start a separate "decision moose" thread.
Title: Re: Dual Momentum Investing
Post by: brainfart on November 28, 2015, 06:47:51 AM

Sure, any strategy that says "sell all of your stocks right before a big crash" is going to outperform B&H.  I don't think that's a particularly useful insight, though.  Market timing totally works if you could just time the market correctly.

There are other momentum based strategies, like those described by Mebane Faber. Do you think they don't actually work over a longer period? Because they are based on insufficient data and overfitting?

Quote
"sell all of your stocks right before a big crash"

I always assumed these strategies sell their stuff AFTER the crash has started and just manage to limit their losses.
Title: Re: Dual Momentum Investing
Post by: peterpatch on November 28, 2015, 11:42:50 AM




I always assumed these strategies sell their stuff AFTER the crash has started and just manage to limit their losses.

DM as well as some other absolute momentum strategies (like some of Meb's) have been shown to reduce drawdowns significantly on average based on past results across markets, asset types and time periods. However , and it's a big 'however', it hasn't always worked and there's no scientific law that says it will continue to work. Based on my studies I think there are behavioural reasons for both types of momentum that will persist and will cause the effects of momentum to persist.

The largest single day stock market crash we know of is Black Monday (Oct 19 1987) where the S&P 500 lost 20.5% in a day. Dual momentum did not take the investor out of that crash, there simply wasn't a long enough duration of downward momentum to trigger a sell signal. At the time that was a "black swan" event, nobody had ever seen anything like it and it wasn't part of most peoples models of what to expect. You could never totally eliminate the probability that DM is simply data mining. However the same could be said of indexing, US markets look great over the last 100 years but other countries markets have done horribly or outright failed (Russia, China, Japan, Germany). Past is not necessarily prologue but I can't think of a better way to invest then using empirical data to form statistical inferences along with plausible theories of why those patterns might exist.

I honestly don't believe DM is the best strategy for the average investor. The average investor doesn't have the time and wherewithal to read and digest the books and research necessary to understand the strategy. Also the average investor (according to the Dalbar studies) has trouble sticking to any strategy at all. If someone can stick to a simple indexing strategy through thick and then they are beating most investors just by riding the market wave.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on December 14, 2015, 09:44:55 AM
The latest (superb, as usual) article by Philosophical Economics ("Financial Backtesting: A Cautionary Tale" (http://www.philosophicaleconomics.com/2015/12/backtesting/)) almost seems as if it was written in direct response to the extended debate that occurred over the course of this thread.  The author, using an analysis of a "daily momentum" trading strategy to illustrate his point, compellingly argues that "[f]rom an investment perspective, a theoretical understanding of how the market produces a given outcome is important--arguably just as important as 'the data' showing that it does produce that outcome."  The author concludes, even if out-of-sample historical backtesting demonstrates beyond all reasonable doubt that some causal factor is responsible for an investment strategy's successful historical performance (in other words, that the successful historical performance did not merely result from random chance), as follows:

Quote
As an investor evaluating a potential strategy, what I want to see is not just an impressive backtest, but a compelling, accurate, reductionistic explanation of what is actually happening in the strategy–who in the market is doing what, where, when and why, and how the agglomeration is producing the result, the pattern that the strategy is successfully exploiting.  I want an explanation that I know to be accurate, an explanation that will allow me to reliably gauge the likelihood that the pattern and the associated outperformance will persist into the future–which is the only thing I care about.

If I’m going to run a systematic strategy, I want the strategy to work now, when I run it, as I run it.  I don’t want to have to put faith in an eventual reversion to a past period of glory. That’s too risky–the exploited pattern could have been ephemeral, relevant conditions could have changed.  If a strategy can’t deliver success on a near-term basis, in the out-of-sample test that reality is putting it through, then I’d rather just abandon the systematic approach altogether and invest on my own concrete analysis of the situation, my own gut feel for where it is likely headed, given the present facts.  If I don’t have confidence in my own analysis, if I can’t trust my gut, then I shouldn’t be actively investing.  I should save the time and effort and just toss the money in an index.

Note that this is the same argument many of us made earlier in this thread, but the Philosophical Economics author makes it more forcefully than we did.  I would encourage anyone considering an active, data-driven investment strategy to read and give careful consideration to this article.
Title: Re: Dual Momentum Investing
Post by: sol on December 14, 2015, 11:09:51 AM
The latest (superb, as usual) article by Philosophical Economics ("Financial Backtesting: A Cautionary Tale" (http://www.philosophicaleconomics.com/2015/12/backtesting/)) almost seems as if it was written in direct response to the extended debate that occurred over the course of this thread. 

As one of the largest and most active personal finance forums on the internet, I'm sure most bloggers in this niche peruse these boards for inspiration and guidance.  MMM included, obviously.  "Polling the people" is the primary purpose of forums.

Congratulations, all.  By virtue of your active participation here, you are helping define the tone and substance of a huge amount of related internet content.  Small groups changing the world, and all that.
Title: Re: Dual Momentum Investing
Post by: RichMoose on December 14, 2015, 11:39:16 AM
This information on this thread has really took a dive since Miles got blocked...
Title: Re: Dual Momentum Investing
Post by: Retire-Canada on December 14, 2015, 11:58:35 AM
This information on this thread has really took a dive since Miles got blocked...

I checked his blog. He hasn't posted any new DM info since mid-Nov.
Title: Re: Dual Momentum Investing
Post by: sol on December 14, 2015, 12:05:05 PM
This information on this thread has really took a dive since Miles got blocked...

Is he still blocked?  I understood it was a temporary ban.  One that could have been avoided if he had chosen to adhere to the forum rules of conduct.

Personally, I liked his contributions in most cases, if not his presentation.  And of course I strongly disagree with his opinions on investment gambling through market timing but that's okay too, isn't it?  We are each free to invest in the ways we think are best, and we are each free to promote or criticize other investment philosophies.  Miles chose a hard row when he came to a forum full of indexers to tout a non-indexed strategy, and he's probably a little chagrined that his optimistic predictions haven't played out as promised.

But he'll be okay in the long run.  The key to this forum is having a crazy high savings rate, and even a slightly suboptimal investment strategy won't sink you as long as you save enough.
Title: Re: Dual Momentum Investing
Post by: RichMoose on December 14, 2015, 02:06:24 PM
Is he still blocked?  I understood it was a temporary ban.  One that could have been avoided if he had chosen to adhere to the forum rules of conduct.

Personally, I liked his contributions in most cases, if not his presentation.  And of course I strongly disagree with his opinions on investment gambling through market timing but that's okay too, isn't it?  We are each free to invest in the ways we think are best, and we are each free to promote or criticize other investment philosophies.  Miles chose a hard row when he came to a forum full of indexers to tout a non-indexed strategy, and he's probably a little chagrined that his optimistic predictions haven't played out as promised.

But he'll be okay in the long run.  The key to this forum is having a crazy high savings rate, and even a slightly suboptimal investment strategy won't sink you as long as you save enough.

His latest blog post said he's banned for good. He said its because of a disagreement with a moderator about dual momentum... seems a little odd to me because I thought most of the comments on this thread were reasonably healthy. But that's just my opinion of course.
Title: Re: Dual Momentum Investing
Post by: sol on December 14, 2015, 02:26:34 PM
To my knowledge, nobody lodged any complaints about miles based on this thread.  Perhaps a moderator could clarify, but it seemed there were a few other threads where he was warned for violating forum rules, and then either ignored the warnings or doubled down.

This thread was actually one of the places where miles was slightly better behaved, but I suppose that story doesn't serve his own blog interests so I don't blame him for adopting it.  Writing "I got temp banned for being a jerk to other forum members" is less useful for promoting your pariah complex than "I got permabanned for preaching the Truth about DM."

Our maybe he really was permabanned?  What do I know, I'm just some random forum participant.
Title: Re: Dual Momentum Investing
Post by: arebelspy on December 14, 2015, 02:37:30 PM
MOD NOTE: Miles' ban (his third or fourth one over the last year and 1/2, due to breaking the forums rules over and over) was not initially permanent (and still isn't), but has been extended due to his multiple, multiple attempts to get around the ban, and create new login after new login, creating extra works for the mods, and causing collateral damage when the IP addresses, rather than emails, had to be banned, and others who used the same IPs from the ISP suddenly had trouble accessing the forums.

I suspect he will be back some day, but mods are still determining if and when that is the case.

The ban had to do with his behavior on other threads, specifically multiple violations of rule #1.  None of his ban has to do with anything on this thread--his behavior on this thread, and specifically his positive contributions to the forum and alternate viewpoints, was what has gotten him more leeway to this point (everyone else has been a three strikes and you're permabanned).

Feel free to PM me if you have any questions.

As a mod, when moderation is discussed publicly, it's a fine line.  I'm always for questioning authority, but also it feels inappropriate/inconsiderate to talk in too much detail about his behavior, so I don't intend to post more after this on Miles' ban, but I will happily discuss over PM, and if you think the discussion should be public at that point after a PM discussion, we can do that in a more appropriate--Off Topic--thread, created for that purpose.  Fair enough?

Cheers!
Title: Re: Dual Momentum Investing
Post by: RichMoose on December 15, 2015, 12:21:00 PM
Thanks for clarifying Arebelspy.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on December 17, 2015, 07:39:49 AM
As one of the largest and most active personal finance forums on the internet, I'm sure most bloggers in this niche peruse these boards for inspiration and guidance.  MMM included, obviously.  "Polling the people" is the primary purpose of forums.

Congratulations, all.  By virtue of your active participation here, you are helping define the tone and substance of a huge amount of related internet content.  Small groups changing the world, and all that.

The Philosophical Economics author has posted a (once again, superb) follow-up article to the piece on financial backtesting ("Momentum: Slip Counterfactuals, the 'Stale Price' Effect, and the Future" (http://www.philosophicaleconomics.com/2015/12/momentum/)), noting at the outset that:

Quote from: Philosophical Economics
The recent piece on the dangers of backtesting has attracted an unusual amount of attention for a piece on this blog. 

Additional evidence that this forum's readership is at least partially responsible for "helping define the tone and substance of a huge amount of related internet content"?

In this piece, the author continues his* philosophical exploration of financial backtesting, but also substantively analyzes the momentum anomaly (which he didn't do in the previous piece, in which he simply used momentum as a convenient example to illustrate his point about the dangers of backtesting in general).

He discusses issues regarding momentum's second-order effects similar to those we've discussed in this thread, and he concludes that:

Quote from: Philosophical Economics
It seems, then, that one of two things will end up happening: either momentum will not work like it used to,  or it will work like it used to, and money will flock into it, either through the currently available funds, or through funds that will be set up to harvest it in the future, as it outperforms.  The result will either be a saturation of the factor that attenuates its efficacy, or a self-supporting momentum bubble that eventually crashes and destroys everyone’s portfolio.

But he also makes clear that:

Quote
To be clear, when I talk about momentum underperforming, I’m not talking about the underperformance of a long-short momentum strategy.  A long-short momentum strategy that rebalances monthly will experience severe momentum crashes during market downturns.  Those crashes are caused by rebalancing into 100% short positions on extremely depressed low momentum segments of the market.  When the market recovers, those segments explode higher, retracing the extreme losses. The increase in the 100% long position during the upturn fails to come close to making up for the extreme percentage increases of the 100% short position, which is rebalanced to a 100% position right at the low.  The result ends up being a significant net loss for the overall portfolio during the period.

Instead, I’m talking about the underperformance of simple vanilla strategies that go long the high momentum segments of the market.


* I'm not sure whether or not the Philosophical Economics author has ever revealed his or her gender, but I'll use the masculine pronoun simply because the author's pseudonym (Jesse Livermore) is male.
Title: Re: Dual Momentum Investing
Post by: Retire-Canada on January 10, 2016, 07:57:12 AM
I checked on Miles' blog and I'm surprised there have been no DM updates since Nov 2015.

Given how much effort he was putting into discussing DM here you'd think he'd at least publish an update once a month on his blog.
Title: Re: Dual Momentum Investing
Post by: Crushtheturtle on January 10, 2016, 11:21:54 AM
DM with a 6 month look back called for a shift to bonds in early December, so it's got that going for it.

Hopefully, Miles will (be allowed to?) return.
Title: Re: Dual Momentum Investing
Post by: arebelspy on January 10, 2016, 11:46:11 AM
I checked on Miles' blog and I'm surprised there have been no DM updates since Nov 2015.

Miles tends to agree with most of us that short term results are pretty irrelevant.  There's no need for an update two months later, let alone every month.

Anyone interested in discussing DM with Miles can always leave a comment on his blog or email him; it's not like he's unreachable just because he's not on these particular forums.  Feel free to reach out to him.  :)
Title: Re: Dual Momentum Investing
Post by: peterpatch on January 10, 2016, 04:18:04 PM

The Philosophical Economics author has posted a (once again, superb) follow-up article to the piece on financial backtesting ("Momentum: Slip Counterfactuals, the 'Stale Price' Effect, and the Future" (http://www.philosophicaleconomics.com/2015/12/momentum/)), noting at the outset that:


It's certainly an interesting piece and it does raise some questions about the efficacy of using index data to back test real strategies. One would need to be very careful about the way they use the index so they aren't getting stale pricing effects (prices that weren't available IRL but became part of the index nonetheless).
Title: Re: Dual Momentum Investing
Post by: EngiNerd on January 16, 2016, 07:33:22 AM
If this turns out to be a bear market of  significance this might have turned out to be an early victory for dual momentum investing even though there has already been many claiming that the signal to sell earlier hurt miles and others who have incorporated DM.  I am still B&H with a AA but hope there is a bit of a correction as I am still early in the accumulating phase and would benefit from some good deals on stocks.  And regardless of how it plays out it is still early to say weather DM is better for a lifelong investor or not. 
Title: Re: Dual Momentum Investing
Post by: sol on January 16, 2016, 10:36:43 AM
If this turns out to be a bear market of  significance this might have turned out to be an early victory for dual momentum investing even though there has already been many claiming that the signal to sell earlier hurt miles and others who have incorporated DM. 

Maybe.  The details are important, because DM is essentially all about the timing.  Depending on when during the month you make your trades, and and what your lookback period is, it seems likely that a DM trader just traded back into 100% stocks in December right before this most recent stock downturn in January of 2016.  That looks to be the case for anyone using a 3 or 4 month lookback period and for some people using a 5 month lookback depending on the trade date, since the market was on a steady rise for about 5 months since the low point in August of 2015. 

Folks using a 6 month lookback, I think, should have avoided this trap.  Of course, those people also didn't get OUT of stocks until August or September of 2015, so they're really only back to about even after the ~8% drop in January 2016 thus far.  Some people have argued that the DM lookback period doesn't matter, but in this case I think it clearly does.

The sort of volatility we've been seeing recently isn't very common in the historical record that DM uses to support itself, which would worry me a little.  If I were a DM trader, I'd be praying that the future market doesn't deviate much from the historical market.  Of course, I'm praying for that as a B&H investor anyway, but for different reasons.

Title: Re: Dual Momentum Investing
Post by: brooklynguy on January 18, 2016, 09:10:42 AM
The sort of volatility we've been seeing recently isn't very common in the historical record that DM uses to support itself, which would worry me a little.  If I were a DM trader, I'd be praying that the future market doesn't deviate much from the historical market.

The latest installment of the Philosophical Economics blog ("Growth and Trend: A Simple, Powerful Technique for Timing the Stock Market," (http://www.philosophicaleconomics.com/2016/01/gtt/) published today)
contains more fantastic analysis directly relevant to this topic (it's a long read (and, for a complete understanding of the author's arguments, it's a prerequisite to read the preceding few pieces (which were also long), but it's definitely worth the effort for anyone interested in this topic).

As the title suggests, the author ultimately proposes his own market timing technique (which is based on a momentum-like strategy), but I'm posting it here as recommended reading not for that purpose but for the in-depth analysis that directly applies to momentum trading strategies (and which is difficult to easily summarize here, but I've extracted the quoted tidbit below, which relates to sol's point quoted above, in an attempt to get the DM crowd's attention).

Quote from: Philosophical Economics
The consequence of secular stagnation--the reality of which has become an almost indisputable economic fact--is that you get weaker expansions, and also weaker downturns--weaker cyclicality in general, which is exactly what we've seen in the current cycle.  To a trend-following strategy, that's the equivalent of poison.  It attenuates the sources of gains–large downturns that get captured for profit--without attenuating the sources of losses: choppy volatility that produces whipsaws.
Title: Re: Dual Momentum Investing
Post by: CriticalMass on March 20, 2017, 08:29:36 AM
Hello All - new to the forum and discovered this thread and forum by googling the book title.  I ordered the book yesterday.

Is anyone here still following DM?  Would be really interested to know how you are plotting the two momentum indicators and what criteria you use.

Thanks
Title: Re: Dual Momentum Investing
Post by: anisotropy on March 26, 2017, 04:15:50 PM
Hello All - new to the forum and discovered this thread and forum by googling the book title.  I ordered the book yesterday.

Is anyone here still following DM?  Would be really interested to know how you are plotting the two momentum indicators and what criteria you use.

Thanks

I do. I use DM in conjunction with some other things, a little complicated, but my method has been working pretty well for me so far (2015-present).

Back testing showed that my timing strategy would underperform or tie the b&h approach roughly 65% of the time, net of taxes, with the average annual underperformance being 0%. Ya you read that right.
Title: Re: Dual Momentum Investing
Post by: RichMoose on March 26, 2017, 05:41:04 PM
I do. I use DM in conjunction with some other things, a little complicated, but my method has been working pretty well for me so far (2015-present).

Back testing showed that my timing strategy would underperform or tie the b&h approach roughly 65% of the time, net of taxes, with the average annual underperformance being 0%. Ya you read that right.

As in overall it doesn't really underperform that 65% of the time? Or that it neither outperforms nor underperforms 100% of the time?
Title: Re: Dual Momentum Investing
Post by: waltworks on March 26, 2017, 06:02:22 PM
Is anyone here still following DM?  Would be really interested to know how you are plotting the two momentum indicators and what criteria you use.
I do. I use DM in conjunction with some other things, a little complicated, but my method has been working pretty well for me so far (2015-present).

Come on on back in 10 years, okay? In the meantime, you might want to describe your actual lookbacks/method if by some chance you actually outperform and want to come brag about it.

-W
Title: Re: Dual Momentum Investing
Post by: sol on March 26, 2017, 06:41:04 PM
We've had a lot of folks come to this thread with their great new method, then quietly disappear when it doesn't pan out for them.

Admittedly, it's been pretty hard to beat the market over the past 8 years of crazy growth.  For the entire duration of MMM's existence, indexing has been a golden ticket.  Maybe the market timers will do better in the future.
Title: Re: Dual Momentum Investing
Post by: waltworks on March 26, 2017, 06:52:16 PM
We've had a lot of folks come to this thread with their great new method, then quietly disappear when it doesn't pan out for them.

Admittedly, it's been pretty hard to beat the market over the past 8 years of crazy growth.  For the entire duration of MMM's existence, indexing has been a golden ticket.  Maybe the market timers will do better in the future.

Tell me about it. The RE side of things was crazy too. There are a LOT of people convinced they're geniuses because they graduated from college/got married/etc in 2008-2012 or so and bought a house.

It will be interesting to see how things go with the MMM crowd in general when we get an actual downturn in stocks/RE.

-W
Title: Re: Dual Momentum Investing
Post by: anisotropy on March 26, 2017, 09:18:10 PM
I will describe my method/strategy fully as soon as one of the following occurs:

1. In 2057.
2. My strategy stops working for several years in a row.

All I know is that it has been working (2015-present), and would have worked for the last 8 years (ie, higher total return after taxes, assuming we liquidate both accounts today). In fact, I did brag about my 2016 outperformance on this forum in December last year. I do not know if it will continue to work in the years to come but I will try to report it annually. This year so far I have not made trades so I am probably on par with my mix of indices.

Indexing is great, that's what I tell people to do.
Title: Re: Dual Momentum Investing
Post by: MustacheAndaHalf on March 27, 2017, 02:47:36 AM
You could setup a separate thread where you tell people your trades very soon after you make them.  That would generate a record of your investing that others could verify, and you wouldn't have to disclose how you decided on the specific things you purchased.  For example you might say "switched from 100% US stock market to 100% bond market" after you make a trade, because Dual Momentum predicted a stock correction.

Uncertainty usually translates to volatility.  For momentum and dual momentum, that means false signals of when to buy...  buy a rising asset because it has momentum, only to discover it's volatility.  The asset goes up then back down... and the purchase is timed after the rise in price, but before the drop.  I mention this because US politics right now seems volatile and uncertain, and my guess would be that dual momentum won't do as well as buy and hold.  Volatility is a confusing signal for momentum.

Some people in 2015 described how they think momentum profits.  My impression from reading books and a few white papers is that it's taking advantage of crowds.  Momentum investors don't typically move the markets, but markets do panic on their own.  When everyone is happy and buying, momentum tries to join the ride but get out before the party ends.  When people start exiting, hopefully momentum catches that signal early and switches to another asset.  So the theory of how momentum could make money is based on the emotional gyrations of the market.

But to really test dual momentum we need a dual momentum mutual fund making real purchase decisions with real assets.  Then it's track record is publicly available, and anyone could look it up online.  Back testing is too easy to "fit the curve", and look perfect in hindsight.  For dual momentum to prove it's worth, it needs to predict future market crashes using a track record that others can see (in my opinion - others may have a lower standard of proof and transparency).
Title: Re: Dual Momentum Investing
Post by: waltworks on March 27, 2017, 09:15:13 AM
Meh, nobody wants to admit they were wrong. Hence the parade of people chiming in that their cool strategy is kicking ass, and then crickets after a while.

I agree that at least a record of trades would be useful if you *did* plan to boast later.

-W
Title: Re: Dual Momentum Investing
Post by: AdrianC on March 29, 2017, 08:03:30 PM
Gary Antonacci talks Dual Momentum with Meb Faber:

http://mebfaber.com

"Episode #45: “You Get a Synergy That Happens When You Use Dual Momentum”   Guest: Gary Antonacci. Gary has over 40 years’ experience as an investment professional focusing on underexploited investment opportunities. Since receiving his MBA degree from the Harvard Business School, Gary has concentrated…"

Antonacci sounds like a genuine guy. He's not trying to get rich from this -he's already wealthy.
Title: Re: Dual Momentum Investing
Post by: AdrianC on March 30, 2017, 03:44:44 PM
Antonacci isn't asking anyone to invest money with him. As far as I can tell he shares his research just because he's that kind of a guy.

Meb Faber has a fund company (Cambria). Nothing interesting there for Boglehead/mustachian types.
Title: Re: Dual Momentum Investing
Post by: RichMoose on March 30, 2017, 05:38:27 PM
Thanks for sharing AdrianC. I listened to the podcast and it gave some nice background on Antonacci. He's clearly not to interested in the money. Given his background he could have started a fund and made himself even wealthier than he already is with the research/strategy he did here. Many fund managers have become multi-millionaires and billionaires with weaker strategies than his.

His actions and words show a very indifferent approach to whether or not people actually use the strategy. He's not making a hard sell at all, just sharing facts, giving credit to many others, and sharing his personal opinions on the strategy.

He does license some spins on the general strategy to others, but he suggests​ they do not have a substantial advantage over the basic DM/GEM. GEM is very easy to follow on your own and he honestly believes it's a decent strategy for the long term that will underperform every now and then. He believes this will actually help the strategy over the long term as periods of poor relative performance will cause abandonment of the strategy.

On a matter of more interest to some Mustachians here who oppose all active type investing... Antonacci is actually an early retiree and somewhat Mustachian himself. After working just a decade in finance he pulled the pin, went traveling, took up art, and clearly has a lot of hobbies and interests that many on here can align with.

I genuinely got the impression that he cares about others, the world around him, his personal health and well-being, and helping others by sharing his knowledge in finance and making a tiny bit of coin with it. Who are we as Mustachians to fault him for that?

I should note that I am using a DM type strategy myself, with some minor changes and adaptions for Canadian markets.
Title: Re: Dual Momentum Investing
Post by: Cornel_Westside on March 30, 2017, 06:40:02 PM
I find this academically interesting, if not interesting enough to try with a small amount of money for a year to see how I feel about it. But I see people discussing things here and online with different lookback periods. I see people with 5 month look backs, 6 months, and 1 year. I see people comparing equities to the price of short term treasury bonds, to bond funds, to intermediate term bonds.

Has there been analysis on what look back periods and fixed-income investments lead to the best performance in different types of markets? Does a 6 month look back respond better to most bear markets than a year, or does the increased volatility cost you more than the reactivity? Does an intermediate bond fund comparison save you earlier from drops than a shorter term bond?

I don't see a consensus about this, and I think the lookback period is the key to all of this. The whole point (as far as I can see) of dual momentum is that the look back period should follow the trends of investor mood appropriately to get out of bears early enough and back in before gains are lost without costing yourself too much in volatility from trades. It should be easy to have backtested data on this. Does anyone know the answer? What look back period captures investor mood best?
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on March 30, 2017, 06:47:08 PM
I find this academically interesting, if not interesting enough to try with a small amount of money for a year to see how I feel about it. But I see people discussing things here and online with different lookback periods. I see people with 5 month look backs, 6 months, and 1 year. I see people comparing equities to the price of short term treasury bonds, to bond funds, to intermediate term bonds.

Has there been analysis on what look back periods and fixed-income investments lead to the best performance in different types of markets? Does a 6 month look back respond better to most bear markets than a year, or does the increased volatility cost you more than the reactivity? Does an intermediate bond fund comparison save you earlier from drops than a shorter term bond?

I don't see a consensus about this, and I think the lookback period is the key to all of this. The whole point (as far as I can see) of dual momentum is that the look back period should follow the trends of investor mood appropriately to get out of bears early enough and back in before gains are lost without costing yourself too much in volatility from trades. It should be easy to have backtested data on this. Does anyone know the answer? What look back period captures investor mood best?

You could mine historical data to come up with answers to all of those questions.  But then your model likely would be over-fitted to precise historical conditions that aren't likely to occur in exactly the same configuration again.
Title: Re: Dual Momentum Investing
Post by: lost_in_the_endless_aisle on March 30, 2017, 07:29:04 PM
An economist and his non-economist friend are walking down the street. The friend sees what appears to be a $20 bill on the ground and stops to bend over and pick it up. The economist stops his friend by saying "if that really was a $20 bill, someone else would have picked it up already."
Title: Re: Dual Momentum Investing
Post by: brooklynguy on March 30, 2017, 07:50:57 PM
An economist and his non-economist friend are walking down the street. The friend sees what appears to be a $20 bill on the ground and stops to bend over and pick it up. The economist stops his friend by saying "if that really was a $20 bill, someone else would have picked it up already."

I was about to say that that joke was already told (https://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/msg630096/#msg630096) in this very thread, but then I realized it couldn't really have been or else it wouldn't have just been repeated!
Title: Re: Dual Momentum Investing
Post by: lost_in_the_endless_aisle on March 30, 2017, 07:59:00 PM
An economist and his non-economist friend are walking down the street. The friend sees what appears to be a $20 bill on the ground and stops to bend over and pick it up. The economist stops his friend by saying "if that really was a $20 bill, someone else would have picked it up already."

I was about to say that that joke was already told (https://forum.mrmoneymustache.com/investor-alley/dual-momentum-investing/msg630096/#msg630096) in this very thread, but then I realized it couldn't really have been or else it wouldn't have just been repeated!
Yes, I suppose that one falls under "if it was a good joke, someone else would have already told it"
Title: Re: Dual Momentum Investing
Post by: RichMoose on March 30, 2017, 09:30:52 PM
I find this academically interesting, if not interesting enough to try with a small amount of money for a year to see how I feel about it. But I see people discussing things here and online with different lookback periods. I see people with 5 month look backs, 6 months, and 1 year. I see people comparing equities to the price of short term treasury bonds, to bond funds, to intermediate term bonds.

Antonacci recommends a 12 month lookback as adequate. He suggests there are ways to get somewhat higher returns by changing the timing, but feels the simplicity of 12 months is beneficial in itself. He also said that playing with timing doesn't give substantial extra returns and can increase Portfolio turnover and taxes.

In the research papers he compares to cash (T bills), being the ultimate safe return. However in GEM he uses an aggregate bond index. The biggest factor here is Fed actions. As long as the Fed practice is to reduce interest rates in downturns, agg bonds will be better because they get a bigger interest rate effect on underlying bond values.

Trying it for a year is just silly. You are likely to be in just one or two asset classes since portfolio turnover occurs about 1.3x annually. To properly evaluate this strategy you have to commit to investing this way over a complete business cycle (peak to peak), or around 10 years.

Antonacci himself tells followers to consider abandoning the strategy if it underperforms for a whole business cycle. How many greedy fund managers or active investing promotors say that?
Title: Re: Dual Momentum Investing
Post by: CriticalMass on March 31, 2017, 08:22:07 AM
I find this academically interesting, if not interesting enough to try with a small amount of money for a year to see how I feel about it. But I see people discussing things here and online with different lookback periods. I see people with 5 month look backs, 6 months, and 1 year. I see people comparing equities to the price of short term treasury bonds, to bond funds, to intermediate term bonds.

Antonacci recommends a 12 month lookback as adequate. He suggests there are ways to get somewhat higher returns by changing the timing, but feels the simplicity of 12 months is beneficial in itself. He also said that playing with timing doesn't give substantial extra returns and can increase Portfolio turnover and taxes.

In the research papers he compares to cash (T bills), being the ultimate safe return. However in GEM he uses an aggregate bond index. The biggest factor here is Fed actions. As long as the Fed practice is to reduce interest rates in downturns, agg bonds will be better because they get a bigger interest rate effect on underlying bond values.

Trying it for a year is just silly. You are likely to be in just one or two asset classes since portfolio turnover occurs about 1.3x annually. To properly evaluate this strategy you have to commit to investing this way over a complete business cycle (peak to peak), or around 10 years.

Antonacci himself tells followers to consider abandoning the strategy if it underperforms for a whole business cycle. How many greedy fund managers or active investing promotors say that?

He uses the Treasury Bills for comparison only.  If the return of the SP500 or International-Ex-US is lower than the Treasury Bill then he buys aggregate bonds (Barclays aggregate).
Title: Re: Dual Momentum Investing
Post by: Cornel_Westside on March 31, 2017, 01:28:54 PM
Antonacci recommends a 12 month lookback as adequate. He suggests there are ways to get somewhat higher returns by changing the timing, but feels the simplicity of 12 months is beneficial in itself. He also said that playing with timing doesn't give substantial extra returns and can increase Portfolio turnover and taxes.

In the research papers he compares to cash (T bills), being the ultimate safe return. However in GEM he uses an aggregate bond index. The biggest factor here is Fed actions. As long as the Fed practice is to reduce interest rates in downturns, agg bonds will be better because they get a bigger interest rate effect on underlying bond values.

Trying it for a year is just silly. You are likely to be in just one or two asset classes since portfolio turnover occurs about 1.3x annually. To properly evaluate this strategy you have to commit to investing this way over a complete business cycle (peak to peak), or around 10 years.

Antonacci himself tells followers to consider abandoning the strategy if it underperforms for a whole business cycle. How many greedy fund managers or active investing promotors say that?
I don't mean "trying it for a year" to try to see if it outperforms. I understand the most value from this is in the decades so that you aren't crushed by a downturn. I mean trying it in the sense of simply following the plan every month and getting used to how it works.

So he suggests 12 months. Reading his website, I see his reasons for it. Whipsaw is minimized and it is still reactive enough to bear markets. It surprises me that 12 months has performed better than 9 or 6, but I am a recent investor and recent bear markets have been on the shorter side. If I think that a trend of shorter bears will continue, I may consider 9 months. But I may lose more in whipsaw than I expect.

One thing that is interesting is this quote by him:

Quote
  On page 101 and 112 of my book I give a simplified logic for GEM so anyone can easily implement it using a free charting website. There is a minor difference if you calculate the signals as discussed on page 98 of my book. I mention there that I determine absolute momentum using only the S&P 500 index, since the U.S. leads world equity markets. I cite a supporting reference. This means we may occasionally be in aggregate bonds if the trend in U.S. stocks is down even when non- U.S. stocks are the strongest asset. 

So he apparently uses only the US market as an absolute momentum signal. Very interesting.

I see that he uses the S&P 500 Index and the All World Ex US Index. But he also uses 1-3mo T-Bills as a comparison but then buys Barclays Aggregate Bonds. Does that mean we can choose our own US or International Index Fund as well but use his indices? Because it does make sense to use the most visible indices for momentum as a comparator but then buy the most diversified fund. So in this case I'd use the S&P 500 index to know if I should buy Vanguard Total Market Index. I could do the same for the bond fund in which instead of the Barclays Aggregate I could use a Vanguard aggregate.

I'm going to set up a Perf Chart and go with it with ~10% of my Roth IRA to make sure I understand it. Then I'll consider switching higher percentages of my retirement accounts to this strategy. The key concern is my lookback period matching investor mood such that bear markets are captured correctly by it in the future.
Title: Re: Dual Momentum Investing
Post by: AdrianC on April 05, 2017, 10:33:50 AM
Has there been analysis on what look back periods and fixed-income investments lead to the best performance in different types of markets? Does a 6 month look back respond better to most bear markets than a year, or does the increased volatility cost you more than the reactivity? Does an intermediate bond fund comparison save you earlier from drops than a shorter term bond?

I don't see a consensus about this, and I think the lookback period is the key to all of this. The whole point (as far as I can see) of dual momentum is that the look back period should follow the trends of investor mood appropriately to get out of bears early enough and back in before gains are lost without costing yourself too much in volatility from trades. It should be easy to have backtested data on this. Does anyone know the answer? What look back period captures investor mood best?

You can back test different look-back periods yourself here:

https://www.portfoliovisualizer.com/test-market-timing-model?timingModel=6

I see a 10 to 15 month look back as being advantageous, back to 1988. 12 month gives peak returns to 1988. 10 month gives peak returns to 1998.

Going forward...who knows?


Title: Re: Dual Momentum Investing
Post by: RichMoose on April 05, 2017, 05:28:36 PM
Has there been analysis on what look back periods and fixed-income investments lead to the best performance in different types of markets? Does a 6 month look back respond better to most bear markets than a year, or does the increased volatility cost you more than the reactivity? Does an intermediate bond fund comparison save you earlier from drops than a shorter term bond?

I don't see a consensus about this, and I think the lookback period is the key to all of this. The whole point (as far as I can see) of dual momentum is that the look back period should follow the trends of investor mood appropriately to get out of bears early enough and back in before gains are lost without costing yourself too much in volatility from trades. It should be easy to have backtested data on this. Does anyone know the answer? What look back period captures investor mood best?

You can back test different look-back periods yourself here:

https://www.portfoliovisualizer.com/test-market-timing-model?timingModel=6

I see a 10 to 15 month look back as being advantageous, back to 1988. 12 month gives peak returns to 1988. 10 month gives peak returns to 1998.

Going forward...who knows?

Another important consideration is turnover and taxation. With shorter lookback periods your turnover is higher and it's much more likely to be in the form of Capital Gains not eligible for the long-term holding status. This isn't necessarily a factor in Canada (where I live), but it might be a large enough factor in the US where at high income, shorter term capital gains are taxed pretty steep.

Also, with shorter lookback you're more likely to be whipsawed, which can cost you money.
Title: Re: Dual Momentum Investing
Post by: AdrianC on April 06, 2017, 01:15:54 PM
Another important consideration is turnover and taxation. With shorter lookback periods your turnover is higher and it's much more likely to be in the form of Capital Gains not eligible for the long-term holding status. This isn't necessarily a factor in Canada (where I live), but it might be a large enough factor in the US where at high income, shorter term capital gains are taxed pretty steep.

Also, with shorter lookback you're more likely to be whipsawed, which can cost you money.

If I was to do this it would be in a tax-deferred account, no question. So taxes are not an issue, and trading costs are not really an issue (free trades at Vanguard and Fidelity).

The issue, apart from any ethical considerations, is the whipsaw. There’s a distinct possibility that we switch out of stocks after they go down, and have to buy them back after they've gone up. Sell low/buy high is not a strategy I find appealing.

Aspects I do find appealing:
• Possibility of avoiding large draw-downs.
• Uses three funds we all know and love already, and just messes with the asset allocation if we do it with a small part of the portfolio.
• Rules-based system
• Possibility of a larger equity allocation in FIRE

I’m still thinking about it. I did buy the currently indicated asset (US stocks) in early January, with about 15% of our portfolio that I’d had in short-term bonds. I labeled this purchase as “GEM??”.

So far, so good. But will I be able to make the switch to International or Bonds if indicated? Don’t know yet.
Title: Re: Dual Momentum Investing
Post by: RichMoose on April 06, 2017, 06:34:48 PM
Another important consideration is turnover and taxation. With shorter lookback periods your turnover is higher and it's much more likely to be in the form of Capital Gains not eligible for the long-term holding status. This isn't necessarily a factor in Canada (where I live), but it might be a large enough factor in the US where at high income, shorter term capital gains are taxed pretty steep.

Also, with shorter lookback you're more likely to be whipsawed, which can cost you money.

If I was to do this it would be in a tax-deferred account, no question. So taxes are not an issue, and trading costs are not really an issue (free trades at Vanguard and Fidelity).

The issue, apart from any ethical considerations, is the whipsaw. There’s a distinct possibility that we switch out of stocks after they go down, and have to buy them back after they've gone up. Sell low/buy high is not a strategy I find appealing.

Aspects I do find appealing:
• Possibility of avoiding large draw-downs.
• Uses three funds we all know and love already, and just messes with the asset allocation if we do it with a small part of the portfolio.
• Rules-based system
• Possibility of a larger equity allocation in FIRE

I’m still thinking about it. I did buy the currently indicated asset (US stocks) in early January, with about 15% of our portfolio that I’d had in short-term bonds. I labeled this purchase as “GEM??”.

So far, so good. But will I be able to make the switch to International or Bonds if indicated? Don’t know yet.

Based on my own calculations, albeit modified for Canadian use and not a perfect Antonacci-type GEM, in the past 2 market cycles there has been a clear pattern of lower returns during the bull market portion. You should expect to get only about 90% of the index return due to whipsaw "costs". This means that your strategy might direct you to sell 1000 units of fund XYZ and four months later you buy back 950 units of XYZ. Sucky...

The problem with GEM is that it is impossible to perfectly predict bear markets, so that means you will accept a somewhat lower returns in bull markets in order to avoid the largest part of losses in longer bear markets. I don't believe you can sustainably have the best of both worlds, although it has happened in previous cycles.

However the evidence is real that, over every complete market cycle, DM has outperformed the standard balanced index portfolio somewhat and very importantly (to me) reduced big drawdowns. If this continues, you could virtually eliminate sequence risk in retirement.

Also, statistically you probably would increase your equity allocation. GEM actually has you in bonds 30-35% of the time while many here put less than that allocation of bonds in their portfolio (not sure about your target AA of course).

I believe quite firmly that DM is a strategy you have to commit to for a full market cycle to see the benefits. Comparing performance to a Boglehead 3-fund or something similar from month to month, or even year to year, is deceiving because DM will either look really good or bad.

I would suggest you be cautious taking the leap. Do your research and make sure you feel comfortable and prepared to make the market cycle commitment before jumping. That's potentially 10 years! I would agree that DM is better done in protected accounts, but again this only exacerbates the commitment requirement as then you would easily be comparing returns from one account to the next.
Title: Re: Dual Momentum Investing
Post by: brooklynguy on April 07, 2017, 11:02:55 AM
It's not directly related to dual momentum, but there's an interesting article in today's Wall Street Journal describing a theory that the current widespread use of volatility insurance by market participants is creating a self-reinforcing feedback loop having the effect of depressing market volatility, precisely the inverse of the volatility-amplification effect that was attributed to momentum trading upthread.

https://www.wsj.com/articles/are-traders-creating-a-bizarre-new-feedback-loop-feedback-loop-feedback-loop-1491557400
Title: Re: Dual Momentum Investing
Post by: kenaces on April 19, 2017, 07:27:43 PM
Interesting thread :)

I read Meb Faber's white paper on his trinity portfolio(includes big allocation to trend following) and that lead me thinking about trend/momentum again.  So I am just about finished with the Dual Momentum Investing book and have listened to all the podcast and youtube videos I could find with Gary.  I find the idea of diversifying my portfolio with a component of trend/momentum to be very compelling but I can't buy into paying Faber 80bps(+trading costs) for his GMOM ETF. 

I am going to continue reading up on this on dualmomentum.net and alphaarchitects.com.  Any other places with good content on building portfolio that had trend component to it?
Title: Re: Dual Momentum Investing
Post by: RichMoose on April 19, 2017, 09:17:33 PM
If you haven't already, read all the posts in Antonacci's blog, www.dualmomentum.net and info site www.optimalmomentum.com

The Optimal site has the white papers that he based the book on. It also keeps a running picture on the GEM strategy until last month.

You could also read the white papers from other researchers that Antonacci referred to in his own research.

www.sharpereturns.com also has some decent technical posts on GEM/DM
Title: Re: Dual Momentum Investing
Post by: kober.paul on February 08, 2018, 11:05:40 AM
Sorry if this has been addressed. I have skimmed through much of this thread and it is hard to pull out information.

So I have a simple question to those using DMI.

With how much of your net worth are you actually doing DMI?

I have heard it is best with tax advantaged accounts.  Also, some of us have a large amount of net worth in real-estate (prime residence & rentals).

To answer my own question.

Out of my investable assets (cash, stocks, bonds etc.)  I would consider DMI with about 50%.  Out of my total net worth it would be less than 20%.


Some of you may have a number figure like, I will try DMI with $10K $100K etc.

I am just trying to get a feel for what people are actually doing.

Thanks in advance for sharing.


100% of my investable assets (both taxable and tax-free) are using DMI (specifically GEM). That is about 50% of my net worth.  I cleaned up all my accounts and streamlined to follow GEM starting October 2017. I am using VEU, FSGDX and VTIAX to index global equities ex USA (depending on taxable or tax deferred account - I have it in a couple of places). Currently GEM points to global equities. I would use similar combination of ETF and funds if I need to be in the US. I would use AGG or something similar when GEM signals me to get out of stocks.

Hello to everybody on this forum! This is my first post here. I thought I respond to this old post as a way to introduce myself. I have read most of of the 22 pages of the discussions related to DM skimming through some of the off topics. Looks like this forum became very quiet after miles left. I enjoyed the discussions related to DM. Hoping to see more of it and participate in some.
Title: Re: Dual Momentum Investing
Post by: Tardi44 on February 08, 2018, 01:46:50 PM
Hi,
For for keeping this topic alive.

For GEM lovers here is an exellent blog I just discover with GEM monthly results using VEU, IVV and BND.
https://indexswingtrader.blogspot.fr/2016/10/prospecting-dual-momentum-with-gem.html (https://indexswingtrader.blogspot.fr/2016/10/prospecting-dual-momentum-with-gem.html)
What do you think about ?
Title: Re: Dual Momentum Investing
Post by: kober.paul on February 08, 2018, 04:53:52 PM
Hi,
For for keeping this topic alive.

For GEM lovers here is an exellent blog I just discover with GEM monthly results using VEU, IVV and BND.
https://indexswingtrader.blogspot.fr/2016/10/prospecting-dual-momentum-with-gem.html (https://indexswingtrader.blogspot.fr/2016/10/prospecting-dual-momentum-with-gem.html)
What do you think about ?

Yeah - I keep an excel sheet myself. At the end of the month, it takes a good minute or two to plug in the previous month's return numbers and the excel sheets spits out the signal for the next month. For those who don't want to keep such excel sheet, this site seem to provide a signal calculator. There seems to be some other sites as well that do this - http://www.scottsinvestments.com/dual-etf-momentum/. Quite frankly, I feel much better if I do it myself. It is easy enough.
Title: Re: Dual Momentum Investing
Post by: kober.paul on February 12, 2018, 04:07:17 PM
Thanks for the interesting post.  An interesting side topic might be "the power of an individual to shape thinking, as an accelerant (band wagoners) or retardant (skeptics) and their roles on the persistence or termination of trends.

For example, I saw former treasury secretary Paulson speak the other day and he went into TARP and the financial crisis. He seemed to feel the program, while very unpopular, really saved the economy.  It is possible, one or two people being unwilling to buck popular notions (bankers should not be bailed out, despite the consequences) can really swing the outcome of the global economy.

Can belief in the economics of Amazon or Twitter due to popular culture make the success happen?  Interesting to consider.  Many real estate deals pencil out or fail based on perceived desirability of the location.

Much food for thought.  Thanks.

Thanks to pizzasteve posts as well as links provided by brooklynguy in this thread. They provided a lot of food for thought indeed. This is a long post. I have put together my thoughts on what a DMI investor (specifically GEM) should worry about. You need to be familiar with GEM and its methodology to understand this analysis.

Followers of DMI (specifically GEM) are attracted to this investing methodology because of its eye popping over-performance relative to B&H in backtesting. However, this excellent Philosophical Economics blog  http://www.philosophicaleconomics.com/2015/12/backtesting/ (http://www.philosophicaleconomics.com/2015/12/backtesting/) posted by brooklynguy demonstrates that relying on back testing alone without understanding why and how GEM works is very dangerous. Also it would be unwise to take comfort in a theory that momentum anomaly is real and it is sustainable.  Even if that is true, GEM is an algorithm, it has certain parameters with certain values recommended for those parameters. GEM can fail if the recommended values no longer work in the future. So one really need to understand how GEM parameters values interplayed with its context during the period of back testing. You also need to think if the environmental conditions that allowed past success will continue to persist in the future. Lets break this down to examining absolute momentum and relative momentum components of GEM.

Absolute Momentum (or Trend Following)

Again another article from Philosophical Economics blog http://www.philosophicaleconomics.com/2016/01/gtt/  (http://www.philosophicaleconomics.com/2016/01/gtt/) (also link posted by brooklynguy) gives a very good framework to understand the variables involved. Absolute Momentum trades down-market gains (gain relative to B&H that is) to losses (again relative to B&H) due to whipsawing. Thus, Absolute Momentum’s performance depends on extracting higher gains than losses.  The parameters for implementing this strategy is monthly testing and 12 months of look back period. Both are critical - if you reduce/increase the testing frequency and/or look back periods, the returns from this strategy suffers. With these two parameters the way they are, the tug-of-war between gains and losses of this strategy breaks in favor of gains. Given the above background, we can draw the following observations about Absolute Momentum’s promise going forward.

Relative Momentum

Most people who do not fully understand GEM dismiss this as a market timing strategy. It IS based on marketing timing. However, it is also a very cleverly designed algorithm to capture momentum anomaly. Whether or not it will work in the future depends whether or not if we expect to have above outlined conditions of the past persist into future.

What I claim here is that the conditions outlines above captures most of the uncertainty with regard to GEM future performance. Can you think of any other factors?

How would you rank these risk factors?

My rank from top to bottom: AM-3, AM-4, AM-5, RM-1, RM-2, AM-1, AM-2
(AM - Absolute Momentum, RM - Relative Momentum, 1-5 refer to the numbered list in the corresponding sections)

How big are these risks? Based on this analysis, are you more confident or less confident that GEM can hold its promise?
Title: Re: Dual Momentum Investing
Post by: RichMoose on February 12, 2018, 04:53:35 PM
Most people who do not fully understand GEM dismiss this as a market timing strategy. It IS based on marketing timing. However, it is also a very cleverly designed algorithm to capture momentum anomaly. Whether or not it will work in the future depends whether or not if we expect to have above outlined conditions of the past persist into future.

How big are these risks? Based on this analysis, are you more confident or less confident that GEM can hold its promise?
I think you hit the nail on the head right here. It's a sophisticated strategy (behind the scenes) that's very easy to execute for the average self-directed investor with some understanding of trade execution and discipline.

I personally feel it is not wise to ignore any strategy that's not a 60/40 (or similar) buy-and-hold. Many people like to think this is safe and reliable because it has been for U.S. investors over the past century. That said, if you were Japanese or German you might feel differently. There is nothing that precludes the U.S. market from suffering a multi-decade drawdown.

I'm not confident that GEM will continue it's outperformance. But all things considered, I am quite comfortable it will do reasonably well over the long term. I personally wouldn't invest 100% of my portfolio in GEM for this reason.

Most investors would probably benefit from running 2 (or more) different strategies across their total portfolio and re-balance every year or two. Some valid options might be:
1) DMI (GEM) on a 12-month system
2) Buy-and-hold a global market 60% Global Stocks / 40% Domestic bonds (Percentages just an example)
3) CTA / Managed futures
4) Value investing / dividend investing
5) Trend following with ETFs or large-cap stocks
6) Tail-risk / barbell strategy

I'm not saying any one of these will beat another over any medium term or a long time frame. But mixing a few might provide a bit of protection from catastrophe and advantages from good markets. Some might be inaccessible to the smaller investor, but most are pretty doable.
Title: Re: Dual Momentum Investing
Post by: kober.paul on February 13, 2018, 06:29:53 AM
I'm not confident that GEM will continue it's outperformance. But all things considered, I am quite comfortable it will do reasonably well over the long term. I personally wouldn't invest 100% of my portfolio in GEM for this reason.
Are there any risk factors to GEM that you know other than what I identified above? Do you have an opinion about which risk(s) that we need to be most concerned about?
Title: Re: Dual Momentum Investing
Post by: MustacheAndaHalf on February 13, 2018, 06:57:21 AM
The thing I trust the least about dual momentum is it's ability to step neatly out of the market during a crash, and step back in as the recovery breaks even.  When bonds have more momentum than stocks, the strategy switches to bonds. 

But could markets be volatile enough that checking every month isn't often enough?  If the crashing market takes place over 3 weeks, couldn't it take place between two updates?  Meaning at the start of September all was well, the market crashes -25% during September, and the very next month dual momentum suggests switching to bonds.  But that's after the losses have been realized.  Then, if the market recovers equally quickly, dual momentum is left in bonds until the next update.

In theory dual momentum switches out of the market quickly.  But in practice, with someone inexperienced using dual momentum, it could lag the market and suffer significant losses not seen in practice.  This wouldn't apply to someone who checks the market constantly, but would seem to be a problem for someone who doesn't want to check the dual momentum signals more than once a month.
Title: Re: Dual Momentum Investing
Post by: RichMoose on February 13, 2018, 07:02:38 AM
Are there any risk factors to GEM that you know other than what I identified above? Do you have an opinion about which risk(s) that we need to be most concerned about?
When you invest, you are trying to profit from human behaviour. That could be the psychologically driven errors people make in investing specifically, or the larger macro factors that drive the markets.

It's dangerous to focus on the potential risks because they can easily be used as an excuse to exit a strategy that is precisely designed to take advantage of human behaviour.

For example, look at the Divvy Appreciation ETF (VIG). It's a big, big fund that normally it trades just 400,000 units per day. Would indicate to me that it's likely preferred by a Buy-and-Hold Investor. Then look at the volume on February 6 when CNBC/Bloomberg and the Zerohedgers were predicting total catastrophe. Volume went up to 3.5 million units (8.5x typical volume) with $350,000,000 turned over. Many, many investors who convinced themselves they were buy-and-hold investors probably sold at or near the market lows last week because they somehow were led to believe that buy-and-hold would fail them.

I think Gary takes a reasonable approach to the question of risk / failure of DM (GEM). If DM underperforms the market over an entire cycle then start asking questions. It's a great piece of insight because DM is not designed to outperform in all market conditions; it's designed to outperform over a market cycle while smoothing returns.
Title: Re: Dual Momentum Investing
Post by: kober.paul on February 13, 2018, 11:02:44 AM
The thing I trust the least about dual momentum is it's ability to step neatly out of the market during a crash, and step back in as the recovery breaks even.  When bonds have more momentum than stocks, the strategy switches to bonds. 
From a business cycle point of view, during growth stage stock are going up. And the FED monetary policy is tightening to unwind previous excess and also to head off potential over heating  of economy and inflation (Exactly where we are right now). In this environment, bond prices drop and yields go up. When we enter recession, the FED is likely to engage is relaxing its policy to stimulate growth. This will make the bonds rally and yields to drop. That is the time when GEM will most likely have us in bonds. Am I missing something here?

Quote
But could markets be volatile enough that checking every month isn't often enough?  If the crashing market takes place over 3 weeks, couldn't it take place between two updates?  Meaning at the start of September all was well, the market crashes -25% during September, and the very next month dual momentum suggests switching to bonds.  But that's after the losses have been realized.  Then, if the market recovers equally quickly, dual momentum is left in bonds until the next update.
It could happen. However, GEM is doing a delicate balancing act. If it rebalances too aggressively and/or if shortens the look back period too much to be more responsive - the balance breaks to the side of higher whiplash losses which likely will negate any gain it made because of existing bear markets. The back testing confirms that this is a good balance. The real question to ask is if the stock market gyrations are going to be markedly different going forward. That is a risk one must take if they want to engage in using GEM. This risk is identified in my analysis as the top risk to GEM. AM-3.

Quote
In theory dual momentum switches out of the market quickly.  But in practice, with someone inexperienced using dual momentum, it could lag the market and suffer significant losses not seen in practice.  This wouldn't apply to someone who checks the market constantly, but would seem to be a problem for someone who doesn't want to check the dual momentum signals more than once a month.
That is incorrect. GEM won’t give any discretion to user on when to exit. You must follow the signals. It defines how often to check, how far you look back and when to exit and enter. Extremely easy to implement by a novice investor.
Title: Re: Dual Momentum Investing
Post by: kober.paul on February 13, 2018, 11:10:48 AM
When you invest, you are trying to profit from human behaviour. That could be the psychologically driven errors people make in investing specifically, or the larger macro factors that drive the markets.

It's dangerous to focus on the potential risks because they can easily be used as an excuse to exit a strategy that is precisely designed to take advantage of human behaviour.
You are absolutely right. If you deploy GEM, I don’t think you should continually use any discretion to second guess its signals. I am not recommending that at all. My analysis is geared toward deciding if one should use GEM. It has great results back testing. But that is not enough. We need to be convinced that the specific conditions that contributed to its higher performance in backtesting are likely to exist in future. That is the point of the above analysis. I did this mostly for myself. But I thought I discuss it with other so that I will be made aware of what I might be missing and also for others to make their own opinions about GEM. If at any point I realize I made a mistake, I don't mind dumping GEM and moving on to something else.
Quote
I think Gary takes a reasonable approach to the question of risk / failure of DM (GEM). If DM underperforms the market over an entire cycle then start asking questions. It's a great piece of insight because DM is not designed to outperform in all market conditions; it's designed to outperform over a market cycle while smoothing returns.
I would like to do a bit more due diligence of my own before picking up GEM. It is absolutely wrong to judge its performance before one full cycle. It is deliberately designed to trade performance in one part of the business cycle with another. However, for many, waiting one cycle (5-10 years) to judge its merits may not be an option. That includes me. I need to know now if I can reasonably trust GEM. To be more precise, I need to know if I can trust it more than any other option available to me.
Title: Re: Dual Momentum Investing
Post by: MustacheAndaHalf on February 13, 2018, 08:45:23 PM
In theory dual momentum switches out of the market quickly.  But in practice, with someone inexperienced using dual momentum, it could lag the market and suffer significant losses not seen in practice.  This wouldn't apply to someone who checks the market constantly, but would seem to be a problem for someone who doesn't want to check the dual momentum signals more than once a month.
That is incorrect. GEM won’t give any discretion to user on when to exit. You must follow the signals. It defines how often to check, how far you look back and when to exit and enter. Extremely easy to implement by a novice investor.
I'm curious about that, and thought a novice investor could check monthly.  Are you saying it's more often?  Can you give an example of how frequently a novice investor would need to check the dual momentum signals?  If it varies, you could give a specific example of the next 2-3 dates it needs to be checked.
Title: Re: Dual Momentum Investing
Post by: CorpRaider on February 14, 2018, 09:02:39 AM
From what I've read, generally, trend following systems limit the number of test dates to reduce the number of potential whipsaws.  I think there is stuff on this in Stocks for the Long Run, Meb Faber's papers and on the Alpha Architect blog/site.
Title: Re: Dual Momentum Investing
Post by: RichMoose on February 14, 2018, 09:34:07 AM
In theory dual momentum switches out of the market quickly.  But in practice, with someone inexperienced using dual momentum, it could lag the market and suffer significant losses not seen in practice.  This wouldn't apply to someone who checks the market constantly, but would seem to be a problem for someone who doesn't want to check the dual momentum signals more than once a month.
That is incorrect. GEM won’t give any discretion to user on when to exit. You must follow the signals. It defines how often to check, how far you look back and when to exit and enter. Extremely easy to implement by a novice investor.
I'm curious about that, and thought a novice investor could check monthly.  Are you saying it's more often?  Can you give an example of how frequently a novice investor would need to check the dual momentum signals?  If it varies, you could give a specific example of the next 2-3 dates it needs to be checked.
I read a research report some time ago that suggested the optimal time for checking the signal over the last few decades was 20-25 trading days. I believe the research was done by Gogi Grewal, but unfortunately his website is no longer up.

Checking the signal more frequently than 20 trading days showed a significant decline in performance. My recollection was that frequent signal checking (and trading based on that signal) caused a lot more whipsaw trades.

On his website Gary suggests monthly is a good timeframe. Volume tends to go up in the last few days of one month and first few days of the next. This means the market is most liquid and the price is most correct. He also states that if the signal is close (barely indicating a change, or barely indicating a hold), it might be best to wait a few days and check back again when the trend is more confirmed. He made it sound like more of a peace-of-mind thing than this really having an impact on performance over the long term.

Edit* Found Gogi's research after some extensive digging: https://growresearch.com/blogs/blog/testing-momentum-s-robustness
Title: Re: Dual Momentum Investing
Post by: MustacheAndaHalf on February 15, 2018, 08:47:27 PM
https://growresearch.com/blogs/blog/global-equities-momentum-gem

That answers my question.  GEM is examined every month for signals that use 12 months of data.  Which means in theory a market crash could occur between updates, and GEM could get whipsawed.  But historically, that's not the most significant problem.

According to the data presented on that article, the larger problem is riding a volatile market by checking too often.  Someone who checks GEM signals every week will get whipsawed: they will switch investments only to see a trend reverse and cost them performance (in addition to trading costs).  So in practice, the larger problem is checking too often and being exposed too much to market volatility.
Title: Re: Dual Momentum Investing
Post by: AdrianC on February 16, 2018, 12:32:30 PM
Yeah - I keep an excel sheet myself. At the end of the month, it takes a good minute or two to plug in the previous month's return numbers and the excel sheets spits out the signal for the next month. For those who don't want to keep such excel sheet, this site seem to provide a signal calculator. There seems to be some other sites as well that do this - http://www.scottsinvestments.com/dual-etf-momentum/. Quite frankly, I feel much better if I do it myself. It is easy enough.

Or use Stockcharts:

http://stockcharts.com/freecharts/perf.php?VTI,VXUS,BND,VGSH

Click the link, change time period to your desired lookback (e.g. 252 for 12 months). Currently in International, as it has been since June.
Title: Re: Dual Momentum Investing
Post by: anisotropy on February 16, 2018, 02:03:00 PM

Absolute Momentum (or Trend Following)

Again another article from Philosophical Economics blog http://www.philosophicaleconomics.com/2016/01/gtt/  (http://www.philosophicaleconomics.com/2016/01/gtt/) (also link posted by brooklynguy) gives a very good framework to understand the variables involved.

When I first came across GTT in mid-late 2016 I was horrified, mostly due to the similarities in underlying reasoning between GTT and my own timing method. Over time, that fear dissipated as I convinced myself that my method is infinitely superior to GTT. It is not, of course, but it helps me to sleep at night.

As perhaps the leading authority on market timing here (self proclaimed), I feel the need to remind other timers that our goal is not to maximize gains per se, but to simply outperform the market by following pre-defined rules and not get swayed by emotions.  There are a thousand ways to outperform the market, yet few investors ever achieve so. If the rules tell you to catch a falling knife, please just close your eyes and do it.

The business cycles follow fundamental laws of nature, much like how population distribution in a developed country follows the "law of 1/n". The environments change, but the rules stay the same.
Title: Re: Dual Momentum Investing
Post by: PizzaSteve on November 04, 2018, 09:08:19 AM
Any updates?  Or have we decided markets basically reasonably efficiently price future expected returns withing bands of accuracy, and by timing we are just guessing about the future at random?
Title: Re: Dual Momentum Investing
Post by: RichMoose on November 04, 2018, 10:16:32 PM
Any updates?  Or have we decided markets basically reasonably efficiently price future expected returns withing bands of accuracy, and by timing we are just guessing about the future at random?
So far so good. Approximately -1% for 2018 YTD. Signal still in U.S. stocks for November.
Title: Re: Dual Momentum Investing
Post by: kober.paul on December 31, 2018, 08:27:06 AM
Moment of truth again for GEM followers. Need to get out of stocks nows. How are you guys feeling? I am feeling fine. These are very uncertain and volatile times. It may be about time to be out.
Title: Re: Dual Momentum Investing
Post by: 2Birds1Stone on December 31, 2018, 08:56:47 AM
Moment of truth again for GEM followers. Need to get out of stocks nows. How are you guys feeling? I am feeling fine. These are very uncertain and volatile times. It may be about time to be out.

The top is in?
Title: Re: Dual Momentum Investing
Post by: kober.paul on December 31, 2018, 12:12:47 PM
The top is in?

Do you mean, do I know if we have reached the top of this bull market? No, of course, I don't. Why do you ask?
Title: Re: Dual Momentum Investing
Post by: AdrianC on January 17, 2019, 07:23:39 AM
Interesting piece on the "fragility" of GEM:

Fragility Case Study: Dual Momentum GEM
https://blog.thinknewfound.com/2019/01/fragility-case-study-dual-momentum-gem/

In this commentary we use the popular Dual Momentum GEM strategy as a case study to demonstrate how model specification choices can lead to performance differences that span hundreds, if not thousands, of basis points a year.    Unfortunately, we should not expect these performance differences to mean revert.  The realizations of good and bad luck are permanent, and potentially very significant, artifacts within our track records.
Title: Re: Dual Momentum Investing
Post by: RichMoose on January 17, 2019, 04:07:22 PM
Not sure what Newfound is trying to say with this post. We all know that different lookback periods produce different results at different times. 2018 is not an anomaly in Dual Momentum's long term performance by any stretch.

Dual Momentum is a long term strategy that historically outperforms over full market cycles, not every month or year. Lots of research shows that the 12-month signal is very effective over time. Blending timing periods is not as truly effective as it appears, after factoring in all costs.

Also, here's Gary Antonacci's response: https://www.dualmomentum.net/2019/01/whither-fragility-dual-momentum-gem.html?m=1
Title: Re: Dual Momentum Investing
Post by: Cornel_Westside on March 06, 2019, 06:10:24 PM
Looks like the signal said to buy on 3/1. I didn't like getting whipsawed, but that's the price of having a trustworthy signal to avoid bear markets.
Title: Re: Dual Momentum Investing
Post by: MustacheAndaHalf on March 06, 2019, 09:26:00 PM
Could dual momentum's 12 month look back be improved?

With regular momentum, the signal is 12 months minus the most recent month.  That filters out reversion to the mean, which avoids whipsawing to some extent.

Dual momentum avoids looking too often to avoid getting whipsawed.  An earlier post mentioned 20 trading days, or 4 weeks, which is very close to a month.  What if dual momentum only used data from 2 to 12 months ago, and ignored the last month of data (for bonds, stocks, etc)?
Title: Re: Dual Momentum Investing
Post by: RichMoose on March 06, 2019, 09:38:15 PM
Could dual momentum's 12 month look back be improved?

With regular momentum, the signal is 12 months minus the most recent month.  That filters out reversion to the mean, which avoids whipsawing to some extent.

Dual momentum avoids looking too often to avoid getting whipsawed.  An earlier post mentioned 20 trading days, or 4 weeks, which is very close to a month.  What if dual momentum only used data from 2 to 12 months ago, and ignored the last month of data (for bonds, stocks, etc)?
By my recollection, Gary tested the 12-1 method and he found that the recent mean reversion effect is not very reliable on broad stock indices. The 12-1 advantage is strongest on individual stock momentum.
There are several spins out there on the DM lookback, including preference for a 10 month lookback, using a combination of lookback periods for a mixed signal, using a Simple MA, and so on. While some will outperform the 12 month lookback in certain time periods (for example the 10 month has done better since 2008), they don't outperform over long backtests. Some can offer other advantages such as smaller drawdowns with somewhat lower returns. I guess it depends on what the investor wants.
Title: Re: Dual Momentum Investing
Post by: Joe Schmo on March 07, 2019, 07:18:22 AM
I'm about to begin my DM journey. It seems simple enough and what I really need is a system that will "save myself from myself". I do have a few questions:
I'm wondering how DM performed during the last market dip in comparison holding say an S&P index fund?
-For example, I just did my lookback calculations and they were wildly different using a 3 and 6 month look back...6 month says I should be in a bond fund right now and 3 month says small cap.

Since the market today seems (IMHO) to be more prone to large swings for no apparent reason other than Instatwitterface posts and the 24 hour news cycle... is there a school of thought that says the future of DM may be a 3+/- month lookback?
-I know nothing...just asking for advice, feel free to swat me across the mouth if need be.
Title: Re: Dual Momentum Investing
Post by: AdrianC on March 10, 2019, 01:36:37 PM
I'm about to begin my DM journey. It seems simple enough and what I really need is a system that will "save myself from myself". I do have a few questions:
I'm wondering how DM performed during the last market dip in comparison holding say an S&P index fund?
Terrible whipsaw. Missed out on a 13% gain.
Title: Re: Dual Momentum Investing
Post by: waltworks on March 10, 2019, 02:22:13 PM
Yeah, really, if you want to "save yourself from yourself" just set up a direct deposit into a 60/40ish fund and *never* look at it for 20 years.

Really if you are freaked out by investing, the best thing you can do is NOT get too into knowing everything about complex investing systems. Just do it the boring way.

-W
Title: Re: Dual Momentum Investing
Post by: Joe Schmo on March 16, 2019, 01:35:30 PM
Apparently I'm not even smart enough to go back and read the entire thread before asking stupid questions. I got to about page 10 and couldn't take it anymore, somewhere in there MDMD got the boot and all my questions were answered...except of course the unanswerable.
I'm really looking forward to being on this forum. Yes saving myself from myself is pretty much #1. I really do have a ridiculous misconception about investing burned into my brain (should seek counseling) from when I decided to start investing/playing the market/whatever in...March of 2009 :/ I could've deposited a bag of poop into my TDAmeritrade account and watched it blossom into a money tree!!

PS: Thanks for your answer Adrian
Title: Re: Dual Momentum Investing
Post by: Chuck on April 11, 2019, 02:30:15 PM
Stepping in to ask a quick question:

How did DMI perform over the December Crash/Jan Bounce period? Would an investor have already exited equities prior to the decline? Would they have reentered soon enough to reap the Jan/Feb/March gains?

Seems like an excellent case study.
Title: Re: Dual Momentum Investing
Post by: AdrianC on April 11, 2019, 03:25:05 PM
Stepping in to ask a quick question:

How did DMI perform over the December Crash/Jan Bounce period? Would an investor have already exited equities prior to the decline? Would they have reentered soon enough to reap the Jan/Feb/March gains?

Terrible whipsaw. Missed out on a 13% gain.
Title: Re: Dual Momentum Investing
Post by: Cornel_Westside on August 16, 2019, 12:06:14 PM
It's looking like there is potential for a sell signal (based on 12 month lookback) at the end of this month. This is concurrent with some recession signals and 12 months ago had a local maximum for a price.

Note that end of December last year had a very low price, so a GEM strategy may have someone selling on 9/1 and buying on 1/1.

As I've said before, I'm following GEM with a portion of my Roth IRA. Looking forward to see how it does over this market cycle - since I've started it has underperformed SPY, but that is to be expected. If it dodges one bear it is worth it.
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on April 10, 2020, 01:03:11 PM
How are you DMers doing in the current market turmoil?
Title: Re: Dual Momentum Investing
Post by: AdrianC on April 11, 2020, 09:06:56 AM
How are you DMers doing in the current market turmoil?
Depends on the look back being used - once again pointing the fragility problem.

10 month look back = out of stocks at the end of Feb
12 month look back = out of stocks at the end of March
Title: Re: Dual Momentum Investing
Post by: AdrianC on April 11, 2020, 09:13:59 AM
From Portfoliovisualizer:
GEM Performance Jan 2012 - March 2020   
8.25 years   
12 month lookback

Timing Portfolio VTSAX VTIAX VBTLX
CAGR 6.20%   Stdev 11.84%   Max. Drawdown -22.10%

Vanguard LifeStrategy Growth Inv VASGX
CAGR 7.32%   Stdev 10.02%   Max. Drawdown -17.60%
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on April 11, 2020, 10:57:56 AM
So underperforming using the standard 12 month lookback.  I guess time will tell whether getting out at the end of March was a good thing or a bad thing.
Title: Re: Dual Momentum Investing
Post by: Cornel_Westside on September 14, 2022, 08:00:53 PM
Thought I might as well pop in here and note that Dual Momentum told me to exit the market on 2022-05-01, and that happened to save me almost $100k.
Title: Re: Dual Momentum Investing
Post by: Monkey Uncle on September 15, 2022, 05:28:38 AM
Thought I might as well pop in here and note that Dual Momentum told me to exit the market on 2022-05-01, and that happened to save me almost $100k.

Yeah, this has been the type of long, gradual bear market in which momentum strategies do well.  How did you do with the rapid decline and rebound in 2020?
Title: Re: Dual Momentum Investing
Post by: FIPurpose on September 15, 2022, 06:06:56 AM
That all depends on the recovery though too. Will Dual Momentum be able to jump in before the market recovers back? Or will there be a shock month in the near future where you'll miss out on the initial +8-12% recovery?

I remember following Dual Momentum around 2015-2016. Lost money basically all year on the whipsaws that happened around then. I didn't have enough money to bother splitting my investment strats, so I just went back to a simple static portfolio. I think there's a bit of historical bias that he's fallen pray to. Momentum investing absolutely makes sense, but predicting the correct trailing lookback periods is what is difficult / impossible to do. He found some that work well that gave great results in the 80's and 90's, but don't seem to be working now.

And my prediction so far has been correct. Dual Momentum since 2015 has underperformed the benchmark that he compares against by about -10% overall through the end of 2021 (which was a great year for his strat). Considering the book came out in 2014, it is a little sketchy to see his strategy start underperforming the very next year.

According to his website it looks like he left stocks in May so after the April -9% drop. Since May he's done about -2%. The S&P since May is sitting around -3 to -5% depending on where you put your numbers. So at least so far, it doesn't look like it's drastically outperforming.

So either you got lucky on what day of the month you chose to use or on your lookback period. But his website doesn't look that great on performance for 2022.
Title: Re: Dual Momentum Investing
Post by: Cornel_Westside on September 15, 2022, 11:22:26 AM
Thought I might as well pop in here and note that Dual Momentum told me to exit the market on 2022-05-01, and that happened to save me almost $100k.

Yeah, this has been the type of long, gradual bear market in which momentum strategies do well.  How did you do with the rapid decline and rebound in 2020?

The whipsaws cost me about 3-4% looking at my data, and the savings during this bear saved me approximately 17-20%.

That all depends on the recovery though too. Will Dual Momentum be able to jump in before the market recovers back? Or will there be a shock month in the near future where you'll miss out on the initial +8-12% recovery?

I remember following Dual Momentum around 2015-2016. Lost money basically all year on the whipsaws that happened around then. I didn't have enough money to bother splitting my investment strats, so I just went back to a simple static portfolio. I think there's a bit of historical bias that he's fallen pray to. Momentum investing absolutely makes sense, but predicting the correct trailing lookback periods is what is difficult / impossible to do. He found some that work well that gave great results in the 80's and 90's, but don't seem to be working now.

And my prediction so far has been correct. Dual Momentum since 2015 has underperformed the benchmark that he compares against by about -10% overall through the end of 2021 (which was a great year for his strat). Considering the book came out in 2014, it is a little sketchy to see his strategy start underperforming the very next year.

According to his website it looks like he left stocks in May so after the April -9% drop. Since May he's done about -2%. The S&P since May is sitting around -3 to -5% depending on where you put your numbers. So at least so far, it doesn't look like it's drastically outperforming.

So either you got lucky on what day of the month you chose to use or on your lookback period. But his website doesn't look that great on performance for 2022.

I use the first of the month (or first trading day of the month), and the standard 12 month lookback.