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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, (