Is MPT and buy and hold DEAD?
124 RepliesJump to last post
I’ve said this before and it’s worth repeating…
Buy and hold clearly wins in a secular bull market. Put your money in anything from 82-99 and you destroy any type of market timing you could try (unless you are clarevoyant). Holding fixed income and alternatives simply reduces volatility and returns. Defensive investing (of varying types) will often beat B&H investing during a secular BEAR market. Obviously this depends on how good you aer, and relies on you executing properly. But fixed income, alternatives, gold & commodities, treasuries, cash, all will help actually reduce volatility while potentially increasing returns (since the equity returns over the course of an entire secular bear are generally nill or slightly positive or negative). Look at 2000-2009, the 70's, the 30's. Investment strategies are ENTIRELY reliant on what cycle you are investing in. Just look at an S&P or Dow chart from 82-99. Hell, even start in 1975. You could just buy the S&P 500, hold it for 20 years and be rich. It's almost impossible to time cyclical bulls and bears (which occur both during secular bulls and bears), since they are so short lived and often very sudden (look at 10/87 - that occured in the midst of the greatest secular bull market of all time). The problem is determining when a secular market shifts. You need to do some techincal analysis to determine this. It seems historically, secular bulls have ended and secular bears started when PE ratios hit excessive highs (i.e. 1999). And the secular bull doesn't return until PE's come back down to "normal" levels. Some would say we are approaching that point where PE's are again "normalized for the start of a secular bull. But the current bear may persist for some time due to the economic situation. At minimum, when reaching historically HIGH PE's, that is a sign to start taking money off the table, even if you may LEAVE some returns on the table for a while. Losses have a much bigger negative impact than do gains have a positive impact on long-term returns. This is due to the affect of compounding. Most analysis/charts, etc only look at the averages of the annual returns. This nullifies the compunding affect. Take some examples: $1,000 Year 1: -10% Year 2: +10% Average = 0 Real Return = -1% Year 1: -30% Year 2: +30% Average = 0 Real Return = -8% Year 1: 25% Year 2: -20% Average = 2.5% Real Return = 0I love the “ten best days” piece. Of course your returns would be worse if you take out the best days. This is not rocket science. What this piece of mutual fund propaganda does not tell you is when the ten best days happened. This past year really makes this point. Bull markets are marked by low volatility. Bear markets are marked by high volatility. Through the end of 2007, 8 of the 10 best days in the market happened during defined bear markets. The other two happened during the tech boom. The piece tells you that if you just missed those days your returns would be lower, what it doesn’t tell you that if you missed the month before and after the ten best days (including those best days), your returns are increased substantially. It is far more important to avoid losses than to catch every little upswing in the market.
[quote=MinimumVariance]I don’t use B&H myself, but I don’t think there is any EVIDENCE that some crazy theory about the MACD line crossing the 200 day EWMA line has any validity at all. The CAPM describes what will prevail when markets are in equilibrium. Of course markets are never in full equilibrim as new info in available constantly, relative prices are changing somewhere for something, in the case of securities peoples risk aversion changes. However, eventually all markets will clear (which just means theres a price where some people who want something are satisified with its price as are the owners of that same thing).
B&H has nothing to do w/MPT itself. Some academics who adhere to MPT have gone on to empirically investigate different strategies. Up until the latest conflagration none of those studies have found something better than B&H san taxes / transaction costs as a stratgy. Arguing this matter at this point in time tho is like arguing with a guy selling equity linked annuities ["see how well they worked"! Course the insurnce company that guaranteed the returns is not bankrupt, but thats a different issue...] Please NOTE: B&H does NOT mean 'buy 100 stocks and put em in a safe deposit box. Open box at retirement". It means hold the market portfolio. The composition oif the market portfolio will CHANGE DAILY as its' components values change. Let me describe my B&H approach (which is not literally buy and hold). 1- Determine asset class desired exposures. To more closely approximate the total market portfolio I add a healthy does of 'alternative' assets. 2- Within asset classes determine sectors with a greater probablity to gain (or loss) relative to my BM. EG Fertilizer will beat Financials next qtr. (this takes the form of probablilty functions - I am __% optimistic that X will occur). 3- Decide whether you want to use active mgrs, single invetments, or indices. I use all three as I don't believe it's worth paying for active mgrs in LC stocks when all you get is beta. It may be worth paying for alpha though in markets that are less efficient (Korea, BioTech). Collect ten yers of returns on each of your selections, calcualte a bunch of statistics about each one, and the Cov matrix for all of them. Actually computers do this. 4- Optimize groups of selected assets with a Black-Litterman add-on to a Markozitz MVO (say 30 out of an investible universe of 300?) Depending on the risk preferences of the client will determine what goes into the universe. Think of each square in a hypotheticl 'global style box' as having three choices: agressive, moderate, and conservative (as measured by their respective Sharpe Ratios). 5- Buy the optiomal portfolio weights. [I might do this using 3,5,7,10 yr data.]. I carve out a 5% - 10% piece for tactical positions. I might use an options overlay on the whole thing. 6- Repeat every month by adding one data point (more recent) and subtradcting one (most distant). Re-visit performance estimates of sectors (this is called your 'view' of a particular segment). Compare transaction costs with expected gains, either change or wait till some threshold is reached where Bemefit > Costs. As you add new data, and has different sectors pricing relatives change you can emphasize a monentum or a reversion to the mean strategy strategy. Decide whether you'll allow short positions (I don't, but not doing so can be a significant cost in terms of future portfolio returns). THATS HOW I DO BUY AN HOLD [/quote] Ice, I would think your alter ego's name would be Fireh0t or something clever like that.isn’t it ironic when our store goes on sale, people stampede to get out…but when we’re overpriced people throw money at us?
That's a very interesting point. I was wondering if you could tell me where I could find that information. Is it printed, on the web, or did you do the research yourself?I love the “ten best days” piece. Of course your returns would be worse if you take out the best days. This is not rocket science. What this piece of mutual fund propaganda does not tell you is when the ten best days happened. This past year really makes this point. Bull markets are marked by low volatility. Bear markets are marked by high volatility. Through the end of 2007, 8 of the 10 best days in the market happened during defined bear markets. The other two happened during the tech boom. The piece tells you that if you just missed those days your returns would be lower, what it doesn’t tell you that if you missed the month before and after the ten best days (including those best days), your returns are increased substantially. It is far more important to avoid losses than to catch every little upswing in the market.
That's a very interesting point. I was wondering if you could tell me where I could find that information. Is it printed, on the web, or did you do the research yourself?[/quote] Stock traders almanac, and some legwork on my part.[quote=Sam Houston]I love the “ten best days” piece. Of course your returns would be worse if you take out the best days. This is not rocket science. What this piece of mutual fund propaganda does not tell you is when the ten best days happened. This past year really makes this point. Bull markets are marked by low volatility. Bear markets are marked by high volatility. Through the end of 2007, 8 of the 10 best days in the market happened during defined bear markets. The other two happened during the tech boom. The piece tells you that if you just missed those days your returns would be lower, what it doesn’t tell you that if you missed the month before and after the ten best days (including those best days), your returns are increased substantially. It is far more important to avoid losses than to catch every little upswing in the market.
The piece tells you HOW MUCH LOWER your returns would be if you missed the ten best days. That's the point. And I can tell you EXACTLY when the ten best days were, they were IN those twenty years. That's the point, you don't have to know when they are coming, you just have to be invested the whole time. By definition, you will hit the bottom 10 worst days, but still have a good return. The only way to gaurantee you will miss the ten worst days is to be in cash for twenty years. Let me know how that works out for you. As for missing the month before and after the three best days, my crystal ball is broken. Can yours tell you in advance what months to be in, and what months to be out?I love the “ten best days” piece. Of course your returns would be worse if you take out the best days. This is not rocket science. What this piece of mutual fund propaganda does not tell you is when the ten best days happened. This past year really makes this point. Bull markets are marked by low volatility. Bear markets are marked by high volatility. Through the end of 2007, 8 of the 10 best days in the market happened during defined bear markets. The other two happened during the tech boom. The piece tells you that if you just missed those days your returns would be lower, what it doesn’t tell you that if you missed the month before and after the ten best days (including those best days), your returns are increased substantially. It is far more important to avoid losses than to catch every little upswing in the market.
The piece tells you HOW MUCH LOWER your returns would be if you missed the ten best days. Your returns would be lower if you miss the good days? Wow. I am glad a fund company pointed that out, I would have never figured it out on my own.That's the point. And I can tell you EXACTLY when the ten best days were, they were IN those twenty years. That's the point, you don't have to know when they are coming, you just have to be invested the whole time. More genius ramblings here. The biggest up days happen in BEAR markets smart guy. Might want to check out the VIX. I would rather miss these huge up days because the days surrounding them more than eliminate the gains. "You have to buy and hold Mr. Client because if you missed Nov 21, 2008, your portfolio would be down 60% instead of 55%. That would hurt your long term ability to retire and drink rum by the ocean. Look, I have this beautiful piece from AF that shows it. If it is in print, it must be true. Please ignore that AF and every other mutual fund company has a vested interest in keeping you invested." By definition, you will hit the bottom 10 worst days, but still have a good return. I could care less if I hit the best of the worst days. I will take risk when it is rewarded, and avoid risk when it is punished. The only way to gaurantee you will miss the ten worst days is to be in cash for twenty years. Let me know how that works out for you. Quite nicely, thanks for asking. I missed 11/21/2008 and all the other biggest up days this year for the most part. Funny how many of them were concentrated in Oct and Nov. Hmmm. As for missing the month before and after the three best days, my crystal ball is broken. Can yours tell you in advance what months to be in, and what months to be out? I don't own a crystal ball. I do have the ability to recognize a market in a negative trend sometime before you are down 55%. Lucky I guess.[/quote][quote=Sam Houston]I love the “ten best days” piece. Of course your returns would be worse if you take out the best days. This is not rocket science. What this piece of mutual fund propaganda does not tell you is when the ten best days happened. This past year really makes this point. Bull markets are marked by low volatility. Bear markets are marked by high volatility. Through the end of 2007, 8 of the 10 best days in the market happened during defined bear markets. The other two happened during the tech boom. The piece tells you that if you just missed those days your returns would be lower, what it doesn’t tell you that if you missed the month before and after the ten best days (including those best days), your returns are increased substantially. It is far more important to avoid losses than to catch every little upswing in the market.
What part was funny? I was trying to be serious.Agree or not…That’s pretty damn funny!
I have very few friends here, admin not included, but I think I like Sam more and more…All this bullsh*t literature and talking points put out by the fund co.'s, brokerages, talking heads on tv…all have a vested interest in the client staying fully invested…its a very large ponzi scheme…it seems everyday theres a new scam being uncovered. There’s a tremedous number of brokers, advisors, whatever who have no capacity to think for themselves. They’re always under pressure to meet goals or “dots” on a screen that they don’t have time to take a step back with eyes wide open. THey drink the koolaid without hesitation.
I still remember my buddy at Morgan who told me when I was getting the last of my clients, who listened, out of the market back around 9200 on the dow. He said his firm was saying the bottom was in and it will turn by October....hahaha...he's a principal on a team with 300mm under management...drinking the Morgan koolaid....watching his AUM drop like a rock, charging 1-1.5%...waiting on his "bonus" check from Morgan after they bought SB....just to stay in his seat...wtf....The piece tells you HOW MUCH LOWER your returns would be if you missed the ten best days. Your returns would be lower if you miss the good days? Wow. I am glad a fund company pointed that out, I would have never figured it out on my own.That's the point. And I can tell you EXACTLY when the ten best days were, they were IN those twenty years. That's the point, you don't have to know when they are coming, you just have to be invested the whole time. More genius ramblings here. The biggest up days happen in BEAR markets smart guy. Might want to check out the VIX. I would rather miss these huge up days because the days surrounding them more than eliminate the gains. "You have to buy and hold Mr. Client because if you missed Nov 21, 2008, your portfolio would be down 60% instead of 55%. That would hurt your long term ability to retire and drink rum by the ocean. Look, I have this beautiful piece from AF that shows it. If it is in print, it must be true. Please ignore that AF and every other mutual fund company has a vested interest in keeping you invested." By definition, you will hit the bottom 10 worst days, but still have a good return. I could care less if I hit the best of the worst days. I will take risk when it is rewarded, and avoid risk when it is punished. The only way to gaurantee you will miss the ten worst days is to be in cash for twenty years. Let me know how that works out for you. Quite nicely, thanks for asking. I missed 11/21/2008 and all the other biggest up days this year for the most part. Funny how many of them were concentrated in Oct and Nov. Hmmm. As for missing the month before and after the three best days, my crystal ball is broken. Can yours tell you in advance what months to be in, and what months to be out? I don't own a crystal ball. I do have the ability to recognize a market in a negative trend sometime before you are down 55%. Lucky I guess.[/quote] [/quote] Good luck to you, you're going to need it.[quote=now_indy][quote=Sam Houston]I love the “ten best days” piece. Of course your returns would be worse if you take out the best days. This is not rocket science. What this piece of mutual fund propaganda does not tell you is when the ten best days happened. This past year really makes this point. Bull markets are marked by low volatility. Bear markets are marked by high volatility. Through the end of 2007, 8 of the 10 best days in the market happened during defined bear markets. The other two happened during the tech boom. The piece tells you that if you just missed those days your returns would be lower, what it doesn’t tell you that if you missed the month before and after the ten best days (including those best days), your returns are increased substantially. It is far more important to avoid losses than to catch every little upswing in the market.
Luck has nothing to do with it. “Lucky” is just a label attached to others when they can do something you either can’t or won’t do. Turn off CNBC, look past your computer screen, and do what your clients are paying you to do. If you feel you are doing this, more power to you. But if you have the opinion that your way is the only way, that there is no way to improve your skill, then you have already lost the battle. This does not upset me in the least. I need as many “buy and hope” advisors as possible telling their clients the same regurgitated BS. It makes my job much easier.
It is not measured before hand. Think about it this way. Chart SPY and AGG. Normalize the prices and chart using % changes in value. Since price is accurately show supply and demand, do you think it is possible to see divergences in the two charts? I am not even saying one goes up while the other goes down, they may both be going down but at different rates. Now chart EAFE, EEM, Money Markets, DJIA, Stoxx, MSCI blah blah blah. Bull and bear markets feed on themselves. Bull markets end when every last person who is going to put in money has put it in. The supply of buyers has run out. Bear markets end when every last person who is going to get out is out. The supply of sellers is exhausted. Look at MF inflows and outflows to confirm. Record for inflows? Late summer of 07. Record of outflows? It was Oct 2000, just got broken in Dec 2008. You play the odds for your clients. I play the odds for my clients. We are just playing a different game. Supply and demand is measurable, and actionable. What I do is not right all the time. I do not need to be right all of the time. I just need to be right more than I am wrong.
Smart people (not me) got out of the market at 9200 because Lehman and AIG had failed, BAC and Citigroup were toppling and all they started hearing that their clients couldn’t get loans or buy cars. If you took your head out of the charts or stopped believing the smoke the wholesalers were blowing at us you could see that ‘this time it’s different.’ The day that Barney Frank went into a meeting with GWB and came out singing the same tune you knew the news was bad.
The last year pretty much blows up the whole ‘efficient markets’ theory. As advisors we need to get back to buying value and not getting caught up in bubbles. If you’re an index investor, you’re getting pulled along by the crowds, which means you’re an idiot. Just for the record, I would consider most managed funds to be index investments, too, since they are investing in the same stocks and following the same crowd.
Umm . . . if all our clients have to do is buy some ETF’s and Index Funds, what do they need us for?
Everyone’s a market timer. If you’re buying equities–or MF’s, or ETF’s–you believe they’re lower today than they will be in the future. But the idea that, knowing what you do now, you would have sat still while your clients’ accounts have gotten annihilated-- well, frankly, you’re either a liar or a fool.
And I’ll also say that if Roubini stayed FULLY invested during the course of all this–so is he. If someone tells you that in three days at 6:15 PM there will be a semi moving at 95 miles an hour drive past your house, and HE BELIEVES IT, then what could explain his going outside at 6:14:45 and pitching a lawn chair in the middle of the street?
That’s just silly. I’m no expert, but even I can see that.
First of all, nobody will tell you when the semi will be coming. Besides where's the gain in sitting in the middle of the street? You know the longer you sit there the more likely it is that you get run over. So why sit there at all? Maybe we should just all stay in cash forever and avoid the semi. It's a bad analogy and doesn't fit the scenario. Let's try a different one. How about poker. There's a saying in poker: "You can't win it if you ain't in it." It's pretty self-explanatory. Some players play aggressively. They usually either win big very quickly or lose big very quickly. Some players play conservatively. Their wins and losses come at a much slower rate. Generally, if you have a short time horizon, like in a poker tournament, you need to play aggressively in order to come out on top. If you're a cash game player and have all the time in the world, then you'll generally play much more conservatively to help ensure consistent wins. The problem for either scenario is...you NEVER know how the cards will play out until your money is on the line. When the cards piss all over you, it doesn't matter how you play you'll still lose (some more, some less). You just have to employ the best strategy for your specific situation. Of course, you COULD always get lucky.Roubini is an economist, a writer, a professor. He’s not an investor.
I could counter with Naseb Talem, who was invested entirely in treasuries and other hedging strategies, but again, that’s just as irrelevant. A doctor can tell you not to smoke while puffing on a Marlboro. It’s the advice that matters, not the actions. Roubini was right about calling the recession.