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Showing posts with label mean reversion. Show all posts
Showing posts with label mean reversion. Show all posts
Monday, August 11, 2014
Saturday, October 26, 2013
Implications of Momentum Investing
Trend following, aka momentum investing is probably the weakest part of my investing DNA. I am a natural contrarian with a strong value tilt. I have learned the value of growth and the importance of sentiment and momentum, but they are still both hard for me to fully commit to.
Over the past 10-15 years research has vindicated and validated trend following strategies as a way to add alpha. Consequently, and in conjunction with the increasingly quantitative/algo driven basis of the market, I believe trends, predicated upon more momentum investors and trend followers, will be longer and of greater magnitude that previously. The nature of momentum is that it feeds upon itself. It is self perpetuating, self replicating. There are three major implications. First, you need to incorporate momentum into your investment strategy. Second, a momentum based market leaves opportunity for fundamental based value investors. Because the trend goes longer and for a greater duration than fundamental value would indicate, it creates an opportunity for a fundamental based value perspective. Third, turns in the market or changes in trend will trip up a lot more investors. Trend followers, quant or qual, always get burnt by the turns in the market. The length and magnitude of trends will be greater on boths sides of a trend. Significant alpha will come from picking a change in trend. Incorporating a market reversal component into an investment process (albeit incredibly difficult) will be very rewarding.
The old adage, go with the flow will be the dominant characteristic of future markets.
Over the past 10-15 years research has vindicated and validated trend following strategies as a way to add alpha. Consequently, and in conjunction with the increasingly quantitative/algo driven basis of the market, I believe trends, predicated upon more momentum investors and trend followers, will be longer and of greater magnitude that previously. The nature of momentum is that it feeds upon itself. It is self perpetuating, self replicating. There are three major implications. First, you need to incorporate momentum into your investment strategy. Second, a momentum based market leaves opportunity for fundamental based value investors. Because the trend goes longer and for a greater duration than fundamental value would indicate, it creates an opportunity for a fundamental based value perspective. Third, turns in the market or changes in trend will trip up a lot more investors. Trend followers, quant or qual, always get burnt by the turns in the market. The length and magnitude of trends will be greater on boths sides of a trend. Significant alpha will come from picking a change in trend. Incorporating a market reversal component into an investment process (albeit incredibly difficult) will be very rewarding.
The old adage, go with the flow will be the dominant characteristic of future markets.
Monday, October 7, 2013
Why jumping on the band wagon is so tough for me
I am a natural contrarian.
I think mean reversion is etched into my DNA.
I also have a bad case of regret embedded within my psyche.
Consequently, jumping on the band wagon aka as trend following or momentum investing really cuts against the grain for me.
I am happy buying when others are selling and then riding it down, and I am happy selling when others are buying and then seeing it continue higher. But I have a hard time bringing myself to buy after the horse has bolted (even if I can see clear air ahead) and selling after a holding has been pinged. The reason is because the regret of jumping on board and being wrong, ie. having the stock go back down, or selling a loser only to see it rise, weighs heavily upon me.
I've got to cure my momentum reluctance. It is not constructive.
I think mean reversion is etched into my DNA.
I also have a bad case of regret embedded within my psyche.
Consequently, jumping on the band wagon aka as trend following or momentum investing really cuts against the grain for me.
I am happy buying when others are selling and then riding it down, and I am happy selling when others are buying and then seeing it continue higher. But I have a hard time bringing myself to buy after the horse has bolted (even if I can see clear air ahead) and selling after a holding has been pinged. The reason is because the regret of jumping on board and being wrong, ie. having the stock go back down, or selling a loser only to see it rise, weighs heavily upon me.
I've got to cure my momentum reluctance. It is not constructive.
Friday, April 26, 2013
Making Heads 'n Tails of GDP Components
Refer: https://twitter.com/cullenroche/status/327874531551232000/photo/1
The interesting thing is that it has been a fairly mixed bag quarter to quarter.
If I had to eyeball trends, I'd say that Gross Private Investment has been the dominant factor lifting us out of the 2009 pit, with nice support from Personal Consumption. Strong mean reversion.
Govt is now dragging on the economy and I would expect that to continue into the future, but normalcy is returning.
The interesting thing is that it has been a fairly mixed bag quarter to quarter.
If I had to eyeball trends, I'd say that Gross Private Investment has been the dominant factor lifting us out of the 2009 pit, with nice support from Personal Consumption. Strong mean reversion.
Govt is now dragging on the economy and I would expect that to continue into the future, but normalcy is returning.
Wednesday, March 3, 2010
Let the Good Times Roll
Sort of as a contra-note to the previous post*, I want to remind myself of recovery mathematics.
The economy is bottoming and beginning the process of healing.
There are two points to make. First, the damage inflicted by the severity of the recession means it will take a long time to regain previous economic highs. Second, the YOY and MOM change numbers will look real good going forward.
The great thing (if you can call it that) is that asset prices were re-set when the economy imploded. As such, expected returns going forward will probably mirror the rate and extent of recovery.
In an environment where systemic risk factors and secular headwinds are in play, however, it is hard to see equity markets getting too exuberant, even as positive economic numbers come in. There again, that might be ascribing a level of rationality to the market that it does not warrant.
Depending upon how you look at it, it will be both a lost decade and a growth decade.
*The post was really about risk factors. Always got to keep an eye on the downside.
The economy is bottoming and beginning the process of healing.
There are two points to make. First, the damage inflicted by the severity of the recession means it will take a long time to regain previous economic highs. Second, the YOY and MOM change numbers will look real good going forward.
The great thing (if you can call it that) is that asset prices were re-set when the economy imploded. As such, expected returns going forward will probably mirror the rate and extent of recovery.
In an environment where systemic risk factors and secular headwinds are in play, however, it is hard to see equity markets getting too exuberant, even as positive economic numbers come in. There again, that might be ascribing a level of rationality to the market that it does not warrant.
Depending upon how you look at it, it will be both a lost decade and a growth decade.
*The post was really about risk factors. Always got to keep an eye on the downside.
Monday, June 1, 2009
Mean Reversion Man
Mean reversion man says sell that which is overvalued, and buy that which is undervalued.
Thanks mean reversion man, you're a great help!
What is overvalued and what is undervalued? I dunno. But to garner a little perspective on that issue, I analogized that just as the global economy had significant structural imbalances, so to the domestic economy has probably got a few sectoral imbalances. We heard from Jim Chanos last week that he thought tertiary education, healthcare, defense and financial services had grown at growth rates greater than what was sustainable and so they were probably candidates for some sort of mean reversion (predicated upon govt intervention of some sort).
That got me curious. Does that thesis play out in the national accounts? The answer is yes, no and dunno.
I took a mosy on over to the US Bureau of Economic Analysis and dialed up the numbers for GDP by Industry from 1987-2007. I compared the current proportion of the economy for each industry with its long term average and sort to identify anomalies by seeing which sectors were outside of their one and two standard deviation ranges.
Interestingly, Mining was running 2 std dev above its long term average, with much of that change coming in the last year of the data. Perhaps not surprisingly, Petroleum & Coal is also running 2 std dev higher than long term average, as are Information & Data Processing and Management of Companies & Enterprises. I can see a little mean reversion going on in some of those sectors.
On the flip side, Agriculture, Forestry, Fishing & Hunting is running 2 std dev below its long term avg. contribution to the economy, along with Electrical Equipment, Appliances & Components and Retail Trade.*
And yes, education, healthcare, and financial services were all running one standard deviation greater than their long term average contribution to the economy. Defense was lumped into the govt spending category which wasn't, as of the date of the data, much different from its historic average.
* That one surprised me. I'm not sure of the definition of Retail Trade but I'll have to look it up.
Thanks mean reversion man, you're a great help!
What is overvalued and what is undervalued? I dunno. But to garner a little perspective on that issue, I analogized that just as the global economy had significant structural imbalances, so to the domestic economy has probably got a few sectoral imbalances. We heard from Jim Chanos last week that he thought tertiary education, healthcare, defense and financial services had grown at growth rates greater than what was sustainable and so they were probably candidates for some sort of mean reversion (predicated upon govt intervention of some sort).
That got me curious. Does that thesis play out in the national accounts? The answer is yes, no and dunno.
I took a mosy on over to the US Bureau of Economic Analysis and dialed up the numbers for GDP by Industry from 1987-2007. I compared the current proportion of the economy for each industry with its long term average and sort to identify anomalies by seeing which sectors were outside of their one and two standard deviation ranges.
Interestingly, Mining was running 2 std dev above its long term average, with much of that change coming in the last year of the data. Perhaps not surprisingly, Petroleum & Coal is also running 2 std dev higher than long term average, as are Information & Data Processing and Management of Companies & Enterprises. I can see a little mean reversion going on in some of those sectors.
On the flip side, Agriculture, Forestry, Fishing & Hunting is running 2 std dev below its long term avg. contribution to the economy, along with Electrical Equipment, Appliances & Components and Retail Trade.*
And yes, education, healthcare, and financial services were all running one standard deviation greater than their long term average contribution to the economy. Defense was lumped into the govt spending category which wasn't, as of the date of the data, much different from its historic average.
* That one surprised me. I'm not sure of the definition of Retail Trade but I'll have to look it up.
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