Who Makes More Money?

The final aim of investing, is simple, make money. So who really make the most money?

For Warren Buffet the most famous fundamental investor, a quote from his Annual Letter from 2009.

Over the last 44 years (that is, since present management took over) book value has grown from $19 to $70,530, a rate of 20.3% compounded annually.

Then lets move on to one of the most successful hedge funds in recent times. Renaissance Technologies  which has a knack of trading counter intuitive relationships .  They do not give a damn about whether you can understand financial theory, just whether you can exploit any kind of anomaly.

Renaissance employeed thinkers who had spent the bulk of their career in non-economic analytical fields, like mathematics, physics, and astronomy. Once at Renaissance, those thinkers would build data-processing models without any preconceptions about what should cause what, when. The firm’s advantage is in its willingness to trade what doesn’t necessarily make sense.

Notably

For the 11 years ending in December 1999, Renaissance’s Medallion Fund cumulative returns were 2,478.6 percent. Among all offshore funds over that same period, according to the database run by hedge fund observer Antoine Bernheim, the next-best performer was George SorosQuantum Fund, with a 1,710.1 percent return. A measurement of the risk (e.g., beta, volatility, or leverage figures) which accompanied its high annual returns is not publicly available. In 2009 the Medallion fund topped the list of the most profitable hedge funds with profits of over $1 billion.

Meanwhile a  popular  technical analysis blogger carl futia has the returns as follows below, You can follow his trades posted on his blog or follow his monthly trading records.

  • Year 2008 percentage gain: 86%
  • Year 2009 percentage gain: 89%
  • Year 2010 Q1 percentage gain: 26%

Now the ultimate question is how should you trade then? Well its your choice and you should make use of your own strengths. Do not be pigeonholed by any one form of trading or investing. As Falkenblog points out, you do not get higher returns from higher risk, we all know how the high notes which were backed by lehman turned out.  Take for instance a septic tank cleaner, takes more health risks than lets say a computer engineer. But a computer engineer has more salary, that because he has comparative advantage and a particular skill to be used in the job market. Similarly in investing you need to make use of any comparative advantage. Notably,  Abnormal Returns also recently pointed out the merits of being an retail individual investors and these are the edges we should be looking out for when trading or investing.

Individual investors have some distinct advantages over institutions.  Most institutions need to be acutely aware of the indices against which they benchmark.  Individuals, on the other hand, are beholden only to themselves.  The performance of the S&P 500, for example, should be but a data point to an individual.  Many institutions need days to enter (and exit) their equity positions so as not to move a stock’s price.  An individual can do this (usually) in seconds.  Maybe most importantly individuals don’t have clients breathing down their necks.  As an individual investor you are your own client.

China’s Lip Service

Headline news:  China wants to give more flexibility to Yuan. Seems great and all prissy doesn’t it, finally the Chinese are giving in to all the pressure that the methods of keeping their currency low for the sake of cheap exports is coming to an end.  The official report is here.  This statement comes amid pressure from the G20 to appreciate the Yuan. Elsehwere  an ANALYST from SocGen said that stocks should go higher based on the statements.

However if you took a closer look like Yves from naked capitalism did, you would probably have a better perspective and understand why this all just political lip service at play.  Below are the salient points he made

Read more of this post

Curation is Important

Business Insider’s, Steve Rosenbaum wrote about Curation being King due to the fact that there was a flood of news all around from facebook, tweeter, Mainstream Newfeeds, bloggers. Almost everyone and everybody is creating content. Hence managing and sieving the bset content is now a premium.  Although I would not go so far as to say as curation is king, I would say a healthy blend of both would be important.  I have also profiled the best Curator of the Web currently here.  For more details between the different types of contents you can refer here.

Notably I recently came across an interesting resource curation platform. Basically it was used during the Haiti earthquake to aggregate all forms of information ranging from SMS, tweets, Facebooks, blogs, wired news.  For each source of news there are various veracity scores (trustworthiness of scores). The higher the score the more likely the news generated would be used.  Ways of tracking veracity included, type of source, whether content from this source matches the other sources, the history of posts from this source and others. For more details refer to the video, here is the link to his curation platform.

Maybe this could be very useful in tracking the markets when there is widespread panic and possibly picking out turning points.  In addition, there are already quantitative algos hunting out key words in online and news  text and exploiting them to trade.

Notably, on the flipside of this, NewsCorp owned by Rupert Murdoch (aka big daddy of WSJ) is now making attempts to create more paywalls for his news content as the viability of the advertisement business through online content is going no where.  However, I think that this might be difficult to achieve especially with the onset of free content on the net.  My sentiments are also reflected in the video below:

The Two points of discretion for a quant trader

Came across a couple of interesting articles about quantitative traders recently. One of the most intriuging ones was one about an editor diving into the depths of the High Frequency Trading realm.  The article does well in shedding some light over the entire industry of HFT.  A salient point that i picked out below was this:

Narang lifted his profile on May 6 when he revealed to the Wall Street Journal that his firm turned off its high frequency trading computers during the flash crash. Tradeworx wasn’t the only one to do so. Kansas City–based Tradebot, started by BATS founder David Cummings, also stopped trading. Tradebot is one of the world’s two largest high frequency firms, reportedly trading as many as 1 billion shares a day in U.S. equities. Only Chicago-based Getco is thought to be bigger. Although Getco won’t comment on its daily trading volume, a spokeswoman for the firm did tell me that it continued to provide a two-sided market on all the electronic exchanges during the flash crash.

For all the modeling in the world, there are events whereby you know that your system will not perform resilient in. The choice is then to choose whether to turn it off or not. Other times an old model does not work anymore, as evidently shown by the equity curve of the system. The choice then is to whether to turn it off forever or make changes.

The next point of discretion for a systems trader would be the underlying logic behind it:

At Renaissance, models had to meet four principles, says Mr Frey. These were (and maybe still are): simplicity – “don’t make it more complicated than it needs to be”; commonality – “make it as broad as possible”; stability – “models you have to readjust constantly probably aren’t as good as ones that stand the test of time”; and rationality – “it can’t just be statistically valid”. You have to employ reason to identify a statistically significant but spurious pattern.


You Analyze, I Analyze, We Analyze, But we disagree (Part 3)

This will be last part of my series on analysis and I will be touching on noteworthy ideas that i wish to investigate further through this blog and also on my free time. But before I start I want to make some minor additions to my prior posts. Firstly, I would want to add that qualitative analysis is also actually a model, it just that its a mental model and hence like any other model  cannot be all encompassing.  In addition another article form the NYtimes once again highlights that even irrelevant information can effect our decision making. Now back to noteworthy ideas.

Firstly a study on momentum.  Momentum basically states that strong stocks will stay strong and continue higher. AR has also summed up strength of momentum strategy how to mix it with other strategies.  Meanwhile CSS analytics has also provided a nice starting point on how to think and model momentum otherwise also known as relative strength.  CXO advisory adds to this by showing testing out the different variables of momentum here, here and here.  But above all we have a great blog really focusing on systematic relative strength. Read more of this post

You Analyze, I Analyze, We Analyze. But we disagree (Part 2)

Having discussed about the Economists and Analysts and their frailties, I would like to discuss how we can approach analysis. But before i get started I would like to highlight a great article from AR, it basically sums up the lack of transparency of punditry. They hence made a suggestion.

Given these two eternal truths, pundit scorecards are a necessary feature that would allow viewers to help judge the credibility of pundits.  However scorecards are not sufficient.  Until we are allowed to, as they say in math class, see the work, we will be somewhat at a loss when those predictions turn out true or false.

Hence do not accept anybody’s forecast or analysis unless they show you their results and most importantly their underlying hypothesis behind their ideas.  Although it is unlikely anyone will give you their full details but knowing its underlying philosophy can help one to judge whether its feasible or not.  Its also a good idea to track what they are saying. For instance at CXO advisory they track, investing gurus and how they are performing based on public available information. Read more of this post

You Analyze, I Analyze, We Analyze. And we disagree.

In messy world of finance, every single individual tries to provide their two cents worth. There many groups of people ranging from, economists, analysts, news commentators, astrologers, professors and an ever growing group of econbloggers (finance related bloggers).  In addition, there also qualitative and quantitative ways to form arguments. Lets start with two of the most common groups of people who will make their judgments on the markets, economists and analysts.

Firstly analysts, these groups of people usual belong to brokerage firms, investment banks and are investment related entities. As seen from the image below from Mckinsey,

Optimism Bias of Analysts Read more of this post