|
Sector Model
|
XLE
|
-3.53%
|
|
|
|
|
|
|
Full Model
|
Date
|
Return
|
Days
|
|
JOY
|
12/8/2014
|
-18.78%
|
164
|
|
SSYS
|
3/3/2015
|
-44.40%
|
79
|
|
PWR
|
3/9/2015
|
4.59%
|
73
|
|
BHE
|
3/31/2015
|
-1.39%
|
51
|
|
CBI
|
4/2/2015
|
20.16%
|
49
|
|
MTZ
|
4/9/2015
|
-7.14%
|
42
|
|
NE
|
5/7/2015
|
-3.98%
|
14
|
|
DRQ
|
5/15/2015
|
-1.12%
|
6
|
|
RES
|
5/19/2015
|
-2.49%
|
2
|
|
CRR
|
5/19/2015
|
-6.02%
|
2
|
|
|
|
|
|
(Since 5/31/2011)
|
|
|
|
|
S&P
|
Annualized
|
12.21%
|
|
|
Sector Model
|
Annualized
|
20.87%
|
|
|
Full Model
|
Annualized
|
19.03%
|
|
|
|
|
|
|
S&P
|
Total
|
58.03%
|
|
|
Sector Model
|
Total
|
112.37%
|
|
|
Full Model
|
Total
|
99.81%
|
|
|
|
|
|
|
Sector Model
|
Advantage
|
8.67%
|
|
|
Full Model
|
Advantage
|
6.82%
|
|
|
|
|
|
|
Previous
|
2015
|
|
|
S&P
|
53.06%
|
3.25%
|
|
|
Sector Model
|
122.60%
|
-4.59%
|
|
|
Full Model
|
101.13%
|
-0.66%
|
|
I won’t be able to do an update this weekend, so a quick
note on performance statistics, benchmark, and mean reversion.
A full look at the entire 1998-2010 back-test, compared to
2011-2015 live performance shows two major deviations from the long term benchmark:
The low deviation from benchmark (shown here as the
exponential trend-line) was back in first quarter of 2009.
The high deviation from benchmark was in the first quarter
of this year.
The outperformance of last year should create a drag for
this year, and in fact the rolling 12 month performance of the model, the
market, and benchmark show that the model is far closer to the market than
benchmark:
|
Rolling S&P
|
13.51%
|
|
Rolling Sector
|
14.57%
|
|
Benchmark
|
24.39%
|
Still outperforming the market, but barely.
What gives?
Mean reversion.
Kahneman writes in his book Thinking,
Fast and Slow about a training session he had with the Israeli air force.
He pointed out that people responded better to praise than punishment, when an
officer contradicted him and explained that when he criticized bad performance
from pilots he got better performance, and when he praised good performance he
got worse performance.
Kahneman also notes the so called Sports Illustrated curse
where an athlete who makes the cover one year will have a bad year the
following one.
It’s a perverse experience to find that we get bad results
from those we praise and good results from those we punish.
The reality is that we all underestimate the randomness of
life: half of the time we are above our average and half of the time we are
below our average. The key isn’t to focus on how we compare to our average, but
instead how our average compares to other averages.
Take a look at our performance chart above. For the full
time period we are above our average trend-line, which means that we run the
risk of under-performing in the short term.
The question isn’t what to do in the short term.
The question is whether our average is better than the
market’s average.
Another perverse effect of human response to mean reversion
is that we tend to get excited about the market just when it is ready to tank,
and we bail out of the market just when it is ready to rally. This again has to
do with our mental blindness to mean reversion.
Hedge Funds are especially susceptible to this effect, and
respond by closing their funds to new clients when the market gets over heated.
Hedge funds take a percentage of the profit, but also take a percentage of the
loss. It is possible for a hedge fund to out-perform the market every single
year and still go bankrupt if they get over loaded with clients at tops and
under loaded at bottoms. Their profit will be from a smaller client base and
their loss from a larger client base: making money for their clients who ride
it out, but bankrupting the hedge fund owners.
Currently the Sector Model is above benchmark by 0.22
standard deviations. If it were 2 standard deviations above benchmark, I’d get
concerned. If it were 2 standard
deviations below, I’d get excited. Now it’s… eh… slightly high, but nothing to
panic about.
After the last two trades the Full Model owns 4 oilfield
stocks and 1 coal stock. The Sector Model is in energy.
I’m in oil up to my eyeballs.
Mean reversion in oil would be a very good thing right now J.
Tim
