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Its Good To Be Number One

Whilst I was recently in Toronto I noted that there was a degree of hand wringing about the current state of the property market in Canada and the resultant increase in household debt that had accompanied this. Curious about where we stood I looked up the league table of household debt as a function of GDP and generated the following –

gdp

As you can see the Canucks have nothing to worry about. When it comes to investing vast sums of borrowed money into a completely non productive asset class that robs the rest of the economy of vital investment funds we are clearly the best……

Its good to be number one…..

 

Starting Dates

When I was banging on about EFT’s last week I made the point in passing that when you are looking at trading systems that the start date is everything and it is the point at which most of the fudging of results occurs. As an example I took a hypothetical passive system and began to change the starting date of the system to highlight this problem. The chart below shows a series of start dates counting down from ten years ago to today. So if I had started this system and traded it for ten years its annualised return would be 3.6%. Whereas if I had started the system seven years ago my annualised return would only be 1.1%.ReturnsAs you can see changing the start date changes the annualised return that is generated by the system. The worst returns have occurred in recent times with the best being five years ago. It doesn’t take much to work out which you might include in your marketing material if you wanted to cast yourself in the best light. This problem can occur on even shorter time frames such as moving the start date from one month to another.

The problem is also has nuance that catches the unwary; annualised returns are simply a nonsense measure when viewed in isolation because of problems with the construction of averages. For example imagine you invest $100,000 in a fund that in the first year generates a 100% return and then in the second year losses 50%. How much have you made, if you were to a look at the yearly average return you would calculate that 100%-50%/2 = 25% and the fund manager could rightly claim to make this average figure. However, your true return which is the only one that matters is zero.

True returns are given by an equity curve with as much data as possible – this gives you some idea of the trajectory of an account under a variety of conditions. This is then supplemented by looking at the drawdown curve of the system to give you an idea of how rough the ride. So for our hypothetical system above if I take the start date of 10 years ago I get an annualised return of 3.6% but a maximum drawdown of 44.5% because the system is caught by the GFC and being passive it takes no defensive action. Yet if I take our preferred kick off date of five years ago I get a drawdown of only 20.8%. So my system at this point has nearly twice the annualised return and half the drawdown.  Yet the ten year figure is the more complete since it also includes a global shock so it shows the true performance of the system whilst under pressure.

This leaves us with the problem of how to deal with this in a real world situation where this data might not be forth coming. Fortunately we can reduce this problem to a simple rule. If a system does not immediately show a drawdown or has a smooth equity curve something is not right.

The Biggest Game In Town

oil-market-sizeSource – Visual Capitalist

Honda NSX vs McLaren 570S

The Weird Economics Of Ikea

Ikea is a behemoth. The home furnishing company uses 1 percent of the planet’s lumber, it says, and the 530 million cubic feet of wood used to make Ikea furniture each year pulls with its own kind of twisted gravity. For many, a sojourn to the enormous blue-and-yellow store winds up defining the space in which they sit, cook, eat and sleep.

All that wood is turned into furniture that tries to bring a spare, modern aesthetic to the masses. “We’re talking about democratizing design,” Marty Marston, a product public relations manager at Ikea, told me.

The furniture is also sold according to some unique economics. In many cases, Ikea’s famously affordable pieces get dramatically cheaper year after year. In others, prices creep up. In some cases, products disappear entirely. The result is an ever-evolving, survival-of-the-fittest catalog that wields an enormous amount of influence over residential interiors.

As we tour Ikea’s unique economics, you may want to have a seat in the company’s Poäng chair, 1.5 million of which are sold each year. Ikea’s been hawking them around the world for the past four decades, taking over living room square footage and modern design sensibilities with just a hex wrench and some wordless instructions.

More here – FiveThirtyEight

PS: Just for the record I f@#4en hate Ikea, I hate their furniture and I particularly hate their stores.

Another Day Another ETF System

It does seem as if every time I open my junk mail folder I get another invocation to partake of yet another magic trading system. I should note that this sort of thing has been around forever, the only thing that changes is the vehicle  which alters in order to capitalise on whatever topic is hot. Or whatever is perceived to be magical. With the need for a magic system foremost in my mind I wondered how long it would take me to build a magic system that could trade the major Local ETF – STW.

Lets just say the kettle hadn’t had time to boil by the time I was finished. The results of the system are shown below.

STW

The rules are simple – entry is a new 52 week high and the exit is a new 52 week low. The figures above represent buying and selling on the opening of the week immediately following the generation of the signal. You will note that I have been profoundly lazy since I have not included any money management in the analysis. These are effectively block trades – you buy a chunk on the signal and then wait for a signal in the opposite direction. If I get some free time I might be a little bit more sophisticated in my analysis but I just wanted a proof of concept to see what sort of results would be generated by being very blunt and letting the market do the work. But you will notice there is nothing magical nor particular sophisticated about this. As I have said before any robust trend following method will work with any instrument.

 

 

How To Get Rich

In Guns, Germs, and Steel I asked why history has unfolded differently over the last 13,000 years in Eurasia, in the Americas, in sub-Saharan Africa, and in Aboriginal Australia, with the result that within the last 500 years Europeans were the ones who conquered Native Americans and Aboriginal Australians and sub-Saharan Africans, rather than vice versa.

Most of that book, was concerned with comparing the peoples of different continents, but I knew that I couldn’t publish a book comparing the histories of different continents and considering Eurasia as a unit without saying something about the fascinating problem of the differences of history within Eurasia. Why, within Eurasia, was it Europeans who conquered the world and colonized other people, rather than the Chinese or the people of India or the Middle East? I devoted seven pages to that subject at the end of Guns, Germs, and Steel, and I think I arrived at the correct solution. Nevertheless, since the publication of Guns, Germs, and Steel, I’ve received a lot of feedback, and the most interesting feedback has been about the implications of that comparative analysis of the histories of China, Europe, India, and the Middle East.

In particular, in addition to the review of my book by Bill Gates, I’ve received a lot of correspondence from economists and business people, who pointed out to me possible parallels between the histories of entire human societies and histories of smaller groups. This correspondence from economists and business people has to do with the following big question: what is the best way to organize human groups and human organizations and businesses so as to maximize productivity, creativity, innovation, and wealth? Should your human group have a centralized direction, in the extreme having a dictator, or should there be diffuse or even anarchical organization? Should your collection of people be organized into a single group, or broken off into a number of groups, or broken off into a lot of groups? Should you maintain open communication between your groups, or erect walls between them, with groups working more secretly? Should you erect protectionist tariff walls against the outside, or should you expose your business or government to free competition?

More here – Edge

This is a long form read and is good for  a Sunday morning but it is worth taking the time.

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