B the end of last year, anyone who had been paying even passing attention to the news headlines was highly likely to conclude that everything was terrible, and that the only attitude that made sense was one of profound pessimism – tempered, perhaps, by cynical humour, on the principle that if the world is going to hell in a handbasket, one may as well try to enjoy the ride. Naturally, Brexit and the election of Donald Trump loomed largest for many. But you didn’t need to be a remainer or a critic of Trump’s to feel depressed by the carnage in Syria; by the deaths of thousands of migrants in the Mediterranean; by North Korean missile tests, the spread of the zika virus, or terror attacks in Nice, Belgium, Florida, Pakistan and elsewhere – nor by the spectre of catastrophic climate change, lurking behind everything else. (And all that’s before even considering the string of deaths of beloved celebrities that seemed like a calculated attempt, on 2016’s part, to rub salt in the wound: in the space of a few months, David Bowie, Leonard Cohen, Prince, Muhammad Ali, Carrie Fisher and George Michael, to name only a handful, were all gone.) And few of the headlines so far in 2017 – Grenfell tower, the Manchester and London attacks, Brexit chaos, and 24/7 Trump – provide any reason to take a sunnier view.
Since the 2008 financial crisis, colleges and universities have faced increased pressure to identify essential disciplines, and cut the rest. In 2009, Washington State University announced it would eliminate the department of theatre and dance, the department of community and rural sociology, and the German major – the same year that the University of Louisiana at Lafayette ended its philosophy major. In 2012, Emory University in Atlanta did away with the visual arts department and its journalism programme. The cutbacks aren’t restricted to the humanities: in 2011, the state of Texas announced it would eliminate nearly half of its public undergraduate physics programmes. Even when there’s no downsizing, faculty salaries have been frozen and departmental budgets have shrunk.
But despite the funding crunch, it’s a bull market for academic economists. According to a 2015 sociological study in the Journal of Economic Perspectives, the median salary of economics teachers in 2012 increased to $103,000 – nearly $30,000 more than sociologists. For the top 10 per cent of economists, that figure jumps to $160,000, higher than the next most lucrative academic discipline – engineering. These figures, stress the study’s authors, do not include other sources of income such as consulting fees for banks and hedge funds, which, as many learned from the documentary Inside Job (2010), are often substantial. (Ben Bernanke, a former academic economist and ex-chairman of the Federal Reserve, earns $200,000-$400,000 for a single appearance.)
Unlike engineers and chemists, economists cannot point to concrete objects – cell phones, plastic – to justify the high valuation of their discipline. Nor, in the case of financial economics and macroeconomics, can they point to the predictive power of their theories. Hedge funds employ cutting-edge economists who command princely fees, but routinely underperform index funds. Eight years ago, Warren Buffet made a 10-year, $1 million bet that a portfolio of hedge funds would lose to the S&P 500, and it looks like he’s going to collect. In 1998, a fund that boasted two Nobel Laureates as advisors collapsed, nearly causing a global financial crisis.
The failure of the field to predict the 2008 crisis has also been well-documented. In 2003, for example, only five years before the Great Recession, the Nobel Laureate Robert E Lucas Jr told the American Economic Association that ‘macroeconomics […] has succeeded: its central problem of depression prevention has been solved’. Short-term predictions fair little better – in April 2014, for instance, a survey of 67 economists yielded 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot.
Nonetheless, surveys indicate that economists see their discipline as ‘the most scientific of the social sciences’. What is the basis of this collective faith, shared by universities, presidents and billionaires? Shouldn’t successful and powerful people be the first to spot the exaggerated worth of a discipline, and the least likely to pay for it?
More here – Aeon
AQR recently updated its paper A Century of Evidence on Trend Following and whilst the updated hasn’t changed the basic conclusion of earlier versions it is worth unpacking some of the main point of the paper.
The paper in its introduction makes an immensely important point that is lost on most –
As an investment style, trend following has existed for a very long time. Some 200 years ago, the classical economist David Ricardo’s imperative to “cut short your losses” and “let your profits run on” suggests an attention to trends. A century later, the legendary trader Jesse Livermore stated explicitly that the “big money was not in the individual fluctuations but in … sizing up the entire market and its trend.”
The thing I always find fascinating about trading, markets and people is that everyone is trying to reinvent the wheel. I understand this compulsion after all a new wheel sells but the basic technology of trend following and trading in general is as seen above centuries old. Yet these simple ideas somehow go by the wayside. Granted our own psychology gets in the way of following Ricardo’s simple missive of letting our profits run and cutting our losses short as we find being in the action more compelling than actually trading correctly. But even professionals have trouble following this rule as evidenced by the number of institutions who hold stocks as they grind their way into the ground.
In assembling the material for this paper AQR looked at the monthly returns for some 67 markets which were made up of four major asset classes – 29 commodities, 11 equity indices, 15 bond markets and 12 currency pairs. Which is no mean feat when you are going back a century. The results of this analysis can be summed up in few charts. To test the notion of trend following they adopted a simple strategy consisting of a 1- month, 3-month, and 12-month momentum strategy for each market. In this instance momentum does not refer to an indicator but rather price movement. A long position was taken if the pat return over the look back period was positive, conversely a short position was taken if the return over the look back period was negative.
It’s a simple if it’s going up buy it, if it’s going down sell it strategy.
Position sizing was volatility based and the portfolios were rescaled monthly to make certain that the portfolio hit an annualised volatility target of 10%. Fees and charges were included in the testing.
Take home points
Trend following was profitable in every decade since 1880 as shown in the table below.
Trend following beats traditional 60/40 portfolios. The chart below looks at drawdowns during periods of financial stress. As can be seen trend following does very well during these periods. The authors posit that this occurs because of the simple ability of trend following to point themselves in the direction of the prevailing trend as dictated by Livermore’s dictum of deciding what the overall trend is.
Trend following produces outsized gains when markets are moving. In developing a trading system traders often simply look at the overall return of the system and if it is positive then they are happy. However, of equal importance is how those returns are derived. It has been my experience that the majority of returns are generated in a cluster of individual returns, that is the entire portfolio doesn’t do well but rather pockets of the portfolio do extremely well and drag the average up. In trading you want a strategy that produces outliers when the opportunity exists – you have to be a pig when the opportunity to be a pig presents itself.
The chart above illustrates this phenomena – the chart looks a little complex but it is only measuring two things. The performance of the US stock market on the horizontal axis and the performance of the momentum strategy on the vertical axis. The green line curving a path through the dots is known as a smile and it shows that trend following produces its best returns when markets are moving. This harks back to the earlier point of being able to take advantage of market moves when they occur.
Trading is a simple profession since it can be summed up in three ideas. If it is trending up over the time frame you are trading you buy it.If it trending down over the time frame you are trading you sell it. Dont bet the farm. It is hardly rocket science yet despite this our very nature more often than not defeats us despite the evidence that it shouldn’t.
….The theory of cognitive dissonance—the extreme discomfort of simultaneously holding two thoughts that are in conflict—was developed by the social psychologist Leon Festinger in the 1950s. In a famous study, Festinger and his colleagues embedded themselves with a doomsday prophet named Dorothy Martin and her cult of followers who believed that spacemen called the Guardians were coming to collect them in flying saucers, to save them from a coming flood. Needless to say, no spacemen (and no flood) ever came, but Martin just kept revising her predictions. Sure, the spacemen didn’t show up today, but they were sure to come tomorrow, and so on. The researchers watched with fascination as the believers kept on believing, despite all the evidence that they were wrong.
“A man with a conviction is a hard man to change,” Festinger, Henry Riecken, and Stanley Schacter wrote in When Prophecy Fails, their 1957 book about this study. “Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point … Suppose that he is presented with evidence, unequivocal and undeniable evidence, that his belief is wrong: what will happen? The individual will frequently emerge, not only unshaken, but even more convinced of the truth of his beliefs than ever before.”
More here – The Atlantic
In the past few decades, the fortunate among us have recognised the hazards of living with an overabundance of food (obesity, diabetes) and have started to change our diets. But most of us do not yet understand that news is to the mind what sugar is to the body. News is easy to digest. The media feeds us small bites of trivial matter, tidbits that don’t really concern our lives and don’t require thinking. That’s why we experience almost no saturation. Unlike reading books and long magazine articles (which require thinking), we can swallow limitless quantities of news flashes, which are bright-coloured candies for the mind. Today, we have reached the same point in relation to information that we faced 20 years ago in regard to food. We are beginning to recognise how toxic news can be.
More here – The Guardian
There’s an academic I know — very well respected — who especially values one of his collaborators. This particular colleague isn’t invaluable because of his creativity or intellect, says my professor friend, but because “he is willing to tell me when I’m wrong, and that’s rare”. It is indeed rare. Perhaps even rarer is the practice of seeking out colleagues because they give frank criticism.
I certainly don’t enjoy being told that I’m wrong. And it seems that I’m not alone. A recently published working paper from Paul Green and Francesca Gino of Harvard, and Bradley Staats of the University of North Carolina, caught people in the act of avoiding criticism. The particular kind of criticism that interested the researchers was where I think I’m doing a good job, and then you tell me that I’m not. (In the jargon, this is “disconfirmatory feedback”.)
Green, Gino and Staats looked at data from an internal peer feedback process in a medium-sized company over several years. They were able to show that when disconfirmatory feedback arrived, workers would then avoid contact with the people who had given them the unwelcome comments. This is the exact opposite of my professor friend’s behaviour — but, I think, a much more typical response. We don’t like it when people tell us that we’re failing.
More here – Tim Harford
Napoleon Hill is the most famous conman you’ve probably never heard of. Born into poverty in rural Virginia at the end of the 19th century, Hill went on to write one of the most successful self-help books of the 20th century: Think and Grow Rich. In fact, he helped invent the genre. But it’s the untold story of Hill’s fraudulent business practices, tawdry sex life, and membership in a New York cult that makes him so fascinating.
That cult would become infamous in the late 1930s for trying to raise an “immortal baby.” But even those who know the story of Immortal Baby Jean may not know that the cult was inspired by Hill’s teachings, practically using his most famous work as their holy text. Don’t worry, the whole story of Napoleon Hill only gets weirder from there.
Modern readers are probably familiar with the 2006 sensation The Secret, but the concepts in that book were essentially plagiarized from Napoleon Hill’s 1937 classic Think and Grow Rich, which has reportedly sold over 15 million copies to date. The big idea in both: The material universe is governed quite directly by our thoughts. If you simply visualize what you want out of life, those things and more will be delivered to you. Especially if those things involve money.
The past few decades have been a profitable era for all sorts of self-help and business success books. Napoleon Hill blazed a trail for an entire industry. But Napoleon’s early work is seen as “the source” when people get deep into self-help and business success literature. Hill’s Think and Grow Rich is passed around in certain business and real estate circles like some kind of ancient text. In fact, when The Secret emerged on the scene in the mid-2000s, countless entrepreneurial writers would pen their own books, pointing to the works of Napoleon Hill as the true basis for what The Secret called the Law of Attraction.
You can see the influence of Hill in everything from the success sermons of Tony Robbins to the crooked business dealings of Trump University. In fact, you can draw a direct line to Donald Trump’s way of thinking through Norman Vincent Peale, an ardent follower of Napoleon Hill. Reverend Peale, author of the 1952 book The Power of Positive Thinking, was Donald Trump’s pastor as a child.
“You always, when the service was over, you said, ‘I’d have sat there for another hour,’” said Trump of Peale. “There aren’t too many people like that. It wasn’t the speaking ability, it was the thought process.”
The legend of Napoleon Hill has grown and morphed over the years. He really did live an extraordinary life, just not the life that his thousands of disciples over the years have claimed. It’s just too bad that Hill spent most of his life as an utter fraud—a fraud who by hook and by crook was constantly reinventing himself.
More here – Paleofuture