Testing, testing... are the Markets Random?

[Lizard]

Over the years, I have read many strategies in regard to how to achieve above-market profits from investing/trading. I have also read research papers and references which have disproved any consistent out-performance from many of these recommended methods. Yet most of us persist in believing that it is possible to outperform the market by "being good" at investing/trading. So either we are wrong and our results are down to luck, or much of the research has missed some vital factor or interaction which accounts for outperformance.

Before any more research is wasted on "what doesn't work", I thought we should unscientifically test the concept of whether outperformance can be learned. IF it can't be learned, then the market is most likely entirely random. If it can, then we can accuse the researchers of looking in the wrong place...

So, this NO-NAMES poll is going to rely on:
a) only being completed by those who have been seriously investing/trading for at least 5 years
b) An honest attempt to be accurate and truthful about your results (not how you'd like to think of your results). There is no point recording an overly optimistic (or pessimistic) view of your results - we don't know who you are and the truth would be more helpful
c) Having kept at least some comparable records of your performance.

Hopefully there are still a few people left out there who can answer the question. Before completing it, please try to accurately assess your performance RELATIVE TO THE MARKET in the early year/years of your trading and compare it to performance in the last/later years.

All performance needs to be considered relative to the benchmark indices representing the pool of investments you consider yourself to be selecting from.

[Mick100]

2003 , 84%
2004 , 65%
2005 , 50%
2006 , 87%
2007 , 19%
2008 , -6% (so far - but the year is not over yet and I'm loading up on goldies so this hopefully will change for the better by yr end)

NB, 2008 has been different for me in that , for the first time, I have made significant profits on my commodities account and gains from the depreciation of NZD which has made up for most of my losses in my share account, other wise, I'm guessing, I would be down at least 35% at the moment

[Lizard]

Mick - you'd need to put those relative to the index to tell if you were getting better or worse over time - 2003 a pretty good year from memory, while 2007 not so good by year end. Even then, one result from one person is not that significant as volatility/luck will always have some contribution, but hopefully if a few more people add to the result, the good luck should balance out the bad luck. Outperformance or underperformance is of less interest in this poll than whether people actually improve with time, therefore suggesting that they've learned to identify some sort of inefficiency they can exploit.

I had to go back and calculate mine after I'd written that post. It was an interesting exercise, as I thought I'd probably come out about the same, but against the index the measure had actually improved "slightly" - well slightly enough that it would give me twice the money after 10 years compounding. The interesting thing was that initially my results were actually better (relative to the index) in down years than in up years, but I seemed to have improved more on the up years as time went on. I am aware that this correlated with having a "value" style and strong contrarian leanings in the early days and having learned to take more notice of "growth" in recent years. Perhaps one of the reasons that research fails to identify consistent methods of outperformance is that experienced investors may vary their preferred tools depending on market context?

[Mick100]

Mick - you'd need to put those relative to the index to tell if you were getting better or worse over time - ?

Hi lizard
could you post the index returns for ASX and NZX over the past 5 yrs
My portfolio of resource related stocks would have a higher average beta than most portfolios (ie my portfolio goes up more than the index in a good yr and goes down more than the index in a bad yr)
,

[Lizard]

Hi Mick,

Here's my calcs off the Yahoo historical data and (early NZX50/NZSE40) from a couple of old charts. I've put the small cap indices in too as might have expected a higher beta for them too and therefore maybe a better comparison.

http://img.villagephotos.com/p/2006-8/1204598/Pictureclipping.gif

Looks like you've been outperforming the XSO rather nicely, but not clearly improving as you've tended to move in tandem, with (if anything) a decrease in outperformance rather than an increase. Possibly you did more of your learning more than 5 years ago and need to go back further to when you were a newbie to do a comparison? Gets harder to find the comparable index data though!

[Mick100]

Looks like you've been outperforming the XSO rather nicely, but not clearly improving as you've tended to move in tandem, with (if anything) a decrease in outperformance rather than an increase. Possibly you did more of your learning more than 5 years ago and need to go back further to when you were a newbie to do a comparison? Gets harder to find the comparable index data though!

thanks lizard
I like to think I know more than I did 5 yrs ago.
I think it's more likely that I havn't adapted to the current conditions which have been much more favourable for traders than "buy and hold" types like myself.

[Snoopy]

Hi Mick,

Here's my calcs off the Yahoo historical data and (early NZX50/NZSE40) from a couple of old charts. I've put the small cap indices in too as might have expected a higher beta for them too and therefore maybe a better comparison.


Hey Lizard, I will play your game. My own records go back five years. But my records are all set up for the tax year (ended 31st March), not the calendar year ended 31st December.

Any chance of providing some index figures for those tax year dates?

TIA

SNOOPY

[Lizard]

Here you are then, Snoopy - 6 years worth... I can go back further if you have earlier years, as I would have thought your rapid-learning/method development phase was likely to be further back than 5 years?

http://img.villagephotos.com/p/2006-8/1204598/Picture3.gif

[Snow Leopard]

I sold most of my shares in Jun'07 for reasons unconnected with the state of the share markets.
Despite buying, holding and selling more stocks than I can remember my overall fortunes have been closely aligned with two particular stocks (MFT and RYM) which have dominated my portfolio for a number of years plus I have done well from the splintering of TWR into TWR, AUW.ASX TAL.ASX of which I only currently hold TAL. More recently I seriously bought into NZO which I still have and PRC which I am out of now.

So based purely on the performance of shares held my numbers are:


Year Me NZX Relative
2003 43.2% 26.2% +17.0%
2004 55.6% 26.0% +29.6%
2005 58.2% 10.0% +48.2%
2006 154.5% 20.3% +134.2%
2007 -3.6% -0.3% -3.3%


regards
Paper Tiger

[Snoopy]

Here you are then, Snoopy - 6 years worth... I can go back further if you have earlier years, as I would have thought your rapid-learning/method development phase was likely to be further back than 5 years?


Thanks Lizard. I have other investments. But I have only been applying my methods in their entirety to my investments on the NZX. So I am using the NZX50 as my benchmark



Year Snoopy NZX Difference
2003/4 36.9% 31.6% +5.3
2004/5 19.0% 21.6% -2.6
2005/6 21.4% 21.8% -0.4
2006/7 -8.1% 10.9% -19.0
2007/8 2.0% -15.5% +17.5
2008/9* 5.1% -7.7% +12.8

* Interim result after 4.5 months


I could give you more results back further. But 2003/4 is probably as good a starting point as any because it was probably about then that I finally knocked my portfolio into an approximately balanced core line up of just seven companies ( CEN, LPC, PGW, RBD, SCT, SKC and TEL ) that I have been with since that time.

My results include my brief flirtation with WHS in FY2005/6 and FY2006/7, and also the widening of my portfolio from FY2007/8 with the addition of both TUA and NZS.

Perhaps of more interest to the long term investor such as myself is not the year by year results, but the long term multiplier result. That answers the question, if I put $10,000 in at the start of year 2003/4, what would it be worth now?

For the NZX50 the answer is:

$10,000 x1.316 x1.216 x1.218 x1.109 x(1-0.155) x(1-0.077)= $16,858
-equates to a compounding annualised rate of return of
$10,000(1+i)^5=$16,858 => 11.0%

For Snoopy the answer is:

$10,000 x1.369 x1.119 x1.214 x(1-0.081) x1.02 x1.051 = $18,322
-equates to a compounding annualised rate of return of
$10,000(1+i)^5=$18,322 => 12.9%

SNOOPY

[Snoopy]

Year Snoopy NZX Difference
2003/4 36.9% 31.6% +5.3
2004/5 19.0% 21.6% -2.6
2005/6 21.4% 21.8% -0.4
2006/7 -8.1% 10.9% -19.0
2007/8 2.0% -15.5% +17.5
2008/9* 5.1% -7.7% +12.8

* Interim result after 4.5 months


Perhaps of more interest to the long term investor such as myself is not the year by year results, but the long term multiplier result.

For the NZX50 the answer is: 11.0%

For Snoopy the answer is: 12.9%


Now I know what some of you are thinking. What an awful lot of effort I have put in over the years to gain such a modest overall premium to the market. However, if you look at the year by year results you will see that generally I have performed slightly below market returns in good years, but have gained significantly better than market returns in the last year and a half as the general market fell. By contrast my wealth hasn't fallen. I am still going forwards in this so called 'bear market'.

Does this mean I have done better, relative to the index, in recent times? I suppose I have. But then value investment portfolios typically behave like this. So I don't consider I have done 'better'. My improvement is what you would expect with any decent value investment strategy. My expense ratio is much lower than almost everyone else because I haven't had to spend any broker fee money 'selling out' to preserve my capital. And I won't be spending any fees getting back into the market that I never got out of. Finally I haven't lost any sleep on market timing issues! Roll on the bad times. The worse the market gets, the better it is for me.

SNOOPY

[shasta]

Now I know what some of you are thinking. What an awful lot of effort I have put in over the years to gain such a modest overall premium to the market. However, if you look at the year by year results you will see that generally I have performed slightly below market returns in good years, but have gained significantly better than market returns in the last year and a half as the general market fell. By contrast my wealth hasn't fallen. I am still going forwards in this so called 'bear market'.

Does this mean I have done better, relative to the index, in recent times? I suppose I have. But then value investment portfolios typically behave like this. So I don't consider I have done 'better'. My improvement is what you would expect with any decent value investment strategy. My expense ratio is much lower than almost everyone else because I haven't had to spend any broker fee money 'selling out' to preserve my capital. And I won't be spending any fees getting back into the market that I never got out of. Finally I haven't lost any sleep on market timing issues! Roll on the bad times. The worse the market gets, the better it is for me.

SNOOPY

Snoopy

I've always read your posts with interest, despite our "systems" being poles apart*, i admire the fact you have a system & have stuck with it.

(* I don't believe in diversification, 5 companies max)

I would contend anyone who has any system, & who constantly tests & refines it, will out perform over time all those without one.

I haven't got enough records to go back & benchmark my perfomance relative to any index, but at a guess my old "buy & hold" strategy would have underperformed v the NZX50. It's for that reason (& FX opportunities) i turned to the ASX where i have performed much better

My trading strategy would have outperformed the NZX50 over the past 3 years & ASX All Ords/ASX 200, but thats only over a short period of 2 years. My old "buy & hold" strategy on the ASX was a disaster!

It's only recently i reviewed my strategy, & exited a number of companies that didn't meet the criteria i had outlined in my system.

I've substantially increased my "expected returns" benchmark, as i believe the lessons (& money) i've lost in non performing specs, has refocussed me into doing more comprehensive FA, as well as learning some basic TA to support it.

For me it's a case of "sticking to my knitting" & largely ignoring what the herd is doing.

My niche is finding fundamentally "undervalued" & well managed companies with potentially great growth prospects in the short term.

[Lizard]

Thanks to all those who have so far taken the time to vote on this poll!



I would contend anyone who has any system, & who constantly tests & refines it, will out perform over time all those without one.

This was what I'd thought too. For a start, I'd assume that:

Those who post on sharetrader generally believe markets are inefficient and therefore it is possible to outperform through refining technique
Active, direct investors (which I'd expect to be the main constituent of sharetrader) who have been seriously trading/investing for longer than 5 years are more likely to be outperforming the index - otherwise, after 5 years, they'd have moved on!


However, the latter doesn't preclude that ShareTrader is just representative of those who have been at the "lucky" end of the normal distribution.

This poll is therefore really trying to test if people can improve through learning (as we all believe).



(* I don't believe in diversification, 5 companies max)

This is exactly why this poll is important - if you believe you can outperform through some learned technique, then you would probably be inclined to use different techniques to if you believe markets are efficient. For instance, if stock performance is random, then diversification will give you a slight mathematical advantage. So will re-balancing your portfolio - the anathema of trend-following. As will "buy-and-hold" which minimises brokerage and slippage.

While wanting to believe that I can (and am) improving my returns by transitioning from being the ultimate "chimp" investor to mastering stock-selection and timing, I'm still not convinced enough to give up the mathematical advantages.

Interestingly, this poll hasn't so far been as clear cut as I'd expected - given it relies on personal interpretation and measurement, I'd have expected a slight positive bias to the results for starters. Still, the numbers are really not significant. I hope people will keep adding to this poll - it has no time limit, and the basic question is timeless.

[Snoopy]

Snoopy

I've always read your posts with interest, despite our "systems" being poles apart*, i admire the fact you have a system & have stuck with it.

(* I don't believe in diversification, 5 companies max)


Our strategies are not so different Shasta. I don't believe in diversification either. There wouldn't be many 'funds' out there on the NZX with ten or fewer shares in the portfolio [except for TENZ I suppose ;-) ].

But one advantage of the amount of diversification I *do* have (both in number of shares and in 'Beta'), is that I have enough not to bother with the idea of a 'stop loss'. And I am less likely to be seriously damaged by a 'black swan' event.



I would contend anyone who has any system, & who constantly tests & refines it, will out perform over time all those without one.

I haven't got enough records to go back & benchmark my perfomance relative to any index, but at a guess my old "buy & hold" strategy would have underperformed v the NZX50. It's for that reason (& FX opportunities) i turned to the ASX where i have performed much better

My trading strategy would have outperformed the NZX50 over the past 3 years & ASX All Ords/ASX 200, but thats only over a short period of 2 years. My old "buy & hold" strategy on the ASX was a disaster!


I think it is important to get your benchmark right Shasta. The NZX50 is not comparable to the ASX200. And the minerals subsection of the ASX is not comparable to the ASX200.

Good luck to you, although it sounds as though 'luck will be less important in the future to your results.

SNOOPY

[Snoopy]

This poll is therefore really trying to test if people can improve through learning (as we all believe).


I haven't changed my strategy over the last five years. But that doesn't mean I haven't learned anything. I think the biggest thing I have learned is that if you have a (say) five year time horizon, a single company return (out of nine) in any particular year doesn't really matter.

My worst year of the last five, both in absolute and relative terms, was the year ending 31st March 2007. And the two shares that punished me the most were Restaurant Brands and PGG Wrightson. One year later PGW was my best performing share and even RBD performed better than the market average (albeit still with a negative result). Taking the five year view, the performance of both RBD and PGW in FY2007 were blips in the complete picture.

Although I have a 'per year' performance goals in mind, I intend to be much more flexible in the future, looking for results well above my long term goal in good years, and tolerating counterbalancing substandard years without making any changes to my investment methods.

SNOOPY

[Kookaburra]

Year Kooka NZX Difference
2003/4 14.2% 31.6% -17.4
2004/5 47.2% 21.6% +21.4
2005/6 18.1% 21.8% -3.7
2006/7 21.8% 10.9% +11.9
2007/8 0.3% -15.5% +15.2
2008/9* 23.3% -7.7% +31.0

Interesting comparison to reflect on.
My calculations are calendar years.
Went to cash a bit early at start of 2006 but no regrets now