Let me back into the issue I see potentially at hand today which was part of the landscape at the part of the last financial crisis.
It gets to the heart of what I see as the risk at hand with modern-day “high finance.”
Why: Because I believe even before you run your theory against your market anomaly test (or vice versa), you might want to ask if you truly are being a fiduciary when it comes to your approach with whether it will work and what is the real purpose of its development and use?
Are you doing enough to make sure your strategy is prudent and what I mean by that is whether your approach will make it through the toughest of markets including a global pandemic with two waves?
I’m not going to get into The Prudent Man Rule but what I am going to try to do is to try to start a dialogue on what it might mean to be a modern-day fiduciary investor in the context of innovation for the benefit of your beneficiaries.
First a timeline and some ideas about reasonableness.
- Just a few years before the 2000-2002 bear, LTCM unwinds in just a year due to the unthinkable: two unexpected back to back crisis’
- 2005 “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets,” is published
- 2017, a very telling paper is published
- Robinhood I have, to be honest, I don’t know what all the peculiars are I just know 10-year olds were using it to day trade
Here are some ideas.
- The LTCM guys were the ultimate as far as fiduciary investors, they had their friends money but their own it and they made I think might be the real Achilles heel of the modern fiduciary investor. Thinking that things don’t cycle and repeat themselves And by making that assumption because you did a few stress tests doesn’t mean the model will hold-up in the next crisis especially if it’s leveraged and you had a bunch of Nobel winners weighing in on the approach. Yes, history may repeat itself but it may be different in sequence and timing, and unless you truly believe that then you might build something that doesn’t hold-up over the long-haul both a bear (and a bull) and multiple scenario combinations.
- At the time when I read Talib’s book, I believe it was telling us that we can’t really use standard deviation as a measure of risk (and forget about using correlations they are just too unstable). If you read Talib’s second book, you’ll learn that Mandelbrot found that risk should be measured on an aggregate basis, and the fractal nature of complex systems that exhibit clustering is something to look into as far as an approach to using securities to grow and/or provide income to your beneficiaries.
- The 2017 paper proved that whatever approaches are being used by big data and python to find market anomalies isn’t working. Only value and momentum have some statistical potential.
- If you see crazy stuff going on in the markets that happened before aka day trading and definitely doesn’t meet the definition of common sense you better have an exit strategy. Because markets crash due to their fractal cyclical nature. But day trading may truly be the canary in the coal mine. You just have to start with the South Sea Company and move forward to see this.
- Tomorrow I’ll present the numbers behind the CAPE Fear idea using CAPE, VIX, and a fractal approach that appears to represent a potential exit strategy at a time when day traders are being drawn into the market because they believe higher risk/fear means higher prices.
Here are the illustrated summary points of the study I did in ’08
after reading an article on the VIX
The numbers are attached (Exhibit B) below
Note, the patent is no longer in existence it appears to have died three years after it’s inception. I left in March 2010.
And now the company has rebranded itself and the guy at the top is the same guy with his name on the patent.
The possibilities are endless as they are today in “high finance.”
- Exhibit A:
- Exhibit B: A VIX study