Quantitative investment researchers often seek uniquely optimal parameterizations of their strategies amongst a broad “robust” region of parameter choices. However, this ignores a critically important feature of investing – Diversification. By diversifying across many equally legitimate parameter choices – an ensemble – investors may …
Keep ReadingIndustry Illusions
Part 2: Evidence Based Investing is Dead Long Live Evidence Based Investing!
Edesess’ case against evidence-based investing rests on three general assertions. There is a very real issue with using a static t-statistic threshold when the number of independent tests becomes very large. Financial research is often conducted with a universe of securities that includes a large number of …
Keep ReadingEvidence Based Investing is Dead. Long Live Evidence Based Investing! Part 1
Michael’s case against evidence based investing rests on three general assertions. First, there is a very real issue with using a static t-statistic threshold when the number of independent tests becomes very large. Second, financial research is often conducted on a universe of securities that includes a large number of …
Keep ReadingAsset Allocation is Not for the Faint of Heart (Long Live Diversification)
We have posted a lot of research on fairly complex asset allocation topics, but I think many readers would be surprised to learn that I am actually highly skeptical about historical market statistics. I don’t think that we can draw any meaningfully precise …
Keep ReadingThe Importance of Asset Allocation vs. Security Selection: A Primer
By far the greatest source of personal consternation as a professional in markets is investors’ obsession with finding the best stocks, or the best stock pickers. The fact that investors pursue this objective at all undermines all meaningful arguments about efficient markets …
Keep ReadingBold, Confident & WRONG: Why You Should Ignore Expert Forecasts
If you read the paper, watch the news, and listen to investment experts you are doing it all wrong. There are no market wizards; the emperors have no clothes; most people are ‘swimming naked’. The following paragraphs offer abundant and incontrovertible evidence …
Keep ReadingApples and Oranges: A Random Portfolio Case Study
This article was motivated by a provocative discussion with a thoughtful RIA. Let’s call him Harry.
Keep ReadingThe Black Box: Eyewitness Testimony and Investment Models
Multiple discovery suggests that the most valuable, achievable advances in a field are often being examined simultaneously – yet independently – by many people at the same time. It stands to reason that on these occasions, leaps in logic can often occur at the same time by independent parties.
Keep ReadingA fool thinks himself to be wise
As a team whose principals have spent thousands of hours accumulating academic credentials and experience in a fairly narrow field of expertise – public markets – we are endlessly fascinated with peoples’ optimism about their ability to succeed independently in this hyper-competitive domain.
Keep ReadingDon’t Fear the (Alpha) Reaper
Let us preface this article by saying that we can’t for the life of us figure out why any investor cares about beating the market in the first place. To us, the whole concept of beating the market is a red herring. The only people who should be concerned with beating the market are investment managers themselves, because their compensation is directly tied to this specific objective.
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