As a DIY investor, I am a strong believer in measuring my trading/investing performance. As the saying goes, if you don’t measure it you won’t improve it.
I just started a subscription to Real Vision TV and began with the Peter Brandt series of videos. Peter Brandt who considers the Sharpe Ratio to be worthless for evaluating trading performance prefers, among a small number of other metrics, the Gain to Pain Ratio which was developed by Jack Schwager. In Brandt’s view, a Gain to Pain Ratio of 1 or better is quite good, a ratio of 2 or better is excellent and a ratio of 3 or better is world class.
The Gain to Pain Ratio is calculated by dividing the sum of monthly portfolio gains by the absolute value of monthly portfolio losses. Let’s calculate my Gain to Pain Ratio for my own ETF momentum trading system.
The sum of all the monthly returns is 10.74.
The absolute value of the losses (-1.80, -1.33, -2.10) is 5.23.
My Gain to Pain Ratio is 10.74 / 5.23 = 2.05
There is one proviso about the Ratio that Jack Schwager points out which we should all be aware of. You can read about that here.
My next post will be about the second metric that Peter Brandt uses which is Profit Ratio.
Since my early twenties, I have been a DIY investor as I find investing to be such a thought provoking field. For the most part, I have been a rules-based investor choosing systematic trading which is typical of an engineer.
Throughout the years, I have always sought ways to improve my investing. In my home office, perhaps just like yours, are a number of investing books. I have many of the classics but most are about systematic trading. While driving, I listen to a variety of audio podcasts but the bias is definitely tilted towards investing and finance.
There is education to be had through books and podcasts but, for me, there is something else that has been formative in leading to the investing style that I now engage in and am very comfortable with. The most important step for me has been publishing the results of my trading system here on this site. Having your own portfolio equity curve unfold over time in front of you is an absolutely humbling experience but it is instrumental to an investor’s skill development. Publishing your trading performance will greatly assist you in dealing with the emotions of being an investor. You learn not to be overconfident after a period of superior performance because “it too shall pass”. Poor performance is instructive in that it may teach you that your trading strategy is need of a tune up. A volatile equity curve may be just what you need to tweak your trading system such that it matches your personality (been there, done that).
My choice of publishing my trading performance has been Collective2 where I enter trades that match those in my personal accounts but are scaled for the different account size on Collective2. C2 was designed for futures traders more so than equity traders but it is the best I have found. If you are a DIY investor and are not already publishing your results, my suggestion would be to start a blog and publish your trading performance monthly. You don’t have to publicize your blog – it can be for your eyes only. If my experience is any indicator, over time seeing your equity curve will likely lead you down a path of finding ways to improve your trading performance and match your trading style to your personality.
Despite the widespread concern that the U.S. stock markets are overvalued, my ETF momentum strategy which is currently heavily invested in U.S. equities posted yet another positive performance in April with a 1.16% gain. Even though I am using leverage, volatility remains very comfortably below 10%. The strong first four months of 2017 for my strategy has pushed the CAGR up to 8.9%. With a system that requires only about two hours of my time per month, I will gladly take that return in a world of low rates.
I am about to start an email list for this site and am working on an eBook. The eBook is for those of you who want to construct your own ETF momentum trading system. I will outline the steps you need to take to develop and then execute your very own, personalized system. Stay tuned!
I listen to a lot of investing podcasts and thought I would share some insights from recent episodes.
In Planet Money’s latest podcast it was noted, rather casually I might add, that stock pickers were being replaced at major firms by computers. An informative article from Fortune provides some of the details on lay offs at BlackRock, Paul Tudor Jones’ firm, Stephen Cohen’s family office and Ray Dalio’s Bridgewater. If a stock picker is using a rules-based strategy to select stocks, do you think it should come as a surprise that software is taking over that person’s job? I don’t. As a matter of fact, I expect to see a continuation of this especially of financial firms reducing their head count. AI is progressing very rapidly and if your job involves sitting at a desk and performing repetitive tasks, you should ask yourself if you can be replaced by software and what you are doing to prepare for the eventuality.
Former global macro fund manager Raoul Pal (@Raoul GMI) has been in a number of podcasts that I listen to lately. Raoul is one of the founders of Real Vision TV which I haven’t subscribed to yet but am about to start a trial subscription. If you haven’t heard of Real Vision TV before, it appears to be well worth your effort to visit their site. On The Meb Faber Show, Raoul discussed his belief that there is a high probability of a recession in the US very soon based on his research of recessions in the past 100 years. From Yahoo Finance:
He recently spent time looking at US recessions in general. What he found was that every single one in the last one-hundred years occurred during or right after an election. Specifically, when there’s a two-term incumbent change.
“I recently noted that since 1910, the US economy is either in recession or enters a recession within twelve months in every single instance at the end of a two-term presidency… effecting a 100% chance of recession for the new President,”…
For more on Raoul’s view regarding the possibility of a near-term recession, you should listen to the podcast with Meb Faber. I think you will be fascinated with this particular podcast.
If you enjoy podcasts as much as I do and you have a strong interest in finance and investing, I think you will be fascinated with a new podcast that started in January. Adventures in Finance is hosted by Grant Williams (@ttmygh) and Aaron Chan (@macrodidact). The guests on the podcast are the absolute best and the production is high end. An interesting feature on the podcast is a discussion with fund managers, professors, highly successful investors, etc. titled “What I Got Wrong” in which the guest discusses a mistake they made in the past which is usually a bad investment. It is a reminder that even the very best in the world of finance and investing are wrong on a regular basis.