AlphaClone Launches!

After a year of hard work, the startup I have been working on with my co-founder Maz Jadallah goes live today!

I will do a few blog posts on the software over the next week or two, but if you want to take a look the tour is here. Sign up for a guest pass to access the free Buffett and Tiger Cub clones, and full site access is $99/month.

Email me any thoughts or suggestions you may have.

The AlphaClone blog starts here.

Long/Short Version of the Model

I get some of the same questions regularly- so when I do the site redesign I am going to include tabs for FAQs as well as timing updates. Those are the two main features people email me for.

Anything else you would like to see added to World Beta?

I was taking a look at an old post from about a year and a half ago that addressed the question of shorting instead of going to cash in the timing model. Normally, I recommend individual investors not short for a few reasons. 1 – most are not familiar with shorting. 2 – individuals do not get short rebates. 3 – the historical returns are lower than long/flat and buy and hold.

For the long short model the return is reduced with increases in volatility and drawdown vs. long/flat. Also not surprising – the correlation to buy and hold drops to 0 (or negative) for the L/S version.

However, if you include 2008, the disparity in performance is so wide between long/short and buy and hold (namely due to everything puking) , that buy and hold and the long short version now have similar return numbers.

If I get around to it I will include a long short section in my 2009 update to the timing paper in January. . .

Being Long Classic Risk Premia Is A Terrible Place To Be This Year

Being long traditional risk factors has been an awful place to be this year. The lesson of the stability of correlations is especially apparent here.

PDF on the all-weather portfolio here.

There used to be a table of Bridgewater’s All-Weather Portfolio performance here, but they asked me to take it down (they were down about 30% for the year as of November 2008).

The Capitalism Distribution PDF

The Capitalism Distribution: Fat Tails in Action

Quick, before you read this post, ask yourself these questions:

1. What percentage of stocks beat their benchmark index over their lifetime?

2. What percentage of stocks have a negative return over their lifetime?

3. What percentage of stocks lose essentially all of their value?

Not sure? The answers to all three questions are below. Want to know why a monkey throwing darts is probably as good as your stockbroker? Read on.

I have been hounding the guys at BlackStar Funds to publish their research in a top academic journal for a long time now, but like most money managers, they are too busy conducting research and managing their funds to be concerned with publishing their research.

I have included some of their research in my upcoming book, and thankfully they finally agreed to do a guest post here. If you have any questions you can reach Eric and Cole directly at their website here or at


The Capitalism Distribution – The Realities of Individual Common Stock Returns
by Eric Crittenden and Cole Wilcox, BlackStar Funds
(Download the PDF here)

When most people think of the stock market they do so in terms of index results. Popular indexes include the S&P 500 and the Russell 3000. However, most people are not aware of the tremendous differences between winning and losing stocks “beneath the hood” of a diversified index. From 1983 to 2006 over 8,000 stocks (due to turnover and delisting) were at some point members of the Russell 3000. The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. (Some Russell 3000 statistics here.)

Key findings:

39% of stocks had a negative lifetime total return
(2 out of every 5 stocks are money losing investments)

18.5% of stocks lost at least 75% of their value
(Nearly 1 out of every 5 stocks is a really bad investment)

64% of stocks underperformed the Russell 3000 during their lifetime
(Most stocks can’t keep up with a diversified index)

A small minority of stocks significantly outperformed their peers
(Capitalism yields a minority of big winners that all have something in common)

In this paper we make the case for the Capitalism Distribution, a non‐normal distribution with very fat tails that suggests a small minority of stocks have been responsible for virtually all the market’s gains while most stocks have been below average investments.

Our database covers all stocks that traded on the NYSE, AMEX, and NASDAQ since 1983, including delisted stocks. Stock and index returns were calculated on a total return basis (dividends reinvested). Dynamic point‐in‐time liquidity filters were used to limit our universe to the approximately 8,000 stocks that would have qualified for membership in the Russell 3000 at some point during their lifetime.

(Click on any chart to enlarge.)

Chart 1: Total Lifetime Returns for Individual U.S. Stocks, Jan-1-1983 to Dec-31-2006

The following chart shows the lifetime total return for individual stocks relative to the corresponding return for the Russell 3000. (Stock’s return from X‐date to Y‐date minus index return from X‐date to Y‐date.)

Chart 2: Total Returns of Individual Stocks vs. Russell 3000 Index, Jan-1-1983 to Dec-31-2006

The fat tails in this distribution are notable. 494 (6.1% of all) stocks outperformed the Russell 3000 by at least 500% during their lifetime. Likewise, 316 (3.9% of all) stocks lagged the Russell 3000 by at least 500%.

The next chart shows the lifetime annualized return for individual stocks relative to the corresponding annualized return for the Russell 3000. The left tail in this distribution is significant. 1,498 (18.6% of all) stocks dramatically underperformed the Russell 3000 during their lifetime.

Chart 3: Annualized Returns of Individual Stocks vs. Russell 3000, Jan-1-1983 to Dec-31-2006

The next chart shows the cumulative distribution of the annualized return of all stocks. Notice that the average annualized return for all stocks is negative 1.06%.

Chart 4: Annualized Returns for Individual Stocks, Jan-1-1983 to Dec-31-2006

The next shows how stocks, when sorted from least profitable to most profitable contributed to the total gains produced from all stocks. The conclusion is that if an investor was unlucky enough to miss the 25% most profitable stocks and instead invested in the other 75% his/her total gain from 1983 to 2007 would be 0%. In other words, a minority of stocks are responsible for the majority of the market’s gains.

Chart 5: Attribution of Collective Return, Jan-1-1983 to Dec-31-2006

You may be wondering how the Russell 3000 index can have an overall positive rate of return if the average annualized return for all stocks is negative. The answer is partly a function of the index construction methodology. The Russell 3000 is market capitalization weighted. This means that successful companies (rising stock prices) receive larger weightings in the index. Likewise, unsuccessful companies (declining stock prices) receive smaller weightings. Eventually unsuccessful companies are removed from the index (delisted), making way for small but growing companies. In this way market capitalization weighted indexation is like a simple trend‐following system that rewards success and punishes failure.

It’s also important to point out that stocks with a negative annualized return had shorter life spans than their successful counterparts. The average life span of a losing stock was 6.85 years versus 9.23 years for winning stocks (many of which are still living right now), meaning that losing stocks have shorter periods of time to negatively impact index returns. For these reasons the average annualized return is probably a somewhat deceptive number for the purposes of modeling the “typical” stock, but interesting nonetheless.

The astute reader at this point is probably wondering if outperforming large capitalization stocks explain the observed distributions. Mathematically this would make sense. Small cap stocks certainly outnumber large cap stocks, while large cap stocks dominate the index weightings. However, while large cap stocks (Russell 1000) have outperformed small cap stocks (Russell 2000) over the long term it has been by less than 1% per year, hardly enough to explain our observations.

We identified the best performing stocks on both an annualized return & total return basis and studied them extensively. The biggest winning stocks on an annualized return basis had a moderate tendency to be technology stocks and most (60%) were bought‐out by another company or a private equity firm; not surprising.

Some of the biggest winners on a total return basis were companies that had been acquired. Examples include Sun America, Warner Lambert, Gillette, Golden West Financial and Harrah’s Entertainment. However, most (68%) are still trading today. Not surprisingly, they are almost exclusively large cap companies. However, further research suggests that they weren’t large companies when they were enjoying the bulk of their cumulative returns. Becoming a large cap is simply the natural result of significant price appreciation above and beyond that of the other stocks in the market. We were not able to detect any sector tendencies. The biggest winners on a total return basis were simply the minority that outperformed their peers.

Both the biggest winners on annualized return and total return basis tended to have one thing in common while they were accumulating market beating gains. Relative to average stocks they spent a disproportionate amount of time making new multi-year highs. Stock ABC can’t typically travel from $20 to $300 without first crossing $30 and $40. A stock that’s going from $20 to $300 is likely going to spend a lot of time making new highs. Likewise, the worst performing stocks tended to spend zero time making new multi-year highs while they were accumulating losses. Rather, relative to average stocks they tended to spend a disproportionate amount of time at multi‐year lows.

Mathematically it makes perfect sense. Stocks that generate thousands of percent returns will hit new highs hundreds of times, usually over the course of many years.

Could it be this simple; long term trend following on stocks? That’s our conclusion. For detailed results of the trading system that was inspired by this research see the paper, “Does trend following work on stocks?

-Eric Crittenden and Cole Wilcox


Meb’s note:

I mentioned their trendfollowing paper in my research paper as well as my book. It is a great example of a simple approach to risk management for investing in stocks. Setting a trailing stop ould have kept you from holding dogs like AIG, Bear Stearns (BSC), Lehman (LEH), Office Depot (ODP), Sears (SHLD), Beazer (BZH), and Citigroup (C) all the way into the ground. Not only does the system protect your portfolio, but it also saves you the emotional distress and uncertainty from watching Citigroup go from $50 to $5.

Ditto for historical blowups like Enron, WorldCom, Adelphia, and New Century Financial.

So what stocks are going up? A partial list of stocks near all time highs includes, gasp, some financials!

(Disclosure: Blackstar is probably long any stock that is near an all-time high.)

NuVasive (NUVA)
Flowers (FLO)
Stericycle (SRCL)
Heartland Express (HTLD)
Stanley (SXE)
Exponent (EXPO)
First Financial Bankshares (FFIN)
Laclede Gas (LG)
WGL Holdings (WGL)
New Jersey Resources (NGR)
Peoples Bank (PBCT)
Southside Bancshares (SBSI)
Trico Bancshares (TCBK)
Allegiant Travel (ALGT)
Strayer Education (STRA)
Piedmont Natural Gas (PNY)
California Water Serv Group (CWT)
Emergent BioSolutions (EBS)

AlphaClone Beta Launch!

Take the tour here!

Free Warren Buffett clone example here. Beats the market by 10% a year since 2000, including outperforming the market by 20% in 2008. (Those number agree with the historical numbers found in this academic study.) Top holdings include WFC, KO, PG, COP, BNI, AXP, KFT, JNJ, USB, and WSC.

Screenshot of Buffett clone below:

Free Tiger Cubs clone here. This clone selects the most popular holdings from 20 funds that are progeny of Julian Robertson’s Tiger Management. Beats the market by 12% a year since 2000. Top holdings include QCOM, V, MA, AMX, PCLN, TDG, SD, SBAC, AMT, XTO.

To keep updated on the full launch (early December), sign up here.

Email me any thoughts or suggestions you may have.

Have a great Thanksgiving!!

Market Timing is Impossible

That was the response of a certain Nobel Laureate when I tried to get him to read my paper “A Quant Approach to Tactical Asset Allocation.” He refused to even take a look at it.

This year has certainly been the perfect storm for buy and hold investors. Everything has gone down – Sotcks, Foreign Stocks, REITs, Commodities, and (some) bonds. This has been an instructive year to showcase the benefits of a market timing solution, namely, risk management and avoiding large losses. I have no idea how big this decline will be or when it will end, but it is instructive to take a look at some historical relative performance of the timing model vs. buy and hold investing.

October 1974 ended a period where buy and hold had its highest drawdown ever at around -20%. That has now been eclipsed by the current -30%+ drawdown. (The max timing drawdown is around -10%.)

Below is a chart for the relative returns of buy and hold vs. the timing model. Readers know that both have similar compounded returns over the past 36 years, but that the timing model has much lower volatility and drawdowns. Usually one outperforms the other by a maximum of around 10% before mean reverting. (Click on the chart to enlarge)

However, in times of severe market stress (now), the timing model can outperform by far greater amounts. As of the end of October it was outperforming by about 27%. Has there ever been a period comparable?

By October of 1974 the timing model was outperforming as most asset classes were declining severely (with the exception of commodities). The timing model ended the year with a gain of around 13% vs. a loss of -12% for buy and hold. However, buy and hold mean reverted over the next year, and returned about 20% for 1975 while the timing model would have done about 2%.

The million dollar question is, how bad is it gonna get?
(Stay tuned to a follow up post on some thoughts I have here.)

Asset Allocation Backtester, Quant Funds, and Market Timing

Of the 10,002 US Stock Mutual Funds Morningstar tracks, ZERO are up on the year and the average performance is -43.63%.

Of the 2,892 Foreign Stock Mutual Funds, ZERO are up on the year, ZERO are down less than -10%, and the average performance is -50.75%.


It is about time for the Hedge Fund Masters update, but since AlphaClone is (finally) getting near launch, I am going to stop with the updates and let users play around there. . .and check out Market Folly for more info on tracking the funds through 13Fs:


Lone Pine
Pershing Square


Druckenmiller’s funds have never posted an annual loss.


Wondering how these declines fit into a historical context? Are you a data junkie and want to backtest virtually any buy and hold asset allocation portfolio for free? AssetPlay can do it:

Backtester here
Data Sources here
Domestic Index Returns
Bond Index Returns


Morningstar likes LSC,
and so do I.


Time for a bounce? I think we could see a nice rally here in December and January, and if Fosback has anything to say about it, a good entry would be Monday at the close.


I don’t like it when people group “hedge funds” together. Ditto for “quant funds”. It is like describing the average dog. While they all have four legs, a tail, and like table scraps – there is a considerable difference between a Great Dane, a Beagle, and a Bulldog. A better description would be “hedge (or quant) funds that do the same thing.”

Asness chimes in on some quantery here.


Here is a nice post contrasting two market timing systems, but Michael, you gotta include the cash returns!


Whatever happened to the guys in Hoop Dreams?


If you get paid $60,000 per speaking appearance, I think you can afford a better home page.


Let Detroit go bankrupt


NAAIM $10,000 prize for the best paper in active investing. Full description here:

In the face of $9.8 trillion in equity losses since October 2007, $7.4 trillion of which have hit Main Street portfolios either directly or indirectly , individual investors continued to be deluged with the same old advice. “Even in downturns, it’s best to ride out the market.” Ernie Ankrim, chief investment strategist, Russell Investments.

It’s time academics and the financial media take a second look at that advice. To that extent, we are issuing a request for papers on the viability and use of active management. A $10,000 prize will be awarded by NAAIM to the best paper.

Our query concerns the practice of multiple trading decisions, both buy and sell, throughout a calendar year using trading methodologies such as tactical allocation, exploitable market inefficiencies, hedging techniques, position sizing, dynamic asset allocation, sector rotation and long-short strategies including the effectiveness of trading restrictions and risk management techniques involving mutual funds, individual securities, ETF’s, options or financial futures or derivatives.

You Should Listen to Jim Rogers

From December 2007:

Rogers, who is short Fannie Mae shares, is also short Citigroup (C, news, msgs) and highly negative on its prospects, too.

“Technically, it’s bankrupt, with gigantic off-balance-sheet derivatives positions whose value it cannot possibly know,” he says. Though he believes some large banks can and will go under in the next year or two under the weight of billions of dollars worth of bad loans and blown-up derivatives positions, he doubts the government will allow Citi or Fannie to fail. “They’ll nationalize them in some way. It’s wrong, but they can’t let the two largest lenders in the nation go down.”

The fund manager, who has traveled extensively in emerging markets and lives part of the year in Asia, says sovereign wealth funds in Abu Dhabi and Singapore that recently made large investments in Citigroup and UBS AG (UBS, news, msgs) are likely to lose a lot of money on their ploys. “They’re making a big mistake; these banks have many more problems still ahead. They should wait until these companies are really on the ropes a few years from now . . . and trading at $5 a share.”

Well, with Citi down about 90% to $7, they might just get their chance. . .

Global Multi-Asset Fund

PIMCO has a new fund out managed by El-Erian and crew – Global Multi-Asset PGMDX.  Although it looks expensive with a 1.5% managment fee. 

Fact sheet here.

Interview with the managers here.


A cool art site to pick up art on the cheap.


Nice quote I saw at a coffee shop this AM:

“The only people for me are the mad ones, the ones who are mad to live, mad to talk, mad to be saved, desirous of everything at the same time, the ones who never yawn or say a commonplace thing, but burn, burn, burn, like fabulous yellow Roman candles exploding like spiders across the stars, and in the middle, you see the blue center-light pop, and everybody goes ahh…” Jack Kerouac, from On the Road

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