Where the Black Swans Hide and the Ten Best Days Myth

It’s been a little slow with Cambria Quantitiative Research Monthly (more like quarterly), but here is the third issue (and the fourth should be close behind).  It happens to be a bit timely with the recent market action.  Hopefully it gives a little color on why volatility is exploding and some ideas on what to do (or not do) about it.

Let me know your thoughts!

As always, you can find my white papers for free on the SSRN.  Click to download.  (And if you can’t figure out how to download it you click “one-click download” and make sure any pop up blockers are disabled.)

Where the Black Swans Hide and the Ten Best Days Myth

Abstract:      
Below we examine market outliers in financial markets. How much effect do these outliers have on long term performance? Can the investor prepare for these anomalies, or are they truly ‘black swans’ that cannot be managed? In this issue we examine numerous global financial markets on daily and monthly time frames. We find that these rare outliers have a massive impact on returns. However, these outliers tend to cluster and the majority of both good and bad outliers occur once markets have already been declining. We critique the “missing the 10-best-days” argument proffered by advocates of buy and hold investing, demonstrating that a significant majority of the 10 best days and the 10 worst days occur in declining markets. We continue to advocate that investors attempt to avoid declining markets where most of the volatility lies, and conclude that market timing and risk management is indeed possible, and beneficial to the investor.