Below is the 4th issue of Cambria Quantitative Research (I removed “monthly” from the title since the schedule is a bit erratic). It was a fun paper to write, and goes to show there’s nothing new in investing. As always, the most important rule is to always survive to invest another day.
I like to get these out as soon as I write them so if you find any errors or omissions let me know your thoughts!
As always, you can find my white papers for free on the SSRN and on the right hand bar on the blog. Click the title below 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.)
Investment manias and financial bubbles have likely existed for as long as humans have been involved in financial markets. In this research piece we take a look at some of the more famous market bubbles in history and the extreme volatility and drawdowns they experienced. We then examine a simple trendfollowing approach investors could use to manage their risk. Across twelve market bubbles we find that a trendfollowing system would have improved return while reducing volatility. Most importantly, it would have reduced drawdowns significantly leading to the most important rule in all of investing – surviving to invest another day.