"TAP não sobrevive se se mantiver pública", garante Pinto Luz

[LTCM]

John Train
Chairman
Montrose Advisors
New York City

...When I was young, and even today to some
extent in England, if a citizen had a financial question, he would visit his “bank
manager” to seek seasoned counsel. Or he might consult a college friend who had
become a stockbroker, perhaps in a family-controlled firm, and who understood
life. He had to be able to count on his adviser to be objective, to put the client’s
interest first.
Not anymore. Objective advice scarcely exists in banks and brokerage firms,
which are in business to sell “products,” some of which, such as all commodity and
currency speculation, are intrinsically imprudent, designed to make money for the
house at the expense of the customer.
The old Wall Street rule is “If the ducks quack, feed ’em.” That is, when the cry
is, let’s all buy houses (or emerging markets, or hedge funds, or whatever), which “can
only go up,” then push them, hard! But such people are hustlers, not professionals.
The effect of all this on the fortunes of imprudent investors can easily be shown.
The most obvious measure is the stock market itself. Depending on the period you
choose, the very long-term total return of stocks, in general, is around 9 percent
before inflation. For funds, you subtract costs. But the long-term return for individual
investors is only half of that. Why? Because the average investor is imprudent.
Convinced that she can outsmart the other average investors, she buys equities when
the excitement is high, toward the top of the market, and then, discouraged by falling
prices, sells again toward the bottom, running up costs both ways. The market itself
is thus a Ponzi scheme—and not only the whole market but also the hot segments
as they come and go. To coin a phrase: Nothing exceeds like success.
What Went Wrong?
270 Insights into the Global Financial Crisis
And take note that the end of every great bull market is that time’s version of a
margin account, enough different from the last one that most people do not recognize
it for what it is. Obviously, leveraged buyout booms and hedge fund explosions are
margin accounts because they are done with borrowed money, and so are houses
bought for higher prices than one can afford with mortgages one cannot pay.
The way out of this misery is well known: prudence. Buy and hold quality issues
for long periods. It should always have been obvious that the crowd cannot outtrade
the crowd. Thus, the correct solution is to trade as little as possible; above all, resist
tips and inspirations.
Then, consider imprudence at the governmental level. The housing bust was,
in part, caused by the government pushing a good idea, encouraging home ownership
via Fannie Mae and the like, beyond where it should go. In essence, it used
political objectives to warp the logic of economics.
There could not be more obvious folly—or worse—than luring financially weak
homebuyers in over their heads, when they ought to be renting, and letting them
pay with wormy paper whose quality is then falsely certified by ratings agencies,1
which are compensated by the sellers. And to further compound the problem, this
wormy paper is then flogged off to trusting foreign buyers.
Or how about using the inflated value of our houses as a credit card? Or,
nationally, how about buying goods we cannot afford from the Chinese in return
for IOUs they may not find useful?
So, how do we learn prudence? Nobody is born prudent. The infant is a bundle
of impatient desires. The Greeks had a maxim: pathe mathos—learn through suffering...

[LTCM]

When Are Times Right For Momentum Investing?

By MARK HULBERT | MORE ARTICLES BY AUTHOR(S)
There's research suggesting that this stock-picking approach's effectiveness is tied to expectations of volatility.

THE STOCK MARKET'S EXTRAORDINARY VOLATILITY over the last week has prompted momentum investors to question the wisdom of their approach.

It was all well and good to bet on high momentum stocks when the market was rising. But when the market suddenly reversed course -- especially on Thursday, when the Dow suffered a dramatic intra-day 1000-point plunge -- those previously high-flying stocks were among the biggest casualties.

But it would be a shame if investors therefore decided to give up on momentum investing altogether. The approach has a stellar long-term record, even after taking setbacks such as this past week's into account.

Better yet, there may be a way for investors to couple momentum strategies with a timing system that goes to cash whenever momentum is about to stop working. Believe it or not, this turns out to be easier than you may think.

Let's start by reviewing momentum's historical record, as compiled by University of Chicago professor Eugene Fama and Dartmouth professor Ken French, two of the most acclaimed financial academics working today.

For every month since 1927, they calculated the return of a portfolio that owned the 30% of stocks with the best 12-month return through the end of the previous month -- and which shorted the 30% with the worst returns. This portfolio gained an average of 0.7% per month over the more than eight decades analyzed -- 8.7%, on an annualized basis.

Note that the professors didn't take transaction costs into account, so net of such costs this portfolio's return would have been somewhat less. But also note carefully that their hypothetical portfolio was market neutral -- always equally balanced between long and short positions. So whatever gain remains after paying for transaction costs can be considered to be a market-beating return.

That's the good news.

To appreciate how poorly momentum approaches can perform when the market's trend turns, however, consider how the professors' portfolio performed a year ago, just as the new bull market was taking off. At that time, of course, the stocks with the greatest momentum were those that had performed the best during the previous bear market. During the spring and summer of 2009, such stocks greatly underperformed those stocks that had been the bear market's worst performers -- which were skyrocketing.

From March through August of 2009, the professors' portfolio lost more than half its value -- 54.1%, to be exact.

Ouch. That's a huge loss over any period, much less just six months.

You might despair at finding some system that would consistently alert momentum investors to periods like the one that lasted from March through August of last year. After all, if we knew when the market's major trend was changing, then we wouldn't need momentum strategies to make money -- we could clean up simply by buying or shorting an index fund on margin. In any case, I hope it is needless to say, no one has shown the ability to consistently pinpoint those times when the market's major trend is changing.

Not all hope is lost, however. It turns out that we don't have to be a market timer to identify periods in which momentum strategies are unlikely to work. All we need to do is identify periods of high volatility which, almost by definition, are periods in which momentum strategies won't work very well. And, fortunately, because periods of high volatility tend to be clustered together, this is relatively easy to do.

Consider the performance of a hybrid portfolio that coupled momentum with a volatility-avoidance strategy. Whenever the VIX was above 30 at the end of a given month, this portfolio was out of stocks for the following month, earning the risk-free rate of return. Otherwise, it pursued the momentum strategy outlined above -- buying the 30% of stocks with the best trailing 12-month returns and shorting the 30% with the worst returns.

This hybrid portfolio did 3.4 percentage points per year better than the pure momentum approach, while nevertheless reducing risk by a third. That's a winning combination.

I present these results for illustration purposes only. I point this out not only because I'm not an investment advisor and cannot recommend any one specific approach. I say this also because there undoubtedly are better ways of devising a volatility avoidance strategy than automatically going to cash whenever the VIX rises above 30.

I can imagine that any of a number of technical trading rules might be useful in determining when the VIX is about to rise, for example, such as comparing the VIX to its 50-day moving average. I have not tested any alternate rules.

Still, my general points should be clear:

* Momentum strategies are, by themselves, risky, especially when the market's major trend is shifting direction
* It's possible to ameliorate that risk, and in the process increase return, by following momentum strategies only when the market's volatility expectations are low.

Mark Hulbert is founder of The Hulbert Financial Digest. He is a senior columnist for MarketWatch.

[Zeb_PT]

Uma duvida que me sempre levou a torcer o nariz a velas mensais (e intraday) foi uma diferença, a meu ver fulcral, quando comparado com velas diarias ou semanais, os fechos.

Nas velas diarias temos uma vela construida continuamente desde a abertura até ao fecho. Fecho esse que fixa as cotações e que poderá se dizer que representa o risco de ficar com esses activos de um dia para o outro, daí fazer sentido aquele ditado que afirma que quem fecha a cotação é quem tem mais experiencia (pois para entrar ou sair de uma cotada do fecho terá de o fazer com um risco muito maior pois qq calamidade ou bonança poderá ocorrer enquanto os mercados estão fechados).

Nas velas semanais acontece a mesma coisa com o agravante de não ser apenas uma noite, são mesmo dois dias mais uma noite, um risco a meu ver ainda maior.

Nestes dois casos uma vela tem o mesmo significado que outra pois têem as duas o mesmo principio (excepto nas semanais q apanhem feriados pelo meio). Têem a mesma abertura e o mesmo fecho temporal.

No caso das velas mensais já é diferente, penso eu, uma vela pode ter um fecho numa 2ª feira, numa 5ª ou mesmo numa 6ª e a meu ver um fecho numa 6ª feira não tem o mesmo significado que um fecho numa 5ª feira pois incorporam riscos diferentes, logo não comparaveis.

Um pequeno comentario para explicar também os meus parentese no incio deste comentario quanto às velas intradays. Tambem estas velas me fazem alguma comichão tendo em conta que a vela de fecho incorpora ainda uma maior diferença com qq das velas (continuas)...

EDIT: Só para concluir, desta forma, apesar de mais ruidosa, acho que faz muito mais sentido usar uma media movel de 10*4=40 semanas , a uma media movel de 10 meses, mesmo que a semanal tenha lá mais ruido, mas a meu ver esse ruido é importante e consistente ao contrário de uma media semanal que pode ter a "sorte" de apanhar um fecho num final de mês espectacularmente volatil e bull dando um sinal bem falso.

Opiniões?

[LTCM]

a estranheza vem não da extensão mas da unidade

10 meses ~= 200 sessões, logo não é nada do outro mundo ter uma mm de 200 dias

o bizarro é falar-se em meses: será que os gráficos são plurianuais e cada barra mensal?

Só contam os fechos, do género dos exemplos abaixo

[Supermann]

Gráficos mensais, com MM de 12 meses... sim acaba por ser muito equivalente à mm de 200.

Se bem que o ruido, envolto da mm de 12 meses, possa ser ligeiramente menor que a mm200 num gráfico diário, devido a que num gráfico mensal só damos validade aquando do fecho desse mÊs

[rsacramento]

a estranheza vem não da extensão mas da unidade

10 meses ~= 200 sessões, logo não é nada do outro mundo ter uma mm de 200 dias

o bizarro é falar-se em meses: será que os gráficos são plurianuais e cada barra mensal?

[LTCM]

Faber’s research showed that using the buy and sell signals generated with simple ten-month moving averages in a portfolio of five asset classes dramatically lowered overall volatility without sacrificing return (in this case, the classes are represented by indexes for domestic and foreign stocks, U.S. Treasurys, REITs and commodities).

ten-month moving averages?

Yes.

[rsacramento]

Faber’s research showed that using the buy and sell signals generated with simple ten-month moving averages in a portfolio of five asset classes dramatically lowered overall volatility without sacrificing return (in this case, the classes are represented by indexes for domestic and foreign stocks, U.S. Treasurys, REITs and commodities).

ten-month moving averages?

[LTCM]

Fresh look at an old idea: momentum investing.
By James Picerno
Momentum investing has long been a thorn in the side of conventional market theories. That doesn’t dim its power as a strategic investment tool, but it can still be an awkward beast.

The momentum approach—investing in stocks that have had high returns in the recent past and dropping those with sluggish returns in the same period to win outsize returns—is difficult to unify with the capital asset pricing model or the efficient market hypothesis. For the moment, it’s the financial equivalent of trying to put a round peg in a square hole. But some financial economists are trying anyway, and they may even succeed as they continue to peel away the mystery of asset pricing in the years ahead. But no one will find the process elegant.

In the meantime, there’s a list of theories arising to explain why momentum investing works, ranging from traditional risk-premium-based explanations to behavioral economics that study irrational investors.

The concept of momentum investing is compelling not just because investors are hungry for diversification and new strategies but also for it’s durability in the real world. Relatively few other strategies survive the transition from paper to real-world portfolios the way momentum investing does.

In the textbooks, minting profits looks easy because the standard asset pricing theory suffers from so-called return anomalies—sources of excess returns above and beyond what’s implied by the academic models. But exploiting these anomalies in actual portfolios is hard. Trading costs, taxes and other frictions take a toll. And many profitable return patterns that look solid in the financial laboratory have an annoying habit of disappearing when the crowd comes rushing in.

Is momentum investing different? It appears to be. Academics and money managers tend to agree that it is a resilient source of return that stands up to the usual lines of attack, such as criticism that it’s simply a byproduct of data mining or that it’s vulnerable to arbitrage. It doesn’t hurt that the basic idea is as old as investing itself and so it’s stood the test of time.

Since it was formally revived in the academic literature for the first time in the early 1990s, there’s been a wide-ranging debate about why momentum investing exists and what it means for modern portfolio theory. Yet now there’s a growing acceptance of it as a separate and distinct driver of return premiums. As if to herald this broader acceptance and the strategy’s coming of age, the first publicly traded index funds that formally target the strategy were launched last year by AQR Capital Management.

Is it time to consider (or reconsider) momentum as part of a diversified portfolio strategy? The answer would seem to be yes, if the expanding menu of product choices linked to it is any indication.

But the fact that money is chasing the strategy isn’t a persuasive argument in and of itself. Momentum investing doesn’t offer easy profits or sidestep risk. Indeed, investors seeking out such an approach must be comfortable with who’s running the strategy and understand the methodology. In short, the details matter.

A Formal Grasp Of The Obvious
The concept of momentum, generally, is unpretentious. Isaac Newton offered a useful working definition of it in Principia Mathematica more than three centuries ago: A body in motion tends to stay in motion.

As an investment concept, the idea has been around for about as long as organized securities markets have been operating. Momentum-based trading advice dominates the famous 1923 book Reminiscences of a Stock Operator, which says the trend is your friend. And the bull market of the 1960s brought the first wave of momentum-influenced mutual funds, inspired by the trading successes of money manager Gerald Tsai. John Brooks famously chronicled this era in his best seller, The Go-Go Years.

In the modern era, academic research on momentum begins with a 1993 paper in the Journal of Finance by Narasimhan Jegadeesh and Sheridan Titman, who showed how buying stocks that have performed well in the past and selling stocks that have poorly performed in the past can win an investor significant returns over three-to-12-month periods (in their now famous report titled, Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.)

Professors Eugene Fama and Ken French cited the momentum factor as an “embarrassment” for their own popular three-factor asset pricing model, which identifies small and value stocks, along with the overall market, as the primary risk factors driving equity returns. Fama and French couldn’t explain the success of momentum investing, even if they did acknowledge its existence.

One researcher, Mark Carhart, a finance professor and former managing director of the quantitative strategies group at Goldman Sachs, took the hint and simply added momentum to Fama and French’s three-factor model, coming up with a four-factor approach that he outlined in a 1997 study. Carhart decided that a richer framework for deciphering stock returns would require researchers to look to momentum and place it in the context of value and small-cap effects, along with the broad market beta.

“Momentum is ubiquitous across all major asset classes,” says professor Craig Pirrong at the University of Houston, summarizing the conclusion in one of his own research efforts.

A similar finding echoes throughout the analysis of Mebane Faber, a portfolio manager at Cambria Investment Management. His work demonstrates that momentum investing’s close cousin—trend following—has proved its worth as a risk management tool in connection with tactical asset allocation. Faber’s research showed that using the buy and sell signals generated with simple ten-month moving averages in a portfolio of five asset classes dramatically lowered overall volatility without sacrificing return (in this case, the classes are represented by indexes for domestic and foreign stocks, U.S. Treasurys, REITs and commodities). He explains in his book The Ivy Portfolio that managing a mix of asset classes using only moving averages can help an investor achieve a high Sharpe ratio (in other words, relatively high performance for the amount of volatility) when measured over several decades and compared with a buy-and-hold portfolio of the same assets.

Faber calls momentum one of the timeless sources of benchmark-beating return. Why does this particular alpha endure? The answer is bound up with investors’ behavior—the byproduct of greed and fear, he says.

Taking a page from Carhart and the four-factor model, researchers have thus continued to combine momentum-based strategies with other factors. For instance, a forthcoming study in the Journal of Portfolio Management reviews the benefits of combining momentum and value strategies in a global tactical asset allocation portfolio. “Momentum and value strategies applied to [such a portfolio] across 12 asset classes deliver statistically and economically significant abnormal returns,” write David Blitz and Pim Van Vliet in the report, Global Tactical Cross-Asset Allocation: Applying Value and Momentum Across Asset Classes.

Meanwhile, Shafiq Ebrahim, a researcher with Aronson+Johnson+Ortiz (AJO), a value-oriented quantitative money management firm in Philadelphia, explains, “Academic and practitioner research has shown pervasive support for the profitability of momentum strategies across several markets/asset classes.”

No wonder that momentum is routinely cited as a central force in managed futures strategies, which cast a wide net across asset classes, including equities, bonds, commodities and currencies. “Momentum is the dominant component of performance for the managed futures industry,” says Pat Welton, CEO of Welton Investment, a managed futures shop in Carmel, Calif., with $500 million under management.

If the momentum factor is pervasive across asset classes, surely it accounts for some portion of what’s generally thought of as manager “skill.” But it’s been difficult to compare active management strategies to relevant benchmarks and make the kind of apples-to-apples evaluations for momentum investing that an investor would for small-cap and large-cap managers against their respective indexes. Analyzing returns through a momentum prism has only just begun in the wider world of investing.

Momentum considerations are one of several “pillars” in AJO’s multi-factor valuation model, says Ebrahim. “We use it to distinguish attractive stocks from unattractive ones.”

A number of studies published over the years suggest that momentum also shows promise in terms of asset allocation. That has inspired some financial advisors to consider one of a growing number of publicly traded managed futures funds in client portfolios for enhancing conventional asset allocation strategies. Russell Wild, a financial planner in Allentown, Pa., has recently been analyzing the Elements S&P Commodity Trends Indicator exchange-traded note (LSC) as a potential investment. For the moment, he’s “dabbling” with it in his personal portfolio. The fundamental attraction is its mandate to hold long and short positions in a wide variety of futures contracts. “It’s momentum both ways,” says Wild, author of Exchange Traded Funds for Dummies.

A 2009 research report by MSCI Barra looks at the historical record for targeting momentum and other “alternative betas” for enhancing results in a traditional asset allocation of stocks and bonds (The report is called Portfolio of Risk Premia: A New Approach to Diversification, by Remy Briand, et al.). The basic conclusion: Adding momentum and other non-traditional approaches to a traditional stock/bond mix can substantially lower overall portfolio volatility with a minimal reduction in return.

That’s old news, as far as the research literature goes. Ditto for the institutional world’s use of alternative betas for augmenting conventional asset allocation strategies. What’s new is the average investor’s ability to formally allocate portfolio assets to momentum investments in something approaching the beta’s pure form, courtesy of the new trio of AQR mutual funds.

Momentum Index Funds
“We thought the time had come,” says Ronen Israel, a principal at AQR, about the timing of the firm’s 2009 launch of index products. The new mutual funds come in three momentum-tracking forms: large-/mid-cap U.S. stocks, small-cap U.S. stocks and foreign developed-market equities. The underlying indices are proprietary momentum benchmarks designed by AQR.

The 12-year AQR has a long relationship with momentum research. In particular, Cliff Asness (a former quant at Goldman Sachs and one of AQR’s founding principals) has penned several studies on the subject over the years, including his 1994 Ph.D. dissertation, which reviewed momentum as one of several sources of equity return.

Among the more compelling arguments for embracing a formal allocation to momentum investments, explains Israel, is the low historical correlation with other specialty betas. Notably, momentum tends to be negatively correlated with the value effect (stocks trading below some fundamental valuation yardstick, such as the book value or a particular price-earnings ratio), he says. On the other hand, momentum tends to be positively correlated with growth. But momentum is more than a proxy for growth stocks, Israel emphasizes. “You can argue it’s capturing the best parts of growth.”

As evidence, he reports that AQR’s large-cap equity momentum index has outperformed large-cap growth stocks (based on the Russell 1000 Growth Index) as well as the broad market (the Russell 3000) over the past three decades. For the 30 years through December 2009, the AQR Momentum Index posted a 13.2% annualized total return, the firm reports. That’s comfortably above both the Russell 1000 Growth’s 10.1% annual rise and the broad large-cap market’s 11.1%, as per the Russell 1000. . And while AQR Momentum’s correlation with the Russell 1000 Growth index is positive, it’s only mildly so, at 0.43. The implication is that the momentum beta is a complement to growth, or perhaps a replacement.

The Devil In The Details
Momentum’s enduring qualities may be reassuring, according to academics and practitioners, but it comes in a variety of flavors. “While momentum may seem like an excellent candidate for alternative beta,” advises Ebrahim, “there are variations in how it is defined that could complicate replication.” AJO defines momentum in several ways, he explains—as a trend in earnings revision, a trend in prices and a trend in trading volume, among other things.

Ultimately, such differences influence the end result. All momentum strategies, in other words, aren’t created equal, as a new study reminds us. A recent research paper co-authored by Hong-Yi Chen analyzes three momentum trading rules for equities according to price, earnings and revenue, reviewing how the three vary in terms of persistence and magnitude to generate an excess return through time (the study is called “Price, Earnings, and Revenue Momentum Strategies,” available at SSRN.com)

AQR defines momentum for its three index funds as the top one-third of stocks in the target universe (large-cap U.S. stocks, for instance) ranked by performance over the past 12 months. The benchmarks are reconstituted every three months to keep the indices populated with recent winners.
Momentum, after all, is somewhat ephemeral as risk premiums go. Although the general effect endures, it requires a fair amount of maintenance through trading for an investor to capture the beta as a long-term proposition and thus beat plain vanilla index strategies based instead on market cap.

“The implementation of a momentum strategy involves significant costs because such portfolios tend to contain stocks that are relatively more expensive to trade,” Ebrahim warns. “It is unlikely that [a momentum] strategy would be profitable in the absence of careful management of transaction costs.” That doesn’t deter AJO, AQR and other shops, but it does keep them humble and focused on costs. Or at least it should.

All things being equal, the stakes are higher for portfolio managers using momentum relative to more familiar risk premiums. Why? Successful momentum investing requires a deft hand. That inspires the question: Is the extra work worth the effort?

The historical studies say yes. But analyzing the past is one thing; showing real world results is something else. Momentum investing has clearly been a strong source of return for a number of active managers. It also casts a long shadow across the encouraging track record of managed futures as an industry. With the advent of AQR’s index funds, a new era dawns for using momentum as a stand-alone strategy and, arguably, in a passive way. But it doesn’t come cheap, at least by indexing standards. The new AQR funds carry net expense ratios of 49 to 65 basis points. That’s quite reasonable for active management, though investors will look twice at the price in a marketplace where some ETFs offer broad equity betas for less than 10 basis points.

As for experimenting with new risk factors in public funds, we’ve been here before. In the early 1980s, for instance, there was hope for the newly recognized power of the small-cap premium. In the following decade, small-cap value earned an academic blessing. In both cases, new products arrived soon after to exploit these academically sanctioned ideas. As a general proposition, both have worked out well, albeit with varying results.

Will a similar fate bless momentum with the mass audience? Stay tuned.
James Picerno is editor of The Beta Investment Report and author of Dynamic Asset Allocation (Bloomberg Press).