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On 6/7/2018 at 11:36 AM, explo said:

I will update more frequently now to keep track of whether TAN is clearly diverging from market.

I’m not comparing against TAN anymore. But the divergence trend keep forming. These trends take time to be well confirmed, but we are getting there.

https://yhoo.it/2x1we4A

Edited by explo

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I'm breaking out the inflation from the Risk-Free return source to get the full picture of the return breakdown. The risky return sources - Alpha and Beta - are always real. It's very clear then that we are in a risk-on period now with inflation being higher than the Risk-Free return causing the real Risk-Free return to be negative. Risky investments are required now to preserve (and hopefully grow) the purchase power of wealth.

return.thumb.png.f96d5846779407b000c44c0ceee17a6a.png

Note that I'm in Europe which is a bit behind and more extreme than US on its monetary policy. Although the (short-term) US Risk-Free rate of return (13 week treasury bills) has been rising quickly (flattening the yield curve) the inflation there is still outpacing it, so the profile of negative real Risk-Free return applies to a USD denominated portfolio too. Due to the rate differential together with the growth differential between the US and the rest of the world capital is flocking to the USD for the purpose of both risk-free and risky investment. Fortunately my portfolio is very positively exposed to that trend and has recently gained a lot on this current state of the world.

Edited by explo

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Following the changes to the Telecommunication Services GICS sector (which with the changes has been renamed to Communication Services) my portfolio of 97 stocks now includes this sector too and therefore now includes all 11 sectors. Although there are 3 sector flows in the portfolio following the GICS changes the net effect is that my Information Technology allocation goes down from 20% to 15% as my Communication Services allocation goes up from 0% to 5%.

Current structure: Consumer Discretionary and Information Technology sectors make up 40% (down from 45%) of the portfolio and the 9 other sectors make up the remaining 60%. More specifically Consumer Discretionary is 25%, Information Technology is 15%, Energy, Materials and Health Care are 10% each and the 6 other sectors are 5% each. 70% of the stock allocation are from cyclical sectors and 30% from defensive sectors (Energy, Utilities, Consumer Staples, Health Care).

Before and after the change:

image.thumb.png.6e72f506cff5da37007bc730cd2deeea.png  image.thumb.png.97e28764f5a12c2b4307bff434db33f3.png

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I am glad you are doing well Explo.  But after reading through a lot of your "recent" posts, I have no idea what you are doing...

Is this something you developed entirely on your own? or is based on/derived from work by others?  (Is there a book or website that would explain the underlying concept/principles?)  I have an MBA so I don't need the fundamentals explained--just want to understand what approach(s) you are following.

A year or so ago you were mostly invested in funds with some individual stocks.  Then in the past ~6 months you shifted to some type of quantitative selection process involving a lot of computation of prior returns that led to investing in a large number of individual stocks across all sectors...where large is ~100.  

Given your strong returns in a short time period, I assume you are following some sort of momentum approach, but it seems like you are invested in a LOT of stocks for a "normal" momentum approach.  Are you trading constantly? 

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14 hours ago, disdaniel said:

I am glad you are doing well Explo.  But after reading through a lot of your "recent" posts, I have no idea what you are doing...

Is this something you developed entirely on your own? or is based on/derived from work by others?  (Is there a book or website that would explain the underlying concept/principles?)  I have an MBA so I don't need the fundamentals explained--just want to understand what approach(s) you are following.

A year or so ago you were mostly invested in funds with some individual stocks.  Then in the past ~6 months you shifted to some type of quantitative selection process involving a lot of computation of prior returns that led to investing in a large number of individual stocks across all sectors...where large is ~100.  

Given your strong returns in a short time period, I assume you are following some sort of momentum approach, but it seems like you are invested in a LOT of stocks for a "normal" momentum approach.  Are you trading constantly? 

It’s actually the opposite of a momentum strategy (I just had a lucky start). It’s a fixed balance approach, but with some slack allowed to capture some momentum too before the strategic balance is distorted too much. The optimal balance is found using the mean-variance optimization (MVO) framework of Harry Markowitz’s Nobel prize awarded modern portfolio theory. It’s a good tool to find a proper balance if suitable constraints are used. It made me realize that it was easier to find good stocks than funds and though stocks are more correlated my balance was sub-optimal before with its heavy hedge funds bias.

With a diversified set of 155 alpha generators (97 stocks, 58 funds) I don’t have to worry too much about one failing. Largest stock has 1% and largest fund has 3%. Beta always goes up long-term as it is very broad and constantly passively adjusts weights by market cap growth success by simply not trading, i.e. stick with winners of all partcipants. It is also, by definition, the same in all assets (just different amounts). So that’s never a worry in terms of return production and the volatilty level can, in theory, be allocated as desired. The stocks generate high net beta and the funds very little. MVO gives both optimal alpha vs beta balance and balance of the different alphas which results in an asset balance and the first part basically determines the stocks vs funds allocation (beta can only be lowered efficiently by allocation of low or negative beta funds).

I don’t trade constantly and I don’t have to think about my trades. When an asset allocation is deviating more than the allowed slack from its target allocation a re-balance trade for that asset alone is triggered, but with 155 assets there could be quite a few trades triggered each month. It depends on how big slack is allowed. 

The strategy, opposite to passive beta, relies on the expectation that past outperformers will like be outperformers in the future of financial assets too. Sort of like Juventus expecting that Ronaldo will continue to outperform other soccer players when they bought him from Real Madrid. The big effort is to scout the financial markets to find the stars and plug-in their statistics to the big covariance matrix that will together with mean returns through MVO find you a perfectly balanced squad where you have plenty of offensive capability while retaining a strong defence. You can configure you preference for offence vs defence bias with the risk-aversion parameter.

Edited by explo

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Thanks for that explanation of your methodology, Explo.  Very interesting.  I use Kalman filters in my work (currently missile defense analysis and simulations), which are another way of variance optimization.  Interesting that the same basic mathematical theories can be applied to such diverse applications.

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35 minutes ago, solarpete said:

I use Kalman filters in my work (currently missile defense analysis and simulations), which are another way of variance optimization

Sounds like interesting work. I took many courses on control theory during my MSc. 

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1 hour ago, explo said:

Sounds like interesting work. I took many courses on control theory during my MSc. 

It is indeed.  I am quite fortunate that my work is both interesting and rewarding.  Now if only my portfolio would emulate that rewarding part (chuckle)....

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First week of volatility since the new inception. This will be the first test. In the very short-term the beta value seems to spike (long-term beta value based calculations of alpha and beta returns getting correlated) with the volatility spike.

return.thumb.png.3bc9259748e791e0c2e49574a2200686.png

Edited by explo

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On ‎9‎/‎5‎/‎2018 at 12:02 PM, explo said:

Since the portfolio will not reach full diversification until above mentioned CTA fund gets sold this month the August 1 date is not very relevant as inception point. Instead I'm looking to incept this new strategy at the first point where the portfolio start behave according to it (meaning earliest time that concentrated holdings have been behaving since until sold off). I found this date to be March 23 this year, since prior that the concentrated holding in the CTA funds caused non-diversified behaviour of the fund basket.

Here's the new chart for new portfolio inception:

return.thumb.png.80dc5f322a48833d4fcbd22bbbdc4863.png

Since I'm not tracking the two separate asset type baskets (single securities vs investment funds, i.e. non-diversified vs diversified assets) anymore I could rewind the portfolio inception date further to the more natural January 1, 2018. This is the first day that starts a new quarter (and year) since I transitioned to the mean-variance optimization approach (instead of back testing optimization).

The portfolio as a whole as well as the Alpha risk individually has behaved as expected for a diversified strategy this year even though the diversification was not completed until the back half.

return.thumb.png.65ba855dfe4f48f5a75358c4f400f140.png

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So much selling/shorting in solars right now. Watching FSLR go up and then come right back down and down and down is depressing. What do these shorts know?

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