No. of Recommendations: 23
Jim wrote: What's a good definition and metric of success? Anyone ever thought about that?
Great question! Indeed, it is something that I think about all the time. And my thinking has changed quite a bit over the years. Back in the 90s my only consideration was whether my returns would beat out an average of the three primary indexes that I was tracking and comparing to. These three had to be total return indexes so these days one would simply use an ETF for that purpose, e.g. IWM for the Russell 2000, or QQQ for the Nasdaq 100.
Around 2005 or so I began to think more in terms of limiting exposure. So a winning strategy for me was one where my time exposed to risk was reduced. My aim was to limit time in the market to a range of ten to twenty-five percent of the time. The rest of the time I'd be in cash. Success would then be measured on how well I did achieving this goal, while also significantly surpassing the average of the three indexes.
Jim's creation of the DDD3 has been super helpful in this regard. Using my understanding of his indicator I come up with the following DDD3 values with a LTBH of these ETFs.
* QLD from 6/21/2006 - 15.96%
* QQQ from 4/12/2007 - 8.96%
* SPY from 1/29/1993 - 7.99%
* DIA from 1/20/1998 - 7.17%
* IWM from 5/26/2000 - 9.46%
My absolute bare minimum threshold is to cut these in half, but combining my limiting exposure approach along with methods to reduce the DDD3 I can typically bring this DDD3 number down to less than 1%.
My primary trading system has a DDD3 of 0.15%. Despite this, the maximum drawdown is still -28.35%. But this was in the middle of the March 2020 volatility.
Very long backtests that were the bread and butter of the Mechanical Investing board's approach I consider more or less irrelevant. Markets change too much based on macro factors to consider them to be predictive. What works in one macro environment falls completely apart in another. Consequently, investing has to be approached with a more nuanced strategy that considers these factors. Which factors exactly?
* Interest Rates
* FED's policies - quantitative easing and tightening
* Inflation Rates
* Multiple macroeconomic indicators that identify recessionary pressures
* Consumer sentiment
I could go on and on, but you get the idea. A long-term backtest based on fundamental data of stocks doesn't take any of these things into consideration. This is where MI investing has failed and will continue to fail.
In summary, a key measure of success in my book is the ability to limit exposure to black swan events, while continuing to produce respectable returns that beat out all the major indexes. If I need to be invested 100% of the time just to match and slightly beat the major indexes, that for me, is failure!
