Investment Strategies / Mechanical Investing❤
No. of Recommendations: 2
There are a growing number of reports that with the PRC's lockdown against its Virus ending, quarantining getting much lighter, and the relatively poor quality of the PRC's own vaccine, the Virus may be beginning to blow up in the government's face. We'll know more, empirically, over the next 90-ish days.
Assume it does. I'm curious what folks think what the impact of that, with its associated impact in the PRC economy, might be on our domestic economy and, in particular, on the effectiveness of our MI algorithms.
Eric Hines
No. of Recommendations: 6
There are a few disparate premises in the question. 1. Long term lockdown policy in China (unknown). 2. Rate of growth China's economy (unknown, but as heuristic growing generally faster than elsewhere). 3. Relation of lockdown policy to trade with US (unknown but more relates to US trade (un)friendliness than china domestic policy) 4. Effect of that trade on US economy (unknown). 5. Effect of that economic change on MI performance (does it refer absolute or relative performance to the S&P500).
I have not answered one of them or seriously implied whether or how they are even connected, but just revealed them as separate premises.
In short, even if we have insights about each of the 1-4, I don't think it explains anything about how effective MI is.
MI is effective (for most participating) if our CAGR exceeds the S&P500 over 7+ years. Most MI investors (for that matter most serious value investors) are extremely skeptical about having an opinion of what the market will do next month or next year.
- Manlobbi
No. of Recommendations: 2
Predicting the future is hard, but we have fun trying. My guess is that a whole bunch of workers are going to be out sick (or worse) and that supply chain problems will get worse, not better. So if you're counting on stuff from China for your business there will be a short-term problem. That said, longer term (3-5 years?) this too will pass. It wouldn't surprise me if the US markets continue downward for the next six months and it is hard to imagine adding to any positions before the summer.
No. of Recommendations: 6
I seriously love both of you bacon and hedgehog444, but please move this to the Macroeconomics board:
http://www.digitalscores.com/MB?bid=14This board is Mechanical Investing (MI) which includes anything about MI - posting new research, post-discovery results, questions by people getting started with MI or wanting support material, fun discussions of course also but the intellectual bulk to be MI!).
If you have economic ponderings - explain the hypothesis as to how to actually benefit, perform a backtest, or ask how you can do a backtest - lots of people here will answer.
Be brave and diligent - the best rewards in life don't come easily!
- Manlobbi
No. of Recommendations: 2
It's because I would have no reason to trust my conclusions on such questions that I invest mechanically. My ETF-based screens backtest to the 1980s. A lot of water under the bridge since then. In that context I wouldn't expect anything extraordinary from China's COVID crisis.
Baltassar
No. of Recommendations: 1
This board is Mechanical Investing (MI) which includes anything about MI....
Hence the original question. Much of the discussion does, indeed, belong on the Macroeconomics board. However, MI and its algorithms are premised on certain underlying assumptions, and the question wonders whether those questions, and your parsed questions, have any impact on those underlying assumptions, and so on the extant algorithms. In the intermediate- to longer-term--those 3-5 years suggested by hedgehog444, and longer, I add--I agree things will settle out. But we have to live through the near-term to get to those other years. We're not allowed to skip ahead.
Eric Hines
No. of Recommendations: 0
Hence the original question. Much of the discussion does, indeed, belong on the Macroeconomics board. However, MI and its algorithms are premised on certain underlying assumptions, and the question wonders whether those questions, and your parsed questions, have any impact on those underlying assumptions, and so on the extant algorithms.
You are exactly right that MI is premised on certain underlying assumptions, but more realistically it is based on a continuous stream of assumptions (changing, semi-random, highly unpredictable conditions). Baltassar expressed this similarly in that they have been selected over a periods that have covered far, far, far more than Covid (particularly Covid continuing in a economy a degree of separation away).
In the intermediate- to longer-term--those 3-5 years suggested by hedgehog444, and longer, I add--I agree things will settle out. But we have to live through the near-term to get to those other years. We're not allowed to skip ahead.
This boils down to market timing, which is pretty much outside of MI. We are not asking how MI will do so much as what the market will do (with MI highly correlated, and extremely correlated in direction even when the volatility is different). But it is fair question, I'm just putting the question in richer context.
- Manlobbi
No. of Recommendations: 1
Which of MI's underlying assumptions seem to be called into question by the looming COVID crisis in China?
That's not intended to be any sort of concealed rebuff of your point: I'm genuinely interested. Because I would have said that one of main underlying assumptions of MI is that it is best not to react to such things.
Baltassar
No. of Recommendations: 1
Which of MI's underlying assumptions seem to be called into question by the looming COVID crisis in China?
Possibly none. But I don't know, hence my question. Most of our MI algorithms are predicated on rebalances much more often than annually: the Virus crisis in the PRC will take longer than that to unroll and settle out. It's not just a matter of the expected economic slowdown in the PRC rippling out, it's why and how it might ripple: supply chain relocation, initial resources obtained elsewhere or substituted out, trade decoupling, and so on. Do any of these impact the underlying algorithm assumptions--not just algorithms' penchant for rolling to other companies, but the assumptions, if any, underlying that penchant.
Regarding market timing, it certainly can be part of MI, beginning with a mechanical decision to time or not, and if so, following mechanically the mechanically derived (if not effectively backtested for efficacy) the timing criteria.
Eric Hines
No. of Recommendations: 3
Possibly none. But I don't know, hence my question. Most of our MI algorithms are predicated on rebalances much more often than annually: the Virus crisis in the PRC will take longer than that to unroll and settle out.
Why is the PRC so much in your attention? Usually the most consequential future events related to economics (or for that matter, anything) aren't the ones in the news today. The data for MI screens is rather confined to US stocks, plus sometimes we use database covering European stocks, because the information standardisation is important. I'm even going to question for a momentary if it is more reliable information, but as a practical matter we have developed most of the testing/screening infrastructure around US stocks. Then, as for 'exogenous influences' on US stocks, the China's policy for Covid is hardly important. What will be important will be something that you are not modelling, that will happen (random() * 10) years from now, and is not being discussed, and not able to be determined - which is part of the value of MI - we don't try to speculate about it.
The whole point of doing 20, 30, 40 or 100 year backtests, and giving enormous weight to post-discovery data, is to find criteria that was robust over long periods including what we think of as 'exogenous' phenomena, much of it far more consequential than what Covid was or will be. I do put in bold the word 'was' as most MI practitioners inadvertently use the word 'is', and the distinction is important, but it is the best we have.
Regarding market timing, it certainly can be part of MI, beginning with a mechanical decision to time or not, and if so, following mechanically the mechanically derived (if not effectively backtested for efficacy) the timing criteria.
I definitely advocate philosophical discussions here, and enjoy to see more, and more - and especially some of the other Shrewdom boards, however the practice of MI is highly, highly pragmatic. If you have a process to decide if backtesting can be used, try to define it rather than only proposing that it could be possible. Upon defining it, you, or someone can try to backtest it. But ready? An idea that seems sound, or not only sound but seems brilliant, in theory, can often give surprisingly terrible results when tested or applied with a real portfolio - that is the nature of markets, or it might even so greatly underperform the market that it can become useful as candidate for a good shorting screen. I don't want to sound harsh, but this is the way the world works.
Enjoying the discussion.
- Manlobbi
No. of Recommendations: 4
Regarding market timing, it certainly can be part of MI,
I think the BCC signal is one of the most useful concepts this board has developed. It has what are for me two important characteristics of a timing signal. It does not turn red too often, and it is not likely to be wrong for long.
Baltassar
No. of Recommendations: 4
As others have said, the idea is that MI adapts to changes (might not always work), but a sudden change can lead to a period of time when MI methods stop working. Jim (mungofitch) has explained this before for, say a momentum screen at a V type market bottom. Typically the best performers at such a bottom is the junk that dropped most to the bottom but your momentum screen immediately after the bottom will be looking for what dropped least. This will essentially 'break' your MI screen until the bottom has mostly disappeared from your momentum look back period. Similarly, if there was a sudden economic impact from PRC, it might affect the performance of some MI screens for a period but the MI theory would suggest that the impact should be short-lived and should pass just like any other economic shock.
StevnFool
