April 20, 2012

Over the past few months, I've been mostly involved in backtesting various concepts to see if they could enhance my trading methodology. The process is still ongoing. Meanwhile, I thought it might be interesting to respond to a post on the LinkedIn group Automated Trading Strategies, where the question was: why not show your methods live on Covestor or Collective2? This way, anyone would see your so-called “over”-performance results and if your trading methods have any value.

The question seems most reasonable. Immediately, the answer should be: why not?

At first, the challenge seemed interesting. However, after thinking about it, it would, from the start, be mostly a waste of time. The reasons are quite simple and are related to the very nature of the trading methods themselves.

My trading methods span years, not days, weeks, or months, but literally years. I am not trying to outguess next day's price variations or next month's. I design trading strategies to accumulate shares over time. A short-term performance result is just considered a wiggle of little importance. What is the use of having a short-term profit if I lose it the year after? And what help would it be to anyone to have a trading method that can show short-term profits but that, over the long term, fails?

My methods start as if on a Buy & Hold strategy, and so initially will underperform for the simple reason that I am slowly scaling in positions and being underexposed. From the start, there is no alpha generation, so how could such a method be noticeable on either of the cited sites? This would translate, in the beginning, as no extra performance, no extra interest, and no willingness to pay a fee to, at first, strictly underperform even the Buy & Hold. And that, to me, would be quite understandable.

It would take years for my methods to get noticed above those that are simply at the right time in the right stocks and really move fast, even if it was by luck of the draw or by coincidence. Nothing beats the big bet on the big move. But is the objective to be lucky short-term, or is it to outperform over the long haul?

So for me, undertaking a Covestor or Collective2 test would provide no benefits until at least a few years, I would venture from 3 to 5 years before anyone would show interest in my work. And then being paid peanuts by subscribers who would have to undergo all anew the same process, which led to overperform. They would have to hold on for 3 to 5 years after my own 3 to 5 years to show the start of overperformance. Would you take the challenge of waiting from 3 to 10 years just to show that your trading methods have value? Well, I certainly will not. I would go for performance now because the market game is a compounding game and I consider time the most important element of the equation.

I intend to report back soon on my latest tests. Thanks for following my research.

Published ... April 20, 2012,    © Guy R. Fleury. All rights reserved.