What makes Equilla different from other computer models?

 

This is a very reasonable question. Computer investing models abound today. There are rules based models, risk parity models, re-balancing models, and numerous quantitative models. So, why is Equilla different?

 

To answer that question let’s examine the investment industries’ obsession with predicting the future. If you watch any of the business channels such as Bloomberg, CNBC, or FBC you have probably seen industry experts from time to time expressing their opinions about where the market will be over the next 3, 6, or 12 months.

 

CNBC has a segment call Bull versus Bear. They select a company, for example Apple and have two professionals debate the pros and cons of investing in the stock. One is always a Bull and one is always a Bear. While the debates are often animated and thought provoking let’s take an analytical view of the premise.

 

By definition one of the experts must be wrong. Apple cannot end the period simultaneously up and down. At the end of the cycle it will either be up or down. Both of these experts advise clients, so one of them is going to be giving incorrect advice. If you acted on the advice they offered on the show your odds of being correct would be 50%. You could flip a coin and get the same odds. So maybe it’s just for entertainment.

 

Let’s go a step further.  The wealth management industry spends a great deal of time and money listening to market experts telling us where the market is headed. So is their advice any better than the CNBC show? Amazingly the answer is NO!

 

 47% is the average accuracy rate of over 68 well known gurus who have given over 6,000 predictions based on a study by the CXO Advisory Group. It turns out you could get the same results by, once again, flipping a coin.

 

Jim Cramer [1] is one of the gurus in this study. He has become rich and famous as a guest panelist and host of his own show (called Mad Money) on CNBC. So what is his accuracy rate according to the CXO study? It is 46.8%, solidly in the mean. We’re not picking on Jim Cramer. We singled him out only because he is one of the best known market pundits included in the study.  We could have picked out Marc Faber or Tobin Smith or a host of others and made the same point. You can check for yourself at

 

https://www.cxoadvisory.com/gurus/.

 

Why are the pundits so inaccurate? These people are really smart, well educated, have years of experience and the latest statistical methods at their disposal yet they produce results equivalent with the flip of a coin.

 

We believe it is due in very large part to their orientation. They are looking forward and trying to predict the future. It is not astounding that when you create a histogram of the gurus’ accuracy ratings you get a normal distribution (a random event).

 

                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Almost all investment strategies have the same orientation as the gurus. They are forward looking. In one way or another each strategy attempts to predict what the market will do in the next 6 to 12 months or longer.

 

Almost all models (Quant investment not Quant trading) have the same orientation as the financial advisors who appeared on CNBC and the market gurus who make a living being wrong half the time. That orientation is to try to predict where the market is heading. 

 

Now “Quants” (the people who build these models) are really smart, well educated people. The firms that develop these models are usually staffed with PhD s, physicists, mathematicians and statisticians. These folks are really good at what they do and the models almost always work for a time.

 

In the final analysis no one can successfully predict where the market will be on a sustained basis. The basic premise is wrong. No matter how hard we try or how sophisticated our methods we just can’t predict the future. The forward looking predictive orientation of these efforts is incorrect.

 

So what makes Equilla different from all of the gurus and various investment models? It is Equilla’s orientation. Equilla does not use a list of rules for either selection or trading.  There are no PE ratios, yield comparisons, ROI, betas, capture ratios, or any other typical financial metric used to determine trading or allocation. The model has no weighting or ranking system. The model does not attempt to rank companies by size, asset class, or even return.

 

Equilla does not attempt to predict what the market will do. We do not anticipate tomorrow. We look at what the market did yesterday and take advantage of that movement. Instead of hypothesizing on what might happen we capitalize on what did happen. Hindsight is 20/20 that’s what we count on.

 

 

 

[1] Note Mr. Cramer responded to the CXO study in a rather lengthy rebuttal. Please see the entire study and Mr. Cramer’s comments at the CXO Advisor web site

© 2019 BovaMetrics Colossians 3:23

  • LinkedIn - Black Circle
  • Facebook Black Round