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Pastimes : Triffin's Market Diary -- Ignore unavailable to you. Want to Upgrade?

To: Triffin who wrote (452)	12/29/2014 10:49:54 AM
From: Triffin	Read Replies (1) \| Respond to of 868

BC: TO TWEAK OR NOT TO TWEAK .. .. .... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. Don’t Interfere With Your Investment Strategy Finding an investment strategy that can beat the market over any reasonable period of time is relatively easy, not interfering with it is the real challenge. Joel Greenblatt- value investor best known for “The Magic Formula” -made his strategy available to the public in May, 2009. Investors interested in using The Magic Formula were given two options: they could either manage the accounts themselves- picking which names to buy and when, or let these accounts be professionally managed with an automated trading solution. What followed probably isn’t very surprising. Over the next two years, in aggregate, the self-managed accounts returned 59.4 percent, versus 62.7 percent for the S&P 500. The professionally managed accounts returned 84.1 percent! A twenty-five percent difference over just two years is an enormous gap. Perhaps even more remarkable is that the lousy results attributable to interfering with the model are not unique to retail investors. Joel Greenblatt, creator of the strategy fell victim to the allure of tweaking the model. From the excellent book, Quantitative Value: “Even Greenblatt has said that he cannot outperform the Magic Formula. He ran an experiment in which the Magic Formula selected stocks for him and his business partner to buy, and then they both went through the list and removed those stocks they “knew” to be value traps. They lost to the Magic Formula. Even a stock in which Greenblatt had personal experience fooled him. The model selected a pharmaceutical stock, but he knew that its main product was about to go off-patent, so he overruled the model. And the thing doubled in six months” Automated investment strategies don’t always work, but interfering with these strategies rarely works. Contrary to popular belief, the market can be a forgiving place over time; the less you interfere, the more likely it is to forgive.