Efficient Market Hypothesis

Posted previously in a Linkedin thread:

The media has a propensity to alarm investors with hyped messages of gloom and doom and make people feel they need to rely on financial news shows and investment gurus for minute to minute updated information on the stock market. It benefits the media to have investors hooked into financial and economic news stories and articles.

Investors do not require constant vigilance, following daily returns, or listening to today’s star money managers. Prudent investing means not worrying about the ups and downs of the market. It means being able to invest and relax. So, one should read nothing; listen to no one; in other words, trust no one, except the signals you get from your trading system (which should be adequately back-tested.)

Research has shown that asset class allocation is the most important factor in determining a portfolio’s expected return level. In fact, asset allocation is 100% responsible for the variance in investment performance. An actively managed fund that stays invested in the same asset class can reliably capture the performance of any particular asset class.

Economic evidence shows that from a typical investment perspective, the major capital markets of a country are highly in-efficient, in the sense that available information is not rapidly digested and reflected in the market prices of securities. As a result, fiduciaries and other investors are confronted with potent evidence that the application of expertise, investigation, and diligence in efforts to ‘beat the market’ in these publicly traded securities ordinarily promises huge payoff making research and transaction costs negligible. Empirical research contradicting the theory of efficient markets reveals that in such markets skilled professionals have been consistently able to identify under-priced securities (that is, to out guess the market with respect to future return) with great regularity. In fact, evidence shows that there is high correlation between fund managers’ earlier successes and their ability to produce above-market returns in subsequent periods.

Back Test Results

All trades Long trades Short trades
Initial capital 1000.00 1000.00 1000.00
Ending capital 109246252495955560000000000000000.00 52797646361221217000000000000000.00 56448606134734281000000000000000.00
Net Profit 109246252495955560000000000000000.00 52797646361221217000000000000000.00 56448606134734281000000000000000.00
Net Profit % 10924625249595555000000000000000.00 % 5279764636122121900000000000000.00 % 5644860613473427200000000000000.00 %
Exposure % 57.69 % 29.74 % 27.95 %
Net Risk Adjusted Return % 18937007502618081000000000000000.00 % 17754688420852922000000000000000.00 % 20194841821029011000000000000000.00 %
Annual Return % 1438.27 % 1393.22 % 1397.31 %
Risk Adjusted Return % 2493.13 % 4685.10 % 4998.96 %

All trades 23685 12206 (51.53 %) 11479 (48.47 %)
Avg. Profit/Loss 4612465800969202600000000000.00 4325548612258005200000000000.00 4917554328315555400000000000.00
Avg. Profit/Loss % 1.90 % 1.84 % 1.96 %
Avg. Bars Held 1.00 1.00 1.00

Winners 23685 (100.00 %) 12206 (51.53 %) 11479 (48.47 %)
Total Profit 109246252495955560000000000000000.00 52797646361221208000000000000000.00 56448606134734263000000000000000.00
Avg. Profit 4612465800969202600000000000.00 4325548612258005200000000000.00 4917554328315555400000000000.00
Avg. Profit % 1.90 % 1.84 % 1.96 %
Avg. Bars Held 1.00 1.00 1.00
Max. Consecutive 23685 12206 11479
Largest win 1455573547636567500000000000000.00 1455573547636567500000000000000.00 841973390612262150000000000000.00
# bars in largest win 1 1 1

Losers 0 (0.00 %) 0 (0.00 %) 0 (0.00 %)
Total Loss 0.00 0.00 0.00
Avg. Loss N/A N/A N/A
Avg. Loss % N/A N/A N/A
Avg. Bars Held N/A N/A N/A
Max. Consecutive 0 0 0
Largest loss 0.00 0.00 0.00
# bars in largest loss 0 0 0

Max. trade drawdown 0.00 0.00 0.00
Max. trade % drawdown 0.00 % 0.00 % 0.00 %
Max. system drawdown 0.00 0.00 0.00
Max. system % drawdown 0.00 % 0.00 % 0.00 %
Recovery Factor N/A N/A N/A
Profit Factor N/A N/A N/A
Payoff Ratio N/A N/A N/A
Standard Error 7133027464202117100000000000000.00 3277583993878480200000000000000.00 3861155421866376900000000000000.00
Risk-Reward Ratio 0.03 0.03 0.03
Ulcer Index 0.00 0.00 0.00
Ulcer Performance Index N/A N/A N/A
Sharpe Ratio of trades 15.14 13.78 16.90
K-Ratio 0.0029 0.0030 0.0029

In Praise of Exchange Traded Funds…

 Exchange Traded Funds (ETF’s) generally provide the easy diversification, low expense ratios, and tax efficiency of index funds, while still maintaining all the features of ordinary stock, such as limit orders, short selling, and options. Because ETFs can be economically acquired, held, and disposed of, some investors invest in ETF shares as a long-term investment for asset allocation purposes, while other investors trade ETF shares frequently to implement market timing investment strategies. Among the advantages of ETFs are the following:

  • Lower costs – ETFs generally have lower costs than other investment products because most ETFs are not actively managed and because ETFs are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions. ETFs typically have lower marketing, distribution and accounting expenses, and most ETFs do not have 12b-1 fees.
  • Buying and selling flexibility – ETFs can be bought and sold at current market prices at any time during the trading day, unlike mutual funds and unit investment trusts, which can only be traded at the end of the trading day. As publicly traded securities, their shares can be purchased on margin and sold short, enabling the use of hedging strategies, and traded using stop orders and limit orders, which allow investors to specify the price points at which they are willing to trade.
  • Tax efficiency – ETFs generally generate relatively low capital gains, because they typically have low turnover of their portfolio securities. While this is an advantage they share with other index funds, their tax efficiency is further enhanced because they do not have to sell securities to meet investor redemptions.
  • Market exposure and diversification – ETFs provide an economical way to rebalance portfolio allocations and to “equitize” cash by investing it quickly. An index ETF inherently provides diversification across an entire index. ETFs offer exposure to a diverse variety of markets, including broad-based indices, broad-based international and country-specific indices, industry sector-specific indices, bond indices, and commodities.
  • Transparency – ETFs, whether index funds or actively managed, have transparent portfolios and are priced at frequent intervals throughout the trading day. Some of these advantages derive from the status of most ETFs as index funds.
Exchange traded funds will shape the new marketplace and the financial products based upon them will only continue to grow.  Rational Wealth Management is already in front of this curve pioneering new and exceptional growth algorithms that are taking the market by storm.  Placing yourself in front of this development will only benefit your portfolio.  Rational Wealth Management achieves this with a balance between aggressive growth strategies that position trade leveraged ETF’s and long term asset protection strategies that achieve a safe haven for your growth.

To answer a subscribers question on Drawdowns

3c66b_l_optTo answer a subscribers question I am commenting again: please refer to my post which you can see when you click on the link See Older Events (in my fund ^FASYF at http://FASYF.YoutualFunds.com) which I have replicated below:

9/09/11 (12:12)
You wrote:
No more volatile individual stocks which are volatile because of value hunters who deem it undervalued (opens lower and closes higher) or overvalued (opens higher and closes lower). I have learned my lesson. The reason I had a big drop in August is because I was trading individual stocks instead of ETFs. Only leveraged ETFs from now on because any fund that invests in diversified ETFS is also instantly diversified.
1 person likes this.

The same goes for other funds with similar longer track records like ^TMFYF and ^UCOYF which were also trading individual stocks. I have had mixed results with trading individual stocks, sometimes as much as 50% in a day, but they are too risky, infact more risky than futures or forex. So, I changed my issue selection to focus on leveraged ETFs. I have reset some funds when I was trading volatile individual stocks, but have not reset any funds once I started trading leveraged ETFs. So your assumption that those drawdowns may reappear is misplaced. Also, my system has grown to become more robust as long I do not let profits run on weekends and monthends. So trust the signals this system generates, read nothing, listen to no one except the signals you get from this system and you may become beautifully rich (Profit Factor > 3.0)

Direxion TNA/TZA


Rational Wealth Management (RWM)


The idea behind RWM is to exploit the fallacy of the myth that “There is no such thing as a Free Lunch.” Yes there is a free lunch, actually a buffet. It is achieved through portfolio diversification. It is not the standard “60% bonds – 40% stocks” mantra that is being offered everywhere. It’s also not the “stocks, bonds, real estate” mantra. What I am referring to is a portfolio that is powered by a diversity of “hot hands”. A “hot hand” has a primary underlying condition that drives the price of a market. My experience is that most people’s portfolios are driven by one, or at most a few, separate conditions. They are most definitely not diversified. If those few conditions become invalid, the portfolio will suffer losses…potentially extensive losses.

Focusing on picking a “hot” stock, but leaving your portfolio vulnerable to a single baseline condition, such as “economic growth” or “the availability of easy credit” is not wise.

In contrast, “investing” is following a systematic process that results in a truly balanced diversified portfolio whose returns are derived from a multitude of conditions. It starts with
first identifying and understanding the necessary baseline conditions that underlie the performance of each trading strategy. A trading strategy is a combination of a system (Technical or Fundamentals based) that exploits a condition (such as the concept of “hot hands”) with a market best suited to capture the returns promised by the condition (such as ETFs/Stocks). Trading strategies are then combined to create a balanced and diversified investment portfolio.

“Hot Hands” aims to select and invest in the strongest performing Exchange Traded Funds (ETFs) or Stocks and are traded daily. Momentum traders seek to enter the market at the start of large market moves to the upside (or downside).

Welcome to Rational Wealth Management!

Welcome to Rational Wealth Management!  This site is a subscription only access portal that offers investor relations services to an exclusive clientele.  If you wish to become a member of this exclusive clientele, click the register link to the right.  If you are already a client click the log-in link to the right or just enter your log-in credentials right on this page.  You will then gain access to the services provided for your membership access level.

Thank you,

Pal Anand and Benjamin De Mers