Acid Test of Mr. Market Market Madness

[ShoeshineBoy]

I decided to put Mr. Market to the test. The results were interesting to say the least.

Here is how I tested his results:

1. I assumed that you had a starting amount of money ($300,000) to distribute among an equal number of what I call "threads".
2. Each thread is like a subaccount. Example: If you have three threads, you have $100,000 in each thread that you can trade.
3. If all threads are tied up (in trades), then NO ADDITIONAL capital is put into the account even if one of Mr. Market's (undoubtedly) superb recommendation comes into play.
4. If all threads are tied up (with trades), then no additional trades are executed until one of the threads frees up.

 

[ShoeshineBoy]

The results were impressive overall but, as you might expect, were highly dependent on the number of threads.

1. With three threads of $100,000 apiece, your Jan. 2002 $300,000 account would have grown into $496,000 on 2/28/04, an "okay" 65% gain in a little over two years.

2. With four threads of $75,000 apiece, your Jan. 2002 $300,000 account would have grown into $695,000 on 2/28/04, a MUSCULAR 132% gain in a little over two years.

3. With five threads of $60,000 apiece, your Jan. 2002 $300,000 account would have grown into $552,000 on 2/28/04, a respectable 84% gain in a little over two years.

 

[ShoeshineBoy]

I've att'd the spreadsheet in case what I just said made no sense whatsoever.

Note: I had no mercy as far as stopping out a long running trade. If a trade lasted over a year, I left it in there tieing up a thread.

 

[ShoeshineBoy]

Is Mr. Market really the best stock-picker on the planet?

My conclusion: he's doing an impressive job but it requires a certain knowledge of how to manage your capital.

And, of course, I recognize that two years proves nothing with these markets...

 

[ShoeshineBoy]

Bottom line: I don't think Mr. Market has been given a fair shake, especially here on et. Let's face it: I can't think of anyone else who free of charge not only posts his trades for all the world to see but puts out very respectable returns. (Well, maybe marketsurfer from what I've read.)

Yeah, at times he makes Muhammed Ali seem timid and insecure. And, yes, this is a trading web site. But isn't there anything we can learn from a guy who has probably out performed 98% of the traders on this site?

 

[mrmarket]

Quote from ShoeshineBoy:

Bottom line: I don't think Mr. Market has been given a fair shake, especially here on et. Let's face it: I can't think of anyone else who free of charge not only posts his trades for all the world to see but puts out very respectable returns. (Well, maybe marketsurfer from what I've read.)

Yeah, at times he makes Muhammed Ali seem timid and insecure. And, yes, this is a trading web site. But isn't there anything we can learn from a guy who has probably out performed 98% of the traders on this site?

You've come pretty close to grasping what I've been trying to say here. Only obviously you've said it much more eloquently than I ever did. Your analysis is pretty darn good.

When ever I start a thread on quantitative momentum investing, it usually ends up as a discussion about body hair, adipose tissue and sexual prowess.

Thanks for your time and hard work on this matter. I'd be more than happy any specific questions you might have on my quantitative momentum model.

mrmarket@mrmarketishuge.com

 

[gms]

Quote from ShoeshineBoy:

Bottom line: I don't think Mr. Market has been given a fair shake, especially here on et.

I disagree. He's been posting since 10/02 and has over 600 posts to his name, and through it all, he's had many others put him to the test. His response tactic in return is to avoid, spin, insult and brag. If you agree with him, he pays you a compliment. And for all the mentions he makes of his education at Wharton, he never contributes anything of that. So I think he's been more than given a fair shake considering all his contributions.

You seem to be missing a lot of his current losing positions in your worksheet scenarios. Shouldn't they be all depicted?

I did something just like this back in November '03. At that time, I estimated he needed about 14 infusions of capital because of getting funds tied up over time. The results were net positive though, at an average 12% per trade, with an average trade duration of sixteen weeks. But he never acknowledged how close or far I was to the actual executions, and I doubt he ever would. But one thing's for sure, it's not 15% in 4 to 6 weeks.

Now, 12% in 16 weeks, if he could do that constantly, would compound to 44% in 52 weeks, and that's not so bad. What makes it bad is that his weakest link is the fact that he doesn't stop out and utilize his capital. That will, one day, bite him in the ass. Actually, it already has to some degree. He's eroded some of his profit by doing so. Heck, even Wharton grad Peter Lynch swapped his losers for new positions instead of holding losers until if and when they rebounded. And yes, because of his losing holds there is the constant need for new funding to open new positions as well. Aren't these terrible aspects of his system?

Because of the continual tie-up of multiple streams of capital in losing holds, making an ongoing need for new capital for new investments, and compounding that with a man who just doesn't seem to care if any of that is down 15%, 30% or whatever, and factoring into that mix having to maintain a house and three kids and the expenses of life without the wife getting ticked at the money infusion march going into the investment pool, it seemed to me that it argued to his not having much of a stake in any one position, or that he's paper trading. Your $300,000 may be way too generous.

 

[ShoeshineBoy]

Quote from gms:

What makes it bad is that his weakest link is the fact that he doesn't stop out and utilize his capital. That will, one day, bite him in the ass. Actually, it already has to some degree. He's eroded some of his profit by doing so.

I agree that there should be some kind of time stop. Example:

if you look at my spreadsheet at the ThreeThread sheet, you'll see that thread #3 has the following trade:

AXL 5/20/2002 12/29/2003 16%

It essentially ties up in this case 1/3 of the account for a year and a half just to get 16%. With a time stop, he could have rolled this capital into a better investment.

 

[ShoeshineBoy]

Quote from gms:


I did something just like this back in November '03. At that time, I estimated he needed about 14 infusions of capital because of getting funds tied up over time.

I assumed no infusions of capital. That way I didn't have to mess with IRR's etc. Plus, the "infusion of capital" issue is one of the biggest complaints against his methodology...

 

[mrmarket]

Quote from ShoeshineBoy:

I assumed no infusions of capital. That way I didn't have to mess with IRR's etc. Plus, the "infusion of capital" issue is one of the biggest complaints against his methodology...

You are correct. I have never "infused" capital. My portfolio will oscillate between 10 and 14 stocks. The # of positions grow because the funds are reallocated to more positions as the total capital increases.