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Author: Zeelotes Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 253543  
Subject: Re: A Blend Torpedoed Date: 11/16/2007 6:52 AM
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Robbie wrote:
While I believe the Screen Builder's Sharpe ratios of 2.2 for such blends are computationally correct, daily-cycled testing reveals them to be flukes caused by over-tuning them to the quirks of the particular slice of monthly history represented by the Screen Builder.

Indeed, the 2.2 is a fluke, but I'd argue that the bigger part of the fluke is not the difference between monthly and daily backtesting, but the difference between running one blend for the full history, and doing what you'd actually do in real-time, obtain a new blend at the start of each year using the same exact approach one uses now to get the blend in the first place.

Let me illustrate -- here is a comparison of your results using daily data with Gritton's results using monthly data:
               S&P    Sharpe 5 Blend                     S&P
Monthly Daily Monthly % Diff % Diff
CAGR: 11.86 33.84 42.36 -20.1% 185.4%
GSD(20): 14.91 17.39 16.17 7.5% -14.3%
Sharpe(20): 0.57 1.61 2.14 -24.8% 181.0%

So the CAGR drops by 20%, the GSD increases by 7.5% and the Sharpe drops by nearly 25%.

Now what happens when you compare the original backtest to actually using the strategy over the full period:
               S&P    Sharpe 5 Blend                     S&P
Monthly Strategy Check Monthly % Diff % Diff
CAGR: 11.86 26.13 42.36 -38.3% 120.4%
GSD(20): 14.91 18.58 16.17 14.9% -19.8%
Sharpe(20): 0.57 1.18 2.14 -44.9% 106.0%

Now we find a drop in CAGR of over 38%, an increase in the Sharpe by nearly 15% and a 45% drop in the Sharpe.

This brings me to the concept of something being torpedoed -- what exactly do you mean when you use this term?

According to Merriam-Webster we get these two definitions:
1 : to hit or sink (a ship) with a naval torpedo : strike or destroy by torpedo
2 : to destroy or nullify altogether : wreck <torpedo a plan>
http://m-w.com/dictionary/torpedoed

It seems to me that the main idea of the word is to destroy or nullify. If what you mean is to strike it such that it takes on damage, than I'd say your use of the word is great IMO. But if your main point is to destroy it, or nullify it altogether, than I for one, don't agree.

Let me illustrate with the examples from your post:
               S&P       YldYear2                        S&P
Monthly Daily Monthly % Diff % Diff
CAGR: 11.86 31.23 36.09 -13.5% 163.4%
GSD(20): 14.91 20.93 20.93 0.0% -28.8%
Sharpe(20): 0.57 1.27 1.48 -14.2% 121.7%
S&P LLTD S&P
Monthly Daily Monthly % Diff % Diff
CAGR: 11.86 33.8 41.8 -19.1% 185.1%
GSD(20): 14.91 27 25.25 6.9% -44.8%
Sharpe(20): 0.57 1.14 1.46 -21.9% 99.0%
S&P H52EarnPS S&P
Monthly Daily Monthly % Diff % Diff
CAGR: 11.86 30.48 39.12 -22.1% 157.1%
GSD(20): 14.91 27.12 24.57 10.4% -45.0%
Sharpe(20): 0.57 1.04 1.41 -26.2% 81.5%
S&P PEG-Minimalist S&P
Monthly Daily Monthly % Diff % Diff
CAGR: 11.86 33.49 45.71 -26.7% 182.5%
GSD(20): 14.91 27.58 26.19 5.3% -45.9%
Sharpe(20): 0.57 1.12 1.54 -27.3% 95.5%
S&P PIH_CSO_simple S&P
Monthly Daily Monthly % Diff % Diff
CAGR: 11.86 32.06 40.45 -20.7% 170.4%
GSD(20): 14.91 22.77 22.3 2.1% -34.5%
Sharpe(20): 0.57 1.22 1.55 -21.3% 112.9%
S&P Sharpe 5 Blend S&P
Monthly Daily Monthly % Diff % Diff
CAGR: 11.86 33.84 42.36 -20.1% 185.4%
GSD(20): 14.91 17.39 16.17 7.5% -14.3%
Sharpe(20): 0.57 1.61 2.14 -24.8% 181.0%

What I see from a comparison between daily and monthly data is a hit of about 25% in the overall return and in the risk-adjusted return as measured by Sharpe. In my view, a hit of anywhere from 15 to 25% is to be expected when you increase your granularity from monthly to daily, and go with an all start days test. When the hit exceeds 30%, or above, I could see talking about it in terms of being nullified or destroyed.

We need to keep in mind that these five screens still show an average CAGR that is more than 175% above the S&P with a Sharpe that is just over 100% over the S&P. Granted, the GSD exceeds the S&P by an average of 40%, but this is to be expected when you consider that these screens are holding four stocks compared to the S&P holding 500. Even after you have torpedoed the blend I still find it very impressive -- keeping in mind that the strategy itself is where it really gets torpedoed.
               S&P    Sharpe 5 Blend                     S&P
Monthly Daily Monthly % Diff % Diff
CAGR: 11.86 33.84 42.36 -20.1% 185.4%
GSD(20): 14.91 17.39 16.17 7.5% -14.3%
Sharpe(20): 0.57 1.61 2.14 -24.8% 181.0%

It beats out the S&P holding just twenty stocks compared to the benchmark of 500 -- a CAGR 185% higher, a Sharpe not far behind, and a gain in GSD of just 14%.

Is this something that has been torpedoed, or just damaged. I'd say the latter -- it provides us all with a healthy dose of realism, but it is still a very worthwhile investment.

Robbie added:
Many, like myself, will say that they had already expected the future to fall short of the past by perhaps 15 CAGR points for a host of other reasons; if so, then before this post you were expecting a CAGR of 42.36 - 15 = 27.36; now that the past has been clarified, you would only expect a CAGR of 33.84 - 15 = 18.84.

I'd say that if any of us can consistently produce a gain at or near 20 we are doing among the best in the world. Anything above that -- and certainly double that -- is fantasy land at best, and running after it, a recipe for total annihilation at the worse.
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