The 45° Test
The 45° Test
If you want to test machines that claim to beat the market, you should use the 45° test, which says that if the market has to cover the longest distance, it should not travel at 60° or 30° but 45°. Because the higher the slant less sustainable the structure, the lower the slant, the weaker the structure, and hence the magic of 45°. And it’s not difficult to understand what could happen above 60° and what may happen below 30°. Above 60° we are getting ready for 1929 and below 30° is no man’s land.
Now, this may all be a technical talk, but you can see the same logic fundamentally. Ask any asset manager and he/she can explain to you that a bull market is hard to beat. This means that the idea of Active investing, which is going in and out of idiosyncratic selections interferes with the pace and the race with the benchmark, which naturally is on the fastest track. Hence when there is a secular trend, the best is not to interfere with it and just stay mounted on the horse.
This is why the 45° test for machines that claim to beat the market. A machine that selects all components of a basket, has an average readjustment period for weights more than 18 months, needs to understand something unique about market behavior to eke out an excess return vs. a benchmark from March 2020 lows to date. The machine should work despite COVIDs unprecedented waves that were pummelling the global economic ship and still maintain the lead. If a machine can do that, either it has access to Clarkian advanced Science or it is just simply lucky. But then if the machine, allows you to test it, month after month, day after day, year after year to pick any starting point and do the test forward, it won't be Science fiction any more.
So here we are with another of our Science Fiction models, almost ready for your trial, presenting the Exceptional & Rich U.S. 500, with the top U.S. 500 components that starting March 2020 lows, somehow magically delivered [on paper] 3.22% excess return with a neat 0.51 Information Ratio. Of course, these are paper models, but then an Index is a paper model, till it gets followed by 35 trillion dollars and transitions from a new entrant to become the incumbent.
Exceptional & Rich U.S. 500 vs. Standard & Poor 500
5 January 2020 - 4 May 2022
Oh! and by they way, these small excess returns are the one that cumulate and create sustainable wealth because what may know how to smartly go up, might just also get lucky, knowing how to smartly manage the way down, which generally is not a 45° slope.
Imagination is a powerful tool, it can transform Science fiction into Science.
AlphaBlock Team