I think opening R2G to micro cap stock not only bad idea for R2G clients but also hurting p123’s core subscription business. I don’t think volatility is the main reason R2G viewer drops because the volatility exist everywhere in every stock market ETF. The main reason is to allow designer choose micro cap stock in simulation to create illusion for R2G client. Don’t get me wrong. P123 is a great product.
All:
I, frankly don't like R2G or its newer version SA:
1) It's a black box. In my view there is no way to validate it; no way to fix it. No way to know how bad the drawdown you're in is going to be.
2) I totally agree with gs3. R2G/SA should NOT allow trading beyond the liquid 2000. Anything more hurts me and all the other non-SA clients.
3) The survivorship bias is ginormous. It's almost a con-game, pick a public ranking system, create a simulation that satisfies the minimum criteria, and rake in the dough. Oh, that little 45% drawdown that nobody wants to sit through and few can, that shows how pure the system is -- no market timing here. What? Cost all my subscribers a pretty cent? Well who cares, I got their money and they've got less -- a lot less. Hey, it's the real world; I can always create a new system -- Any takers for my new extraordinary SA exclusive turbocharged rocket system? [No relation to rocket mortgages.]
Bill
Custom benchmarking is an in-progress project with the next deliverable scheduled to come from me (I’m field testing the protocol with p123 downloads and Excel). We’ll get there and I expect it to come within a very reasonable time frame.
Actually, black box is pretty standard in the world as attested to by the huge body of law regarding trade secrets supported by patent and copyright. Any time you’re getting advice from anyone, other than to follow an index, you’re getting a black-box decision process and even the S&P 500 is a black box (S&P itself recognizes that the 500 etc. are really actively managed portfolios). The issue is spotlighted more with us because unlike other investment sources, we’re so much about the decision process and objectivity and because we have a culture of vigorous forum discussion and debate. But the black box nature of R2G/SA is, actually, more in line with the bigger wider world.
That’s why it’s so so so so so so so so critical for a designer who wants to succeed to get out there, at least on the forums, and show the world who you are and how you approach investing. Talk about the market. Talk about stocks. Why are you bullish? Why are you bearish? Show your thought process. That’s what’s needed. People can and should assume the details of your models will reflect who you are and what you believe.
As to sims and drawdown discussion I’m well on record as to why I believe they have been misused and why they hurt rather than help SA subscribers. But designers who disagree are free to put as much info as they want into descriptive documents posted with the models and subscribers who disagree with me are free to read and react to them as they wish.
There’s another R2G/SA issue that hasn’t been discussed an needs to be covered; he subscription fees.
We’ve allowed designers to do their own thing. But that does not exempt them from the laws of supply and demand. And in assessing demand, designers need to be thinking about the factors that influence what customers are willing to pay.
Let’s start here: You can work with a professional R.I.A. for 1% of assets. You will get buys and sells – implemented for you. And you will have in person and phone communication with a professional who will go further and evaluate your income, expenses, future needs, etc. and work with you on an ongoing plan. Clearly no rational person can be expected to spend more than 1% of what’s in an SA model on subscription fees unless the model delivers stupendously and I’ve seen none (Including my models) that have come close to justifying a premium above 1%. So we know the ceiling has to be below 1% of amount in portfolio.
Next, let’s think about the floor. The robo firms have set it in the range of 0.15%-0.25%. But we can justify higher (a model that can’t probably should be removed by the designer). The robo firms offer pretty web site but plain vanilla ETF packages that have nothing to do with the client’s needs but reflect how hard the quants on their staffs studied when they took MNA classes in MPT (and from some of what I’ve seen, it looks to me like they stuck with Cliff notes).
Considering that our subscribers have to pay commissions on top of model subscription fees, let’s say, for argument’s sake, that the monthly subscription price multiplied by 12 should be . . . ommm . . . let’s say .50% of the amount of money invested in the model. You can fine tune that up or down with reference to the 0.25%-1.00% outer limits.
NOTE: There is no rule or law setting approximately .50% as a proper subscription price. It’s just my analysis of what I think subscribers will be willing to pay.
Going on, your next job is to figure out how much money is likely to be invested by a subscriber in the totality of SA. Once you’ve got an idea of that, you need to figure out how much market share you can plausibly expect to get. Relevant factors include how your model fares compared to others and the nature of your model. If it’s a large cap mid- to low-volatility model, you can likely expect a much bigger share than if it’s a high volatility model for example.
So now, you have an estimate. Let’s say it’s X.
Your monthly subscription fee should be approximately .005X/12. The questions you should consider are how far above or below /005 you think you can go and what you think X will be.
You don’t actually have to do any of this. But I believe it’s a fair approximation of how your potential subscribers are thinking, so I can’t see how you help yourself by not going at it this way.
Here is a different view and I will ask a question. “Why is it that so few people want to share ideas?” I think the community (Except for Marc) gets a failing grade for collaboration. To be honest I will give myself a failing grade. Without a culture of sharing and collaborating people will lose interest. The site used to be filled with lots of SIMS and Ranking systems stating what’s working now. Then the community would have constructive debates on why it will or will not work in the future. I don’t see a lot of that anymore. Designers post there SIMS for feedback but the SIM is private. The problem is compounded by the fact that what worked 10 years ago does not work now. This is evident by the bad performance of most R2G. Maybe the potential for making money on R2G has taken away from the collaboration. If this is true we can at least share Book building ideas without showing the guts. What I propose is that members get more interested in constructive debate. Last February I posted a book challenge and only a handful of people participated. Thank you to everyone who did. Out of that book challenge I learned lot’s of great things.
- A well designed book has a much better chance of beating the market then a single PORT.
- ETF are an important part of your portfolio. Remember most professionals cannot beat the market on a consistent basis. Which is why ETF’s are so popular.
- Diversification and modern portfolio theory
- Balance cost with performance.
- Patience there is no money tree. The winner of the book challenge is not beating the market since February but it has not crashed and burned. https://www.portfolio123.com/port_summary.jsp?portid=1414352
These types of things are what we can debate and learn about. We need to ask questions like:
• Should the majority of your capital be in a ETF? The majority of R2G are stocks.
• What book will consistently beat the market with a better sharp ratio?
• Why do we think this?
• How can we prove it?
• Will people actually put money behind it?
• What are the guiding principles for creating a book and why?
• What are the most important features of diversification and portfolio theory?
To sum it up more collaboration = more page views.
Cheers,
MV
Mark - in my opinion, meaningful collaboration can only occur when there is a disciplined approach to performance monitoring. R2G / SA is that, and tells us what works and what doesn’t. Well it would be better if dead models were kept.
The old wild west consisted of people flashing up outrageous sims they got from god knows where using statistics that weren’t mathematically valid. I have learned a lot from other’s R2G models even though the rules are not disclosed. If nothing else my sense of smell has improved.
Marc is doing a good job collaborating but don’t forget that it is part of his job. The rest of us aren’t paid.
Steve
Steve great points I always enjoy your posts,
- Can you give me more details on how performance monitoring would help us figure out what works? I think the OS gives us a good start.
- Yes the wild west is gone but there were some really good systems 10 years ago that don’t work well with US stocks today but they work great with Canadian stocks. I wish I had known this 3 years ago. If anyone is interested let me know.
- Yes Marc gets paid a salary but I get paid by investing my money. If we don’t make money from our models we will not be hear for long. The ideas you and other members put forward make every one money and I don’t want that to stop. I am guilty of it. I find something that works and just leave it without sharing. Even worse I look at 3 years later and say why didn’t I share that it was a great idea with high liquidity that everyone could help make better and make money off it.
For example the winner of the book challenge I put up I think has a high chance of beating the market but I am sure if we look further we could come up with even better models that are based on good principles at a cheaper cost that meet everyone’s trading style. I think the winning book was $240 dollars per month and lot’s of trading. Not my ideal strategy but a great start.
MV
Aw shucks . . .
True. Steve giveth and Steve taketh away. 
Here’s where it gets murkier.
If you have SA models and hope to make good money from them, then you should see yourself as part of the getting-paid group. I’m not sure this argues for collaboration per se. But it does argue for you to be sufficiently talkative and forthright to allow others to really get to know who you are and what you’re about.
As to collaboration, that’s a really interesting question. On the one hand, we want to keep discoveries secret so we can profit from them or at least control the way other do. On the other hand, there is something to be said for the way any of us can improve by discussing, debating and yes even arguing about ideas. That’s the world of IP.
Whatever anybody can accomplish in a simulation or backtest, that’s nothing compared to what can be accomplished by putting your ideas and approaches (even if not the details) out there and testing them in the marketplace of ideas. That, actually, may be the single biggest protection against data mining. If you can convincingly advocate for why you do what you do, that’s pretty much the antithesis of data mining. And as you work harder to fend of opponents in the forum, you sharpen yourself. Don’t think for one moment that I’m the exact same way I was when I started with portfolio123. Forum discussion, including arguments and fights, and all the commentary and support material has, I believe, made me a heck of a lot better (like most others, I couldn’t do squat with an SP 500 universe and not much with 3-month rebalancing; now, having reasoned my way through all the commetary and forum discussion, i can) and I hope it will continue to do so.
So in a sense, yes, you are getting paid to participate . . . through SA fees and/or through better returns you earn through better models that come about as you pick up your own game. (And I practice what I preach; I talk plenty in the Adviser Perspectives format and I’m not on that site’s payroll. But they have some tough folks over there and tangling with them is like strategic bench pressing.)
Mark - it is very easy to present an idea to the community, but do you really learn anything? If the idea was semi-interesting you will get lots of chatter from the community. Some will think it is great, some will disagree and present counter arguments. But I don’t think the person or the community actually learns anything, not unless the idea is studied in a scientific, disciplined fashion. And one aspect is to follow the performance of the idea for the long haul. Sure you can set up a port on autopilot and check in on it regularly. Some people here do that… over and over again. They set up hundreds of ports and they know “what is working” at any time. But if you set up hundreds of volatile ports, some will give impressive results regardless of whether or not they are good strategies. Are you learning anything by doing this? However with Smart Alpha, you have to decide what your best strategies are, and go forth with them. You have to make decisions and you have to live with the results. You learn this way.
Also, learning the rules of a system isn’t always a good thing. When I was young I dreamed of becoming a magician. But when I was taught my first trick, I thought it was so stupid I quit magic forever. The mystique was lost. The same applies to Smart Alpha models. When I see a model with really good performance, I want to know the secret, and it pushes me to do better. Most of the time I will fail, but in so doing I generally discover new things about the markets. If I was given the secret I would stop thinking and striving to do better.
Marc, as for being communicative, I tried that once but people didn’t like what I had to say. I have learned from that exercise and I’ll try again but the time is not right. I’m hoping for P123’s “new look” to arrive sometime in the near future. Then perhaps …
Steve
All involved with SA:
I like the Saturday emails that show how my ports are doing.
Have you thought about gearing that more towards SA? Making its more of an advertisement for SA?
Those that have signed up for SA could see how their ports are doing: maybe this is already done. Instead of the seeing the performance of public ports it would be just as interesting to see the best performing SA ports. And the best performing open ports. Showing the best performing ports in different categories would provide the opportunity to highlight a number of ports.
Maybe anyone visiting the page could be given the opportunity to receive this–or a similar–email. I hate it where you have to give your email to visit a page but perhaps there are tasteful ways–that are not too pushy–to give people an opportunity to receive emails. Seeking Alpha is a legitimate site and I have to sign in there. Heck, even Bloomberg.com got me to start signing in: they have my email.
I’m sure other things could be done with such an email. Maybe designers could be featured. Maybe designers could put ads into this email.
Just an idea. And even though I love my Saturday email, any changes would not bother me. I can find all that information about my ports on the web page.
Regards,
Jim
Actually, the answer is “Yes!”
Even if nothing more occurs than the writing of a post, you’ve accomplished a lot. Don’t think of it in terms of studies and experimentation. Instead shift the focus to an imaginary peer review committee. Turn on your internal critic and write to satisfy him. And the harsher he is, the more you find yourself hunting for flaws in your own logic and working to address them. If others react harshly and attack you, so much the better. Defending yourself forces you to really really look into what you’re doing and how well you’re doing it. And if somebody else says something that helps you see something new, or something old but in a different way, that’s the best of all possible worlds. But ultimately, even in the “worst” case scenario, where you wind up talking to a seemingly apathetic forum, the process of nailing down your thoughts in away that tries to anticipate and respond to objections will in and of itself do wonders to help you.
If anybody has either of the two books I wrote in the early 2000s (not a plug), compare the approach I advocated then with what I’ve been sating in the current p123 virtual seminar. There’s been a lot of refinement over the years and that came about not just through experience but through continually trying to explain and having to adjust for my internal critic and for external critics – especially the ones here, who, actually, have played a very important role. And as forums go, the one here is one of the best (the only one comparable I’ve found is Adviser Perspectives). Heck, Steve, take, for example, you. As I write to explain my fundamental POV, I try to look for flaws on which you and other well known quants, engineers, etc, might jump. Even if you’re doing other things and not reading what I write, or simply aren’t interested in posting responses, you’re on my internal peer review board – all of you! And I have no doubt it’s a huge plus to me to work to address the flaws I imagine y’all to be finding.
Marc,
You beat me to it. I was going to say I have been learning from you ever since I read your book a while ago. I am so glad I found P123 (period). The forum has helped me a lot and is part of that gladness.
Any concerns I have expressed have been related to my paranoia that I might not be able to continue what I am doing. But no one has turned anything off at P123 for my own good. I think I’ll prioritize my limited worrying time toward whether we get a trading tax in the future.
Jim
Marc - I agree with what you are saying. If I were to write a great deal in the fashion you do, I would certainly learn as a result of thinking through what I am saying and also from feedback. I guess what I was really referring to is the typical style of contributors showing some wildly successful performance chart along with some questionable strategy that gets everybody excited but usually doesn’t have a long term future.
Steve
Right. That’s not constructive.
Aside from member-to-member support in terms of how to use p123, which we’re terrific at, we could also use a lot more general strategy discussion. Toward that end, I’m going to put up a discussion question in a new thread. Let’s see if we can’t get some strategy conversation going.
Great idea, Jim! This way different SA models would get highlighted. Otherwise it is only the usual 5 or 6 models that are listed on the p123 start page.
Cheers,
Florian
Marc: Just because black boxes are common in the industry doesn’t mean that they don’t have the issues enumerated.
Bill
That’s true. And these issues are unavoidable – for the industry and for us. That’s why it’s so important that designers (who want to prosper) do what the industry does – marketing and brand building. Interestinglt, we’re starting to see some of that happen. If forum threads like The one on Brexit multiply; that would be a gisant step in a gbood direction. We also saw participation in a contrarian thread, and a thread was launched on O"Sjaughnessey. These are the kinds of things that can eventually reverberate to SA, as designer’s names become recognizable and associated with persoalities and sets of ideas. That doesn’t eliminate the sting of the black box, but it makes it much more tolerable (when one may not know the “what” of the model but can at least feel comfortable with the “who.”)
Someone made the comment earlier that maybe the P123 site should be more split up between SA users and people who want to develop their own models (for either personal use or to create SAs).
My guess is that the typical strictly-SA user does not want to spend any time reading threads by some SA developer. They might read threads about strategies of selecting ports to comprise a book, as someone said.
Right now in the Forum site, everything is munged together.
If someone did a google on robo investing models and just wanted to use something like SAs, and not care about the guts of it, when they see the P123 site for the first time, they may get overwhelmed. Having a simplified site for just SA users might make sense. You can easily build it by just pulling info from the primary P123 site.
Just a thought.