Since you’re a charterholder I’m going to assume the risk adjusted return comment is sarcasm…right? Please god be sarcasm or I’m going to stop telling people that the CFA charter is superior to the CFP.
Given two choices of investment, X or Y, which both have equal returns, would you not prefer the one with less volatility? If you’re a pension fund that has to make annual distributions you need steady returns so you’re not effectively ‘selling low’ on your investments to make distributions. If you’re a retiree that has just enough assets to retire (most people) then sequence of returns has a massive impact on your ability to achieve a sucessful retirement. A large loss in the first few years has dire consequences.
Yes, college kids should not care about risk adjusted returns. Once you near or enter retirement, risk is more important than return because you can’t make up losses.
The point is irrelevant. Rolling 10 year returns since 1991 produce a 50/50 split between total returns had you invested in either Shanghai or the S&P 500. Using any specific period of time will produce a Shanghai is better than S&P, or S&P is better than Shanghai conclusion. Neither one will be accurate unless the debate is, what investment was the best since ‘MM/DD/YYYY’.
A more relevant analysis is, what would have been the better investment had we invested at any point historically? Since Shanghai returns are only available since '91, thats where we can start the analysis. The result is the 50/50 split. Given the nearly 40% higher downside deviation, you have not been compensated for the risk in Shanghai since 1991, given any random starting period.
The question of whether Shanghai is a better place to invest today is an entirely different debate but has been twisted with the historical return debate …I assume we all understand why we wouldn’t use the second to justify the first.
speaking of lower volatility…Investment A returns 5% for Year 1 and 5.5% for Year 2 and Investment B returns 15% in Year 1 and 4% in Year 2.
In terms of volatility and risk adjusted measures such sharpe A is superior. But B got you more cash in your account.
Of course if B loses here and there the numbers would change. So I am just saying risk adjusted reuturns is just some noise.
As in golf doesn’t matter whether you shoot 70 with 300 yard drives with 14 greens in regulation or somone elses shoots 69 with 12 one putts. For me results matter the most. There is no room to draw or explain in the scorecard. you just write down what you got on each hole.
you’ve touched on my finance pet peve, and you’re entirely accurate about standard deviation.
I don’t fault you for not reading the hundreds of comments in this thread, but the analysis I was refrencing was to a prior post, maybe two pages back. The volatility measure is downside deviation wich is a far superior metric than standard deviation. Standard deviation is like nails on a chalkboard to my ears. So is sharpe ratio. Downside deviation and sortino are much more relevant and address your point perfectly.
As for what you care about, total return may be it. And if total return for the past 10 years is what you’re interested in, well you have your answer.
If your looking for the best total return since 1991, shanghai is your market, but I’d ask you why your placing significance on total return since June 1, 1991. Had you won the lottery on that day and needed to pick one investment, then sure the analysis is prudent.
More likely you would have incremental amounts to invest over the entire time frame, and that is why the 50/50 split is a better analysis. If you invested $100 monthly in both markets, your account value would be nearly identical. Meanwhile, your shanghai account would have experienced far higher downside deviation, far higher drawdown and for a much longer time frame.
The huge return in shanghai in 1992 gives an investor in 1991 a higher total return. The majority of the time Shanghai has underperformed, so the investor throwing in money every month experiences a far smoother ride in the S&P 500 and his account value is the same.
If we’re going to use the golf analogy, the Shanghai market has spent the day in the woods with a few brilliant outs. Meanwhile the S&P has been slow and steady with far fewer shots that end up in the drink. Both markets end up with the same score.
In theory, downside deviation is more important than standard deviation, and so sortino is preferred to sharpe, but in my experience, if you don’t have lots of optionality in your returns stream, the downside deviation is seldom all that different than the standard deviation. It’s similar enough that that it’s often not worth the extra bother to go through the excel hoops toto calculate it.
Remember that if the distribution is even roughly symmetrical, then about half the numbers that go into the standard deviation are going to be the numbers you use for the downside deviation. If the distribution is exactly symmetrical, you’re going to get the same number in both cases.
So yeah, in practice, you’ll get a somewhat different number, but it’s seldom the sort of difference that demands making any more than minor tweaks to the portfolio construction, or it isn’t likely to alter the decision to pull the trigger.
When there is optionality, then the downside deviation makes a bigger difference, but people immediately start trying to discount it by saying “that big loss was a freak thing that happened a long time ago and isn’t relevant or won’t happen again; meanwhile, our competitors are making more money than us and we look bad.” Or worse, you haven’t actually seen the optionality show up in your downside deviation, and so the downside looks quieter than the upside.
So yes, in theory, downside deviation and sortino are superior numbers, but it’s hard to make the claim that in practice they are FAR superior, because daily and monthly returns tend to be fairly symmetrical. And when they’re not, you’re already in a world where averages don’t really matter that much, and what you really want are discriminators.
I agree, many times it is unneccessary. However, standard deviation and sharpe tell you nothing that downside deviation and sortino cant. The reverse is not true.
I think drawdown is also important when looking at long time periods, both severity and length.
for the record, after many posts, my conclusion was that 2005 is the earliest possible start date to measure returns for A-shares as this was the date that ANY foreign investor was able to invest in these shares. it was virtually a state-owned and private market before 2005 so pre-2005 Chinese returns are definitely irrelevant for foreign investors and are also likely irrelevant for domestic investors as the market is no longer structured the same. there is a reason why we don’t record and include the historic private share values of now public companies and post these figures on bloomberg. i don’t care about the value and volatility of zuckerberg’s FB shares prior to going public as it would completely skew what i can reasonably expect from those same shares in the future.
also, purealpha, for the record, just because China is the 2nd largest economy doesn’t mean it is the 2nd largest “stock market”. the SSE is the 5th largest stock market and China has the 4th largest stock market (2 of the biggest are in the U.S.). also, everyone needs to stop comparing the SSE to the S&P 500 or Nasdaq as that’s similar to comparing the U.S. economy to the Brazilian economy and with the hope of making grand conclusions.
Returns are returns, true, but if you’re going to be playing this game, the risk adjustment is important.
I could say I won $100 playing Russian roulette with a 6-shooter and I didn’t die. Returns is returns. Cool! Everyone should play that game, because look how easy it is to get $100! Right? I just proved it with my Benjamin! I’m going to make it to $1000 in no time at all!
But was that a good bet? Of course not, at least if you value being alive. Make it a single round of “You die or you get $10MM”, then I might consider it, but I’m still weighing it against the risks.
Especially if leverage is possible, you should go for the highest Sharpe ratio investment (or Sortino, if you’re Huskie), and lever up to the level of risk you can stand. If you can’t lever up, then you have to make a more subjective judgement about whether the extra risk is worth the return.
If you can’t do the risk adjustment quantitatively, you should at least try to do it qualitatively. But ignoring the presence risk by saying “returns is returns” is simply irresponsible, whether it’s your money or (God forbid) other people’s.
haha i laughed. i thoguht the same thing abotu sortino, that its prolly a better measure of success. but most ppl dont know it. so if u say sortino ur going to sound like an asshat. hahahahaha
The usual noises about “economy too weak to raise rates by 0.25%” have begun. There is no inflation so who wants a higher rate (except for savers and seniors on fixed income, who don’t write checks to politicians)?
Fun, now the sky is falling in US stocks… This is where understanding what is actuallyhappening in China comes in useful. I’ve heard some really stupid stuff said on Bloomberg US TV since the RMB move, inexcusable ignorance. The fact is CN runs the global economic show and people need to wise up and start becoming educated on what’s happening over here. Americans are panic selling even though they have no clue what the numbers/actions out of CN actually mean. Sure, the S&P500 is totally overvalued and this is a long time coming, but they don’t really know why they are selling. We are seeing some stupid prices on some stocks (AAPL), and a juicy VIX short opportunity. Anyhow I’ve been at the beach, just got back this week and trying to sleep, darn VIX alarm woke me up!
Yeah, this is a great chance for Yellen to puss out, then we’ll see another cheesy bounce-back move in the S&P500. Although there are fundamental issues here for US stocks, and it could always be the start of a bear market, bounce-back is my base case. It’s August, Friday, CN is a black box to Americans, nobody really knows what they are doing…the FOMC meeting is a perfect time for that feel good moment!
actually its the wother way around. china is dependent on us. The moment US stopped consuming china tanks. We import a ton from u guys so u guys are completely dependent on us. china then tried to fuel it through investments to make up the lost in exports. Now u guys are overinvested, and over leveraged. and under utilized.
US IMO is hardly feeling pain. with the spy we are down 8% from the peak, that’s almost laughable really. compared to china down 43%. im about to take a vacation too until wednesday haha. going 2 vegas. china on the other hand.
yellen should puss out though. how u gonna tighten when others are easing. das crazy amritie. like even staying stable is like tightening cuz mofos be easing anyways.
anyways volatility is opportunity. given all the negative news, we are doing just fine. id gladly welcome a harsher downside. i like to see more fear. makes crap cheaper. also im rofling everytime i see people complain about cheap oil causing market downturn. dont people know we are net importers. meaning its a good thing.
I’ll comfortably say you’re missing the larger macro economic changes. Just about everything in the global economy says deceleration at an increasing rate. Risk premiums are up and growth is dropping, i’m discounting everything. This isn’t just about China anymore
Oil (and other energy inputs) 7-year lows and falling
Base metals at multi-decade lows, demand falling
Global EPS growth zero or negative for this CY
Hard to believe GDP and equities will continue to grow when input price and demand is imploding.
Yes, I did not say that does not exist. All societies decelerate from developing economy, to basically 0% growth.
I said that Americans have no clue what is happening in China. The CN “news” is no news at all, they’ve been saying “new normal”, and “switch to a consumer economy”, for a long time now. They started cutting rates last year, and no it wasn’t to inflate a stock market bubble kiddos!
