Mandelbrot: Efficient Market Critic

Benoit Mandelbrot, inventor of fractal geometry, is one of the most articulate critic of what is known as the Efficient Market Hypothesis.

Mandelbrot does suggest a method for portfolio construction and it closely follows what Geoff Considine developed in his Quantext Portfolio Planning (QPP) software. Mandelbrot advocates stress testing the portfolio. Quoting from his book, "It means letting a computer simulate everything that could possibly go wrong, and seeing if any of the possible outcomes seem so unbearable that you want to rethink the whole strategy. The technology is called a Monte Carlo simulation. You tell a computer how you think prices vary–specifically, what kind of random-number generator is should use. You feed it all the initial data: the particular stocks (or ETFs), their price histories, your strategy for buying them. Then you press the start button. Using the rules of randomness you gave it, the computer starts generating a series of hypothetical prices for each stock–in essence, it simulates one investor's possible experience with the portfolio. Then it does it again, and again, thousands of times, like someone flipping a coin over and over to see if the odds for getting heads really are fifty-fifty. At the end, it totes up all the scores from all the runs: That tells you which simulated outcomes happened most often, and hence, which might be most likely in real life.  It also tells you which outcomes are unlikely but, if they occurred, devastating.  Finally, you use your own intelligence to decide whether you like the scenario the computer paints.  If not, you decide the portfolio is too risky and you start again." [Read more...]

Year-End Portfolio Performance

TLH Portfolio Performance Data

The following data table includes updates for portfolios tracked by the TLH spreadsheet.  Portfolios tracked by Captool will be updated sometime this week and I should have the results posted by January 8.

In almost every case, the updated portfolios showed gains with respect to the VTSMX benchmark. Most of the portfolios lost ground to the customized benchmark, the ITA Index.  I don't recall a portfolio that did not maintain or improve on the SR and RR values. The trend definitely turned positive over the last month and it may be due to all the ETF dividends that were paid at the end of the month.

Platinum members will have access to the most current spreadsheets as I review the portfolios according to schedule.

Portfolio Performance - 12/31/2010

Portfolio Last Update Launch Date Tracking Tool Port. IRR ITA Index Diff Port. vs. ITA Index VTSMX IRR Diff. Port. vs. VTSMX Index IR SR RR
AA-Mosaic 11/30/2010 07/21/1999 Captool 2.08% NA NA -0.41% 2.49% 0.05 NA NA
Curie 12/31/2010 12/26/2007 TLH SS 4.9% 7.0% -2.1% 0.1% 4.8% NA 13.4 5.0
Mosaic2 11/30/2010 07/19/1999 Captool 4.45% NA NA -0.61% 5.06% 0.15 NA NA
Newton 12/31/2010 06/02/2008 TLH SS 9.9% 6.7% 3.2% 6.8% 3.1% NA 3.6 3.6
Passive Port. 11/30/2010 12/01/2000 Captool 4.76% NA NA 0.02% 4.74% 0.69 NA NA
Schrodinger 12/31/2010 12/01/2000 TLH SS 5.1% 10.9% -5.8% 2.8% 2.3% NA 4.5 4.5
Jane 11/30/2010 02/14/1997 Captool 8.78% NA NA 3.03% 5.75% 0.53 NA NA
Einstein 12/31/2010 06/30/2008 TLH SS 15.2% 21.0% -5.8% 10.9% 4.4% NA 8.2 8.2
Gauss 11/30/2010 02/19/1997 Captool 8.96% NA NA 3.0% 5.96% 0.22 NA NA
Kepler 12/31/2010 11/01/2008 TLH SS 21.3% 33.3% -12.0% 20.6% 0.7% NA 0.3 0.3
Scrappy 11/30/2010 08/14/2008 Captool 10.56% NA NA -3.83% 14.39% NA NA NA
Bohr 12/31/2010 08/14/2008 TLH SS 12.9% 16.7% -3.9% 4.8% 8.1% NA 0.8 0.8
Kenilworth 12/31/2010 08/18/2010 TLH SS 34.1% 32.5% 1.6% 51.0% -16.9% NA -0.1* -0.1*
Projects 11/30/2010 12/01/2000 Captool 5.13% NA NA 0.02% 5.11% 1.32 NA NA
Washington 11/30/2010 06/18/1999 Captool 2.8% NA NA -0.19% 2.99% 0.27 NA NA
Maxwell 12/31/2010 12/25/2000 TLH SS 0.6% 2.9% -2.3% 4.1% -3.5% NA -0.2 -0.2
Adams 11/30/2010 06/18/1999 Captool 3.03% NA NA -0.19% 3.22% 0.71 NA NA
Euclid 12/31/2010 06/30/1999 TLH SS 1.2% 2.0% -0.8% 4.2% -3.0% NA -0.1 -0.1
Jefferson 11/30/2010 03/13/2008 Captool 4.87% NA NA -3.41% 8.28% NA NA NA
Madison 12/31/2010 03/13/2008 TLH SS 5.4% 6.0% --0.6% 9.4% -4.0% NA -0.3 -0.3