Beating the Best From Our Living Room

Feb. 12, 2020

We’ll never be as smart as the geniuses.

We’ll never have their multiple PhDs.

We’ll never be able to match their genius IQs.

But here’s the thing.

That’s okay.

For one, high IQs aren’t mandatory for success.

As Warren Buffett once said, ““To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information.”

It’s easy to be intimidated. It’s easy to think, “How can I possibly compete with Wall Street? I’ll never have the advantages they have.”

But maybe those advantages don’t matter. Maybe it’s too much of an unnecessary thing.

This week, we’re going to put together a simple portfolio and see if we can match the results of the best funds in the world.

We’ll see if the living room trader can replicate the results of the billion dollar trader.

First, what do we have to beat? What kind of performance do the geniuses put up?

The benchmarks for me are these two funds. One is a fund started by the creator of the famous Turtle Experiment. The other might be one of the best funds of all time. (Note: we’ll leave Jim Simons out of this discussion for now. He’s way, way, way out in front of everyone else.)

These two funds are completely transparent. Their results can be found by anyone with a computer and their methods aren’t opaque. The two funds are Eckhardt Trading Company (ETC) and Dunn Capital Management (Dunn).

Just like the Turtles, ETC is basically trend following in nature. William Eckhardt founded the Turtle with Richard Dennis and started trading his own fund shortly after the Turtles disbanded.

Dunn is a 100% systematic fund with medium to long-term trend following as its base.

Both were created by incredibly brilliant people who now employ incredibly brilliant people. They have more trading knowledge in their pinkies than we do in our entire torso.

So, what are the numbers to beat?

Over the past 30-40 years, ECT has averaged 11.49% and Dunn has averaged 13.38%. Over that time, both of these funds beat the S&P 500 by a country mile.

Our modest, homegrown strategy may not have data that goes back that far, though. For example, Fx data only goes back to 2004-ish. To make it apples-to-apples, we’ll just go back to 2008. That gives us the financial meltdown and everything afterward.

So, the numbers we’re looking at, from 2008-2020, are:

• Dunn 13.71%
• Eckhardt 2.70%

What kind of strategy can we use to see if we can match up?

We could use a trend following strategy. I just built a new variation of a trend following system, but we’ll save that for another time.

We could use mean-reversion. Or we could use a little of both.

For example, we could try to go with the trend and get in on a pull-back. That seems fair.

And it’s also convenient since I already have a robot that does that! (The Heron).

We’ll use the Daily charts because that’s what the geniuses do (sometimes longer than Daily) and we’ll use the same settings for a portfolio of instruments.

Anyone could irresponsibly optimize a system and beat those numbers. I get it. We’ll try to do it without optimizing, though. This way it’s fair and also has a chance to be robust.

If it works, it means a trader in his/her pajamas can hang with the best traders out there.

Wouldn’t that be interesting?

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.