AI-powered
podcast player
Listen to all your favourite podcasts with AI-powered features
4min chapter
Antti Ilmanen: The Building Blocks of Long-Run Returns (EP.202)
The Rational Reminder Podcast
The Benefits of Trend Following in Equity Market Drawdowns
Trent following has had this weirdly good historical track record of combining positive long run reward with good performance in many equity market drawdowns. Boring stuff earns higher risk, adjusti returns, often even higher raw returns. Aversion and leverage are the main candidates for stocks that contain embeddable leverage - like financial markets. And those shorings make them more expensive than lower-cost retugs.
00:00
Transcript
Episode notes
Speaker 2
Now i understand that one of the benefits of trend following is supposed to be that it reduces left tail risk. But i also understand that in the covert crash, it didn't do a whole edo. We know whyta why thave happened? Yes, i think i can. But le let me first
Speaker 1
tell the broader sho the more positive thing is that trent following has had this weirdly good historical track record of combining positive long run reward with good performance in many equity market drawdowns. And und ther intuition, how they tend to do well in equity market drawdowns is that traind followers tend to turn then, or can turn book from bullish to berish, and ride the bear market and be among the few investments that help you then when you most need it. But this, of course, works especially well if you have a slow moving, protracted bear markets. And now get i getting to your question, teakilles hell is in sudden turn round. In practice, those are pretty rare. And the worst historical months tend to happen within a bear market, and not at the turn. But sometimes you get a sudden turn. And obviously with covid it was quite a sudden turn, and that hurt. But even in that case, tranc strategis didn't do too badly. Some lost a little sum some made a little because, of course, equity markets turned pretty much only late february. And and then it matters how fast your train signals respond to that. But some other aset classes of bon corence's commodities have already been tilted toward risk of positions. So it wasn't, wasn't actually too bad. And during this these years, equity market termoil trend following has had a fantastic situation, because things have gone sufficiently gradually. So wich also happened in two thousand and eight. Can't always work like that. But but again, with these more gradual bear markets, trend follow in disability. Can
Speaker 3
you define the defensive style premium and how it relates to quality?
Speaker 1
Ya, ye. So general. Let ad will. Let's forca son stock selection mainly. So defensive and quality, they atr both umbrella concepts for this empirical finding that boring stocks perform surprisingly well. And the risky stocks disappoint in the long run. Let us first recognize that this is a huge puzzle in finance. We learn among the first things in finance, risk should be rewarded. And when you think of stocks versus bonds or cash, risk does get rewarded. And that makes all the sense in the world. And then when you go within equity market and you look at portfolios with different betas, you could do lots on different volatilities, or somewat different measures of quality, you find that the risk stocks tend to have disappointing, actually worse performance than other stocks. And instead of having this positive relation, there's inverse relation. And if anything in last decade, for example, it was, it was quite a strong inverse relation, by the way. So in farmer frenc's wie factor model, you can think that the profitability and low investment, they arsorin the camp of quality signals. So so again, statistical low risk measures are one way of thinking of this, and fundamental low risk measures like quality, including those two, are other candidates for it. But a'l focus just with thes story. I just talk it through the beta effect, because that sort of theoreticalitm i don't know, most important. So it was found already by fisher black, the black ad sos black, in early 19 seventies, that there was too little beta, areward for beta. And farma and friends found it again in their early 90 studies. And many other researchers, including my colleagues under afrazini and lase peterson, found it again in two thousand and took this research much further. And the empirical efficenc is it is super compelling, because it works in most countries. You can look at it and find it in within most industries. You can take it into other lasset classes. Boring stuff earns higher risk, adjusti returns, often even higher raw returns. And and then you can ask why? And i don't go into details, but, but i just say investors leverage. Aversion and lottary preferencies are the main candidates. Those speculative stocks contain embeddied leverage with investors then to like. And they are the proverbial lottary tickets in financial markets. Investors then to like. And those shor make them more expensive. And imply than lower long run require retugs.
Get the Snipd
podcast app
Unlock the knowledge in podcasts with the podcast player of the future.
AI-powered
AI-powered
podcast player
Listen to all your favourite podcasts with AI-powered features
Discover
highlights
Listen to the best highlights from the podcasts you love and dive into the full episode
Discover
highlights
Listen to the best highlights from the podcasts you love and dive into the full episode
Save any
moment
Hear something you like? Tap your headphones to save it with AI-generated key takeaways
Save any
moment
Hear something you like? Tap your headphones to save it with AI-generated key takeaways
Share
& Export
Send highlights to Twitter, WhatsApp or export them to Notion, Readwise & more
Share
& Export
Send highlights to Twitter, WhatsApp or export them to Notion, Readwise & more
AI-powered
podcast player
Listen to all your favourite podcasts with AI-powered features
AI-powered
podcast player
Listen to all your favourite podcasts with AI-powered features
Discover
highlights
Listen to the best highlights from the podcasts you love and dive into the full episode
Discover
highlights
Listen to the best highlights from the podcasts you love and dive into the full episode