Hello all,
I attempted to implement the market timing strategy discussed in this post from Alpha Architect. I took Schiller’s CAPE ratio data from his website and calculated the inflation rate directly from the CPI data listed in the spreadsheet.
I applied the data to an Acquirer’s Multiple strategy that rebalances yearly, but also sells when the market is ‘expensive’ and buys back when the market is ‘cheap’.
I tested the system from 2003-06-01 to 2015-12-04. The simple Acquirer’s Multiple strategy has the following returns,
Total Returns Benchmark Returns Alpha Beta Sharpe Sortino Information Ratio Volatility Max Drawdown
358.4% 173.2% .14 1.06 1.20 1.56 .67 .22 53.5%
The Acquirer’s Multiple strategy with market timing has the following returns,
Total Returns Benchmark Returns Alpha Beta Sharpe Sortino Information Ratio Volatility Max Drawdown
304.6% 173.2% .11 0.92 1.04 1.32 .49 .21 42.4%
Although there is a significant reduction in Max DD the results seam underwhelming given the reduction in overall volatility is negligible and there is a reduction in total return.
I also calculated the Real Yield Metric but only using CAPE and CPI data going back to 1945. The results using this data are more impressive,
Total Returns Benchmark Returns Alpha Beta Sharpe Sortino Information Ratio Volatility Max Drawdown
484.5% 173.2% .26 0.93 1.70 2.18 1.16 .21 40.4%
I’ll leave it to the reader to decide whether this is a case of datasnooping or if using post-war inflation and market data is a more realistic measure for estimating future valuations.
