Today I came across a video by AZ Valor, a value investing fund from Spain. In their presentation, they mentioned a study made by Alpha Architect whose conclusion is that, if God were an active investor, He would have been fired (several times).
The basis of the study is that God knows what the future returns are going to be and, thus, He’ll pick the best-performing stocks for the next five years. After those five years, they will rebalance and pick, again, the best-performing stocks.
God, of course, would do great. No wonder, since He knows what stocks are going to perform the best! However, the standard deviation (volatility) would be higher than the index. The worst drawdown, though, would have been slightly lower.
The 29.37% yearly return would have come at a cost. And the cost is volatility. The biggest drawdown would have been in the period between 1929 and 1933, but in the 2000s He would have had two drawdowns of over 40%.
Not only the drawdowns would have been huge, but also He would have needed quite a lot of time to recover. After the drawdown of 2008, He would have needed 669 days to recover the previous peak. In 2000, He would have needed 1,125 days, and in 1929, 1,400. Quite some time of poor performance!
Until here, all I’ve done is show you the results of Alpha Architect’s analysis, but let me tell you my conclusions:
Even if you know that your return is going to be exceptional, you need to have the right temperament to outlive bad times. Otherwise, you would be doomed. It looks easy, in hindsight, but bear in mind that you may need through up to 1,400 days to recover your investment from the previous peak.
This study has been done without leverage. If leverage were involved, God would have gone bankrupt quite some times, even knowing what stocks were performing better. Stay away from leverage!
With God’s strategy, you would have obtained a return of 29,37% per year. Beware of those who promise more than God can achieve!
In the article, Alpha Architect presents a long-short strategy as well. But I’ll let them explain that one. Check the article here.
You can also watch AZ Valor’s video here.
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