rpetrocelli:

wagnerjb:

 

The gains of the Hot Hands strategy in 2004, 2005 and 2006 have all been wiped out by losses in this strategy in 2007 and 2008. 

This is not a correct statement.  If you had two investors: one who strictly followed the HH strategy beginning in 2004,  and the other who invested in the 500 Index Fund (for the sake of comparision), here's how much money they would have today:

• Hot Hands: $200,729
• 500 Index: $122,490

Note that this includes Growth Equity's returns.

Petrocelli 

 

It is a correct statement, but you have used an inappropriate benchmark.

For four years, the Hot Hands fund was an international fund, so using Vanguard's International index for those four years is clearly more appropriate.  Here is how $100,000 turned out today:

• Hot Hands:  $201,434
• Alternative:  $201,454

As you can see, in a short 18 months, this strategy has eroded three years worth of gains.  Sadly, all the publicity you and others put into this strategy leads people to jump into the strategy late in the game, so undoubtedly people lost using this strategy since they experienced the recent losses - without being in the game from the early days.

Sad.

Andy

wagnerjb:

For four years, the Hot Hands fund was an international fund, so using Vanguard's International index for those four years is clearly more appropriate.  Here is how $100,000 turned out today:

• Hot Hands:  $201,434
• Alternative:  $201,454

Once again, I think you are off-base.

If you change the "benchmark" each time the HH fund changes, you are simply engaging in a different form of HH investing.  Indeed, what you propose is similar to the "Callan HH investing" which I discussed in the posts which I linked to above.

HH investing should be compared to a static benchmark.  I have chosen the 500 Index for the sake of comparison. (TSM may be a better choice, but I would have to redo all my spreadsheets.)

As you calculations prove, investors who have used HH investing since 2004 have doubled their money in less than 5 years, even though this year is negative so far.  I can't see any cause to be "sad" about that.

Petrocelli