Burns on Cramer

I read this paper,
http://www.burns-stat.com/pages/Working/cramer_vs_pseudocramer.pdf,
and found it to be interesting, however, the idea of judging
real-world results against artificially constructed portfolios leaves
me cold. The only reasonable way of judging performance is against
stated goals. Goals tend to be specified in terms of returns (relative
or absolute),  variability (volatility, draw down and so forth) or a
combination (Sharpe, Sortino...) and the only reasonable question is
to what extent the goals are met. Judgment against a basket of random
portfolios, however cleverly constructed, is simply not defined in
relation to the efforts of the manager.

(In this particular case, one might well ask what Cramer's goals are.
They would seem to be to have fun and gather fame. Since it seems that
he is eminently successful on both counts one is forced to acknowledge
that he is doing a good job.)

As for the challenge to chartists in the paper's conclusion, they too
should be measured individually against their goals, not random
portfolios. Why this emphasis on goals? Because this goals are what
investors pay for. They may use past performance as a gage to
ascertain whether the goal is obtainable, but by and large investors
pay for specified goals and retain or fire managers on whether those
goals are met. Other assessment alternatives matter little, even if
they are 'better', unless investors agree and contract for them. This
is after all a contractual relationship and results need to be
evaluated in terms of expectations.

    jab

John Bollinger, CFA, CMT
www.BollingerBands.com

If you advance far enough, you arrive at the beginning.