Learning to Love Investment Bubbles: What if Sir Isaac Newton had been a Trendfollower?
Mebane T. Faber
Cambria Investment Management
September 6, 2011
Cambria – Quantitative Research, Issue 4, September 2011
Investment manias and financial bubbles have likely existed for as long as humans have been involved in financial markets. In this research piece we take a look at some of the more famous market bubbles in history and the extreme volatility and drawdowns they experienced. We then examine a simple trendfollowing approach investors could use to manage their risk. Across twelve market bubbles we find that a trendfollowing system would have improved return while reducing volatility. Most importantly, it would have reduced drawdowns significantly leading to the most important rule in all of investing – surviving to invest another day.
Number of Pages in PDF File: 11
Keywords: South Sea, Tulipmania, Mississippi, investing, bubbles, bonds, currencies, commodities
JEL Classification: A10
Date posted: September 7, 2011
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