Learning to Love Investment Bubbles: What if Sir Isaac Newton had been a Trendfollower?
Cambria – Quantitative Research, Issue 4, September 2011
11 Pages Posted: 7 Sep 2011
Date Written: September 6, 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.
Keywords: South Sea, Tulipmania, Mississippi, investing, bubbles, bonds, currencies, commodities
JEL Classification: A10
Suggested Citation: Suggested Citation