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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  

Meb Faber

Cambria Investment Management

Date Written: September 6, 2011

Abstract

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

Faber, Meb, Learning to Love Investment Bubbles: What if Sir Isaac Newton had been a Trendfollower? (September 6, 2011). Cambria – Quantitative Research, Issue 4, September 2011. Available at SSRN: https://ssrn.com/abstract=1923387

Meb Faber (Contact Author)

Cambria Investment Management ( email )

2321 Rosecrans Ave
Suite 4270
El Segundo, CA 90245
United States

HOME PAGE: http://www.cambriainvestments.com

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