An investment guide called A Unified Foundation for Investment Selection is a substructure for risk management rooted on principals founded in physics called Universal Intelligence. Universal Intelligence, this "web of life" or energy in one form or another, causes the materialization of all physical life. There is no exception to this "truth." The word "truth" is bold because "truth" is always relative to and can never be separate from the consciousness or intention of the scientist (or investor and trader).
Laws of Nature on Our Side
Universal Intelligence has and will always exist. As our perceptions evolve, Universal Intelligence will consistently reveal more of itself. As humankind increases its ability to constructively apply this energy, quality of life will gradually increase.
Mathematics as Symbols
Below is one section from a Unified Foundation defining how physicists perceive and use mathematics. Following is our "truth" on what past performance actually evaluates and another method of constructively using the data.
Physics and Statistics
The world seems to place disproportionate attention and faith in statistics, without considering deeper issues relating to accuracy. We are more comfortable perpetuating applications of mathematics used in physics. Our reason is that if models and applied consciousness are accurate enough to quantify probabilities for all life, an extended theory is suitable for investment analysis.
In the Dancing Wi Lu Masters, Gary Zukov describes the environment physicists live in. Unlike investments, where everyone with opinion, who wrote a book, becomes the latest talk show guest, clear distinction between opinion, belief and truth is mandatory. He says, physicists have no tolerance for people with opinions. " Every assertion requires a "proof "or mathematical demonstration. Opinions can only be assertions and must be supported by "proofs" or mathematical demonstrations. A "proof" does not verify that an assertion is "true." True is defined as "the way the world really is." We are incapable of perceiving "truth," we can only perceive symbols of "truth" that are directly related to our intention or consciousness.
In physics a scientific "proof" is a mathematical demonstration that the assertion in question is logically consistent. In the realm of pure mathematics, an assertion may have no relevance to experience at all. Nonetheless, if it is accompanied by a self-consistent "proof" it is accepted. If not, it is rejected. The same is true of physics except that the science of physics imposes additional requirements that the assertion relate to physical reality.
The "truth" of a scientific assertion and the nature of reality has no relationship. "Truth" has nothing to do with "the way that reality really is" because scientists are aware that they can only perceive how reality is, never experience it! A scientific theory is "true" if it is self- consistent and correctly correlates experience (predicts events). When a scientist says a theory is "true" they mean it is "useful." If the word "useful" is substituted for "truth" physics appears in a proper perspective."
Relevance: Past performance can only be perceived as measuring shadows of a very indirect past experience. Layers of statistics garnered from past performance take us even farther from "truth." Or what is "useful." How can "truth" ever be expressed if we can only measure shadows of the past?
FACT: Any quantitative decision for investment, determined only on past performance and data compiled from past performance is cause for unwanted loss.
The basic purpose of data should be to support an effort to comfortably integrate exceptional trading talent into a composite investment, suitable for our life experience that works under variable market and life scenarios.
What Does Past Performance Prove?
It is October 21, 2010. Imagine standing on the Southeast corner of 42nd Street and Broadway in New York. It’s about 1PM. You need to cross 42nd street to walk North on Broadway. There are about 48 cars, taxis and several trucks. Twelve people are flanked on your left side, seven on your right and nine behind you. It is impossible to quantify how many people will be opposing you when crossing the street coming from the other side. We neglected to mention bicycles and people on roller blades that seem to appear from thin air. Today you are wearing jeans, a blue shirt and are carrying two packages. Remember to consider what may be going on with all people flanked on both sides and inside all the motor vehicles. The traffic light turns in your favor and you cross the street.
Congratulations you have just completed one successful trade called crossing the street. Your clothes were your perceptive abilities used on that day. Crossing was your consciousness interacting with the environment and acting at the right time. Background conditions are details that we perceived were happening in the economy and market at that time. As those details shifted, your consciousness or computer model triggered a pre-defined signal that you could act on high probabilities for a successful outcome. I can go deeper into cause of experience, however it isn't necessary.
Reflect on the interaction and balance of all events that shifted probabilities in favor of success for that trade.
Every trade constituting a past performance record has a new set-up. Underlying conditions never repeat themselves. The trading strategy is designed to act under specific conditions that represent symbols and surface conditions of actual experience. Those conditions were defined by a human being with a specific lens of perception. The strategy can only perform according to the limits of its creator. The strategy can NEVER account for the hundreds of factors comprising each condition that it actually can account for. The constant interaction that we cannot perceive is what causes probabilities to constantly shift.
Think of it this way. You are a human being covered in skin. The computer can detect you are human and will react to your skin. It cannot perceive the thousands of constantly changing body parts, consistently interacting that keep you alive. One level deeper, it will never perceive the atoms and how the energy of each atom interacts, to create the physical mass called body parts that keep you going.
FACT: Traditional statistical analysis has a valid place for measuring only shadows of past experience. Misrepresentation and application without understanding of the natural weaknesses associated with performance evaluation are a major cause for loss.
Useful Raw Data Analysis:
Apply statistical analysis only when it increases a probability for future success.
Let's play with Einstein and Relativity for a minute.
- Past performance relative to the strategy used relative to past market conditions.
- How is the relative cost built into past performance relative your current investment.
- Is the analysis built on a foundation of clean data relevant to your investment?
- Is draw down relative to return analysis, if applied to two more advisors based on similar account sizes and money management strategies?
- Are you presented with a pro-forma that mirrors the investment you are considering?
- Where are errors of omission between the investment you are considering and the presentation offered?
- What are costs relative to potential returns? Costs only have meaning in a state of relativity!
(When people tell me our costs are too high - I ask: High relative to what?) - What are the inherent weaknesses in the presentation relative to current and potential reality?
- What are monthly returns relative to equity growth? (The ratio is useful)
- What are indications of current and future market conditions relative to the strategy we are considering?
- Under what circumstance will the strategy we are considering NOT perform?
- Are the people who achieved that performance with the company?
- What are the environmental changes relative to what was and how do those changes affect future probabilities?
- Ask for a copy of the due diligence compiled by the trading company for the investment’s sponsor.
- Think and add your own questions.
Indirect statistical measurements such as a Sharpe Ratio, Standard Deviation, Correlation Coefficients, Etc, become useful when we understand their relationship to each other and to the performance data they are built with.
Because statistics are indirect evaluations, they can and in many instances do, take you farther from truth.
Suitable Application of Performance Evaluation:
- Always define your investment objectives as a composite integrated strategy.
- Ask for weaknesses in the data being presented, then carefully listen to and feel energy behind the words.
- Always integrate your own perceptions and questions into what you are being told. The combined energy will usually offer less risk than what the environment alone can give.
- Analyze any composite presentation in its simplest form.
- If you can get actual trade data, you have more accuracy.
- Look beyond numbers at the people, strategy, past and current market conditions, costs relative to return, weaknesses in the strategy.
- Build your composite investment where weaknesses are compensated for by a complimentary strategy.
- Ask for future return expectations. If a trader or analyst does not meet his or her own expectations you have early warning built into your self-defined strategy.
- Avoid presentations that compare returns against indexes unless the index has validity relative to your investment.
- Ask for the expected maximum downside, be sure you can easily live with it and let go!
Many people base the maximum downside on past performance. We believe it may be more accurate if you ask the investment manager for a future expectation and time frame.