• Posted on July 25, 2023

  Is technical analysis just stock market astrology?

  Technical analysis is a part of finance that studies price moves to guide investment decisions. A lot of investors seem skeptical of the use of past price data, which leads to technical analysis often being perceived as similar to astrology. In this article, I will try to see if it can provide an edge to long-term investors and if it beats reading the horoscope.

  

  Moving Average Crossover

  There are hundreds of different technical analysis strategies and indicators out there. For this article, I decided to pick what seemed to be one of the simplest: SMA crossovers.

  Simple Moving Averages (SMA) are, as the name suggests, just an average of past closing prices. The SMA Crossover strategy uses two moving averages, a “fast” one (50 days) and a “slow” one (200 days), and compares them to decide on buying or selling an asset. If the fast SMA is above the slow one, we should buy and hold the stock, and if this condition inverts, we should sell. It is a heuristic around momentum, which is the idea that if an asset price starts rising, we can jump on the bandwagon and hope it will continue its trajectory.

  

  I have backtested an SMA crossover strategy on the SPY ETF, one of the most traded passive investment funds in the world. My backtest makes the following assumptions:

  • we do not pay any transaction fees
  • we will obtain exactly the close price when buying or selling
  • dividends received while holding stocks are immediately reinvested
  • cash yields no interests

  

  While someone who would have bought 10.000$ of SPY in July 1998 and continuously held the stock would have ended up with 52.030$ in June 2023 (6.78% annualized), an investor using the SMA crossover strategy would have made ended up with 49.127$. (6.54%). Even without accounting for transaction costs, the SMA crossover strategy doesn’t provide a significant over-performance to simply buying and holding over a long period.

  Does this mean that this strategy is completely useless?

  Actually no, a closer look at the data will show that the SMA crossover strategy allows investors to avoid extended drawdowns, like the 2008 crisis. This significantly reduces the risk taken by investors: the yearly standard deviation of the SMA crossover strategy is only 13%, against 19% for the buy and hold strategy. Since returns didn’t decrease as much as risk, this leads to high risk-adjusted returns, as measured by the Sharpe ratio: 0.43 for passive investing vs 0.53 for SMA crossovers.

  But what about astrology?

  Of course, the subject of this article wasn’t to compare technical analysis to buy and hold, but to astrology. I was surprised to learn that financial astrology was actually a thing and that there were also a lot of astrology-related strategies out there. I decided to implement a strategy based on lunar cycles since it was one of the clearest about when to buy and when to sell.

  The strategy goes as follows: we purchase SPY on a new moon, and re-sell it on the next full moon. And repeat that every lunar month.

  

  Clearly, it fails at beating SMA crossovers. Or at doing basically anything, an investor using the moon phase strategy starting with 10.000$ would end up with only 11.110$ and a Sharpe ratio of only 0.09.

  Conclusion

  Similarly to diversification, simple technical analysis strategies can be used to minimize investment risk, without necessarily reducing profits by the same amount. There’s however no guarantee that a strategy that worked in the past will continue working in the future. It is also likely that there exist smarter momentum indicators than moving averages, but you’ll have to do your own backtests for those.

• Posted on June 9, 2023

  Introducing Mikochi: a minimalist remote file browser

  Like many people working in DevOps, I have taken the bad habit to keep playing with servers and containers in my free time. One of the things I have running is a Media Server, which I use to access my collection of movies and shows (that I evidently own and ripped myself). To make my life easier with this, I have built a web application that allows me to browse, manage, and stream/download files. It is called Mikochi and received its first stable release last week.

  

  Problem statement

  My media server was initially running Jellyfin. It is a pretty nice piece of software that probably fits the need of many people. Sadly for me, it focuses a lot on areas I didn’t care about (metadata, transcoding, etc) while being lackluster on classic file management.

  The features I need is to have basic FTP-like management from a browser. This means it needs to list the content of folders and allow navigation between them while allowing to download, rename, delete, and upload files.

  In addition to that, I also wanted a search function that could lead me to any file/directory in the server.

  Since it’s replacing a media server, the last requirement was streaming. I do not use streaming in the browser much (since it doesn’t always support fancy codecs like HEVC), so I just needed to be able to read it from a media player like VLC or MPV, which is easier.

  Frontend

  One of my aims in this project was to get back into frontend development since I didn’t touch a line of JavaScript in a while. For this project, I decided to use Preact, a React alternative weighing only 3kb.

  Preact was a great surprise. I expected a framework that small to be too good to be true, but it works well. I didn’t experience any trouble learning it since it is almost the same API as React and didn’t encounter any performance issues or unexplainable crashes. I will definitely try to use it again for future projects.

  The complete JS bundle size ends up being ~36kb, barely more than the icon pack that I use.

  

  Backend

  The backend was made using Go, which has been one of my main languages for the past 5 years. I used the Gin framework to handle the regular HTTP boilerplate, which worked admirably.

  The only pain point I had was re-implementing JWT authentication. I had decided to not use a library for that because I felt that, it might not handle an edge case well: I need tokens passed in GET params for streaming requests, since VLC isn’t going to write a Authorization header. It’s not particularly complex but it is a lot of code.

  I had the good surprise that streaming files “just works” in a single line of code:

  c.File(pathInDataDir)
  

  Running it

  If you’re interested in trying out Mikochi, it can be launched with just a Docker image:

  docker run \
  -p 8080:8080 -v $(PWD)/data:/data \
  -e DATA_DIR="/data" -e USERNAME=alicegg \
  -e PASSWORD=horsebatterysomething zer0tonin/mikochi:latest
  

  Compiled binaries are also available on GitHub. And for those who love fighting with Ingresses and PersistentVolumeClaims, there’s a helm chart available.

• Posted on April 3, 2023

  Specialization considered harmful

  It is sometimes recommended that software engineers should learn “depth-first”, and seek to specialize early in their careers. I think his advice is misguided. In my opinion, having a wide range of knowledge is in many cases more important than being extremely good at a very specialized task. I will use this article to make the case for avoiding specialization as a software engineer.

  

  It’s not just about practice hours

  A common misconception when learning a new skill is that, since it might take 10,000 hours to master it, the best thing to do is to start practicing as early as possible and with as much focus as possible. Reality is however not as simple.

  It may be true that just putting in a lot of focused practice hours will lead to amazing results in problems that are very constrained in scope (like chess). However, for subjects that have a very broad, and frequently evolving set of problems, experience working on very diverse subjects will often perform better than intense specialization.

  One of the reasons behind that is that many problems that are at first sight unrelated will have similar patterns. Being exposed to a wide variety of problems allows you to see a lot of potential patterns between problems.

  This is why history has many records of people achieving breakthroughs in many fields. For example, Benoit Mandelbrot first noticed the concept of fractal by studying probability distributions in financial markets, he managed to find an application of the concept to many patterns that appear in nature, such as coastlines, clouds, and blood vessels.

  Tech changes, fast

  Many people underestimate how fast the world of software engineering can change. Some extremely popular concepts like “DevOps” were pretty much not a thing 10 years ago. 20 years ago, I doubt anyone would have known what differentiated a “frontend developer” from a “backend developer”. Even if you zoom on very specific technologies, things are changing every year: React code written in 2023 doesn’t have much in common with React code written in 2015.

  

  Being a generalist, allows you to adapt much faster to change, it can be seen as a way of “learning to learn”. Once you have been exposed to many problems and solutions, picking up new tools and adapting to changes in the field becomes easier and easier.

  There’s more to software engineering than code

  Most importantly, learning the ins and out of a programming language and tech stack is not what brings value. Software engineering is the art of using computers to solve problems. Those problems are generally not about computers, but involve businesses and people. In my experience, this is a point that is easy to miss when over-focusing on the depth of a specific technology.

  This is also where a lot of people who make a career change and transition late into the tech industry have an edge. They can compensate for their late start by being more aware of the reality of business and the needs of organizations.

• Posted on March 9, 2023

  Why diversification matters for long-term investors? Meet Shannon's Demon

  Any introduction to finance will mention that diversification is extremely important. Intuitively, it is easy to understand that diversification reduces risks. If I own stocks in two companies, and one of them goes bankrupt, I lose less than if I had invested all my money in it. However, what appears less intuitive is that diversification itself will increase investment portfolio returns. This phenomenon is known as Shannon’s Demon, from the name of its inventor Claude Shannon, also famous for his work on cryptography.

  

  Let’s take the following scenario: I am an investor who can purchase two assets with completely random and unpredictable returns. My crystal ball is broken, so I cannot know in advance which of the two assets will perform better. They can be modeled by a random walk. Any change to my investment portfolio will cost a 1% transaction fee.

  I can use the following two strategies:

  • put 100% of my money in one of the two assets and hope it performs well
  • put 50% of my money in each asset and rebalance the portfolio every 6 months to keep each position at 50%

  

  I made a Monte-Carlo experiment that simulates the above scenario 100,000 times over 20 years (5040 trading days). After inspecting the final returns, I observed the following:

  • in nearly 100% of outcomes, the balanced portfolio beats investing everything in the worst-performing asset
  • in 70% of outcomes, the balanced portfolio also beats investing everything in the best-performing asset

  Explanation

  The second observation might be surprising, but can be easily explained. The trick is that regular rebalancing will create a mechanical way to “buy low and sell high”.

  Let’s illustrate it step by step:

  • at the start, I own 500 of asset X, for a value of 10$ each, and 500 of Y for the same value

  Name	Price	Position	Value
  X	10$	500	5,000
  Y	10$	500	5,000

  • after 6 months, my position in X experienced explosive growth and now trades at 50$, while Y is stable at 10$

  Name	Price	Position	Value
  X	50$	1000	25,000
  Y	10$	500	5,000

  • I rebalance the portfolio, and now own 15,000$ in X and 15,000$ in Y

  Name	Price	Position	Value
  X	50$	300	15,000
  Y	10$	1,500	15,000

  • 6 months later, X performed poorly and is back at 10$, while Y is now worth 20$

  Name	Price	Position	Value
  X	10$	300	3,000
  Y	20$	1,500	30,000

  • I rebalance, and now own 16,500$ in X and 16,500$ in Y

  Name	Price	Position	Value
  X	10$	1,650	16,500
  Y	20$	825	16,500

  Over the last scenario, my portfolio gained 23,000$. If I had invested everything into Y, I would have gained only 10,000$. And if I had bough and held X over the same time, I would not have made any profit.

  Caveat 1: correlated assets

  One important thing to consider is that this only work with assets that are not positively correlated. A positive correlation means that both assets will move up at the same time, and down at the same time. In this situation, the balanced portfolio will still perform better than the worst of the two assets, but will most of the time underperform the best-performing asset.

  

  In practice, many asset returns are very correlated with each other. For example, in the stock market, we can observe periods where the large majority of stocks tend to move up (bull markets) or down (bear markets). This makes the creation of a diversified stock portfolio more complicated than just randomly picking multiple stocks to purchase. This is also why it is often advised to diversify across multiple asset classes (ie, stocks, bonds, commodities, and cash).

  A common way to make use of Shannon’s Demon is to use an asset with a stable price (ie. a money market fund) alongside a volatile one. A portfolio with 50% cash and 50% in a volatile asset will not only cut the risk in half but sometimes outperform being 100% in a single volatile asset. Simulating 10000 random walks over 20 years, in 91% of cases, the balanced portfolio beats investing everything in the random walk.

  

  An alternative use of Shannon’s Demon is to profit from negatively correlated positions. This can be done by taking two positively correlated assets and being long on one, and short on the other. This strategy is called pair trading, and it is not something you should try at home.

  

  Caveat 2: real-life is not as simple

  Obviously, there’s more to portfolio management than just diversification and rebalancing. First, the 50/50 repartition I used in this article is rarely optimal. The common calculation used for optimal position sizing is the Kelly criterion, which would need an entire article dedicated to it to cover it properly.

  In previous examples, I used a fixed 6 months period between rebalances. I chose this period for completely arbitrary reasons. An optimized rebalancing strategy would need to take into account asset variances, investment time-frames, and transaction costs to determine the rebalancing intervals.

  Lastly, while simulations using random walks are a useful mathematical tool, they might not reflect real market conditions. A portfolio composed of assets that are likely to depreciate over time is unlikely to be profitable, no matter how diversified it is. This is why asset purchases should be carefully researched, eventually with the help of a professional financial advisor (not me).

• Posted on March 2, 2023

  Learning Dutch online in 2023

  Back in 2020, I left France to live in the Netherlands. Since then, I have spent some time learning the language and reached an intermediate (B1-B2) level. While learning Dutch is not a hard requirement to live and work in the country, it does make day-to-day life a bit more convenient. There are plenty of resources out there to learn languages, so here’s my pick of tools that are worth spending your time on.

  

  Duolingo

  Duolingo is probably the most famous language-learning app around. Despite its popularity, many people in the language learning community will dismiss it as just a toy. It is, in my opinion, actually great for beginners. One of the main benefits of it is that it focuses on complete sentences, and will drill the sentence structure of your target language in your head.

  

  However, once you have acquired a basic idea of your target language’s grammar the application loses any usefulness. Duolingo is sadly extremely slow at introducing new vocabulary, and going across the whole course is unnecessarily time-consuming. Which I guess is a consequence of its subscription business model. The gamification makes it addictive enough that I reached a 300 days learning streak, but I would honestly not recommend using it for more than six months.

  Anki

  Anki is a very often recommended option in language learning communities. It is a spaced repetition app, that will show you flashcards and ask you if you know the correct translation. Unlike Duolingo, Anki is essentially focused on vocabulary.

  

  It is free and open-source software, so the application gives you a lot of customization options, which lets you introduce new words at the rhhythm you want. A few Dutch decks are available online, but many Anki users prefer creating their own decks with words they encounter in target language content.

  Anki didn’t stick with me, I think the issue was the lack of variety in exercises. Doing the same thing to every flashcard turned the activity into a chore (instead of the addictive game that Duolingo was).

  Memrise

  Memrise is my personal favorite. Like Anki, it is a spaced repetition app, which focuses on memorizing vocabulary. But it is much more enjoyable than Anki because it alternates between different exercise variations. Adding to that, their repetition algorithm seems smarter, making for a more enjoyable and efficient learning experience.

  

  It contains seven official courses, for a total of more than 2000 words. Which is largely enough content to start engaging with native content. Additional content is provided by the community.

  Just like Duolingo, some features are locked behind a subscription.

  Italki

  Unlike the previous apps, Italki is not focused on providing exercises but on matching students with language teachers. Some could say it is the “Uber” of language learning, providing cheap and personalized courses. It is a pretty good way of getting into some conversation practice, which is especially useful if you are not in the country. The experience will vary from teacher to teacher, but I had a great time using it.

  

  Native content

  Of course, apps and courses are a great help when learning a language, but exposure to native content is what will help the most in the journey toward fluency. In the beginning, I found NOS Jeugdjournaal to be very helpful. It is the kid’s version of the NOS newspaper and comes with shorter articles, simpler vocabulary, and less depressing news. Most articles are accompanied by video clips which also helps build your listening, and their daily “Ochtendjournaal” can be easily fit into a routine.

  

  For more advanced learners, there are quite a few Dutch TV shows and movies around. Amongst my personal favorites are the Dirty Lines show, which is about two brothers creating the first dutch phone-sex line, and the movie De Oost, which covers the story of a dutch soldier in the Indonesian War of Independence. You can find a list of Dutch movies on IMDB.

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