Want to Be Rich? Don't Use The Sharpe Ratio
A simple strategy can get us to $27M instead of $274k invested in bonds 27 years ago
In 1966, William F. Sharpe developed one of the most widely used metrics in Modern Portfolio Theory. Sharpe originally called it the “volatility-reward ratio” but later adopted Sharpe Ratio in honor of its creator.
This metric led him to win the Nobel Prize in economics a few years later. However, it is one of the metrics that provide the most negligible value and has been used the worst by economists and hedge fund managers. With it, they have deceived many investors into believing that their portfolio had less risk than it had, and this is not the case.
Taleb has always been critical of this metric, and I could not agree more.
“High Sharpe ratios are predictive of huge blowups. The more stable the return, the more likely the blowup. Volatile funds lose money; but not as much as nonvolatile ones.” — Nassim Taleb.
Knowing how to put volatility in your favor can make you a lot of money. People know this, but they don’t do it in the right way. That’s why in …