Bonds Much Sharpe -r Than Buffett

August 23, 2012

[This article was first published on Timely Portfolio, and kindly contributed to R-bloggers]. (You can report issue about the content on this page here)
Want to share your content on R-bloggers? click here if you have a blog, or here if you don't.

Mebane Faber’s post Buffett’s Alpha points out Warren Buffett’s 0.76 Sharpe Ratio discussed in the similarly title paper Buffet’s Alpha.  I of course immediately think about the 8th Wonder of the World – the US Bond Market, whose Sharpe Ratio has trounced Buffett’s for the last 30 years.  What I like even better are all the tactical systems that employ US bonds in their backtests and make no adjustment for substantially different returns going forward.  For those of you who do not know, bonds with absolute certainty cannot achieve >8% annualized returns with max drawdown < 5% for the next 30 years with a starting yield to worst at 1.86% (Barclays Agg 8/23/2012). 

If anyone can show me where to get 8% annualized returns with max drawdown of 5% for the next 30 years, please let me know, and I will buy that with leverage and enjoy life. I’ll be happy to share my gains with whomever has the answer.

From TimelyPortfolio

In addition to an unbelievable Sharpe Ratio, bonds have exhibited a low/negative correlation with stocks during stocks’ bear market, which is also historically very anomalous.

From TimelyPortfolio

Just because I love horizon plots.

From TimelyPortfolio

For a longer perspective, here is rolling correlation since 1900 from the CSFB 2011 Yearbook.


So the experience can be dramatically different than what we have been fortunate enough to experience recently.


R code from GIST (install xtsExtra):

To leave a comment for the author, please follow the link and comment on their blog: Timely Portfolio. offers daily e-mail updates about R news and tutorials about learning R and many other topics. Click here if you're looking to post or find an R/data-science job.
Want to share your content on R-bloggers? click here if you have a blog, or here if you don't.

If you got this far, why not subscribe for updates from the site? Choose your flavor: e-mail, twitter, RSS, or facebook...

Tags: , , ,

Comments are closed.

Search R-bloggers


Never miss an update!
Subscribe to R-bloggers to receive
e-mails with the latest R posts.
(You will not see this message again.)

Click here to close (This popup will not appear again)