A.I.M. Users Bulletin Board

[RazorbackFan]

Extending the Idiot Wave (or how to become a complete idiot)

First things, first......To all board-lurkers from Cajun land......WoooooPiiiiigSoooiiieeee

I stumbeled across the riskgrades.com web site after joining AAII (they have a link). We all worry about evaluating the return of our investments, but this site provides tools for evaluating their risk. It was recently voted "best of the web" by Forbes.

Taken from their website:

What is a RiskGrade™ Measure?

The Benchmark for Measuring Financial Risk

A RiskGrade™ Measure is an open and transparent benchmark to measure the risk of the world's financial assets.

A RiskGrade™ Measure:

allows for a comparison of investment risk across all asset classes, regions, and currencies.

varies over time to reflect asset specific information (e.g., the price of a stock reacting to an earnings release) and general market conditions.

operates differently from traditional risk measures, such as beta, standard deviation, and average shortfall

Initially, I wanted to somehow compare Riskgrade information to Tom's Idiot Wave. Inially, I compared the NASDAQ-100 ETF (QQQ) Here is it's Riskgrade history since Jan 1999.

http://www.riskgrades.com/retail/riskchart.cgi?tickers=QQQ:US&sdate=19990101&edate=20031128&...

And here it is for SPY

http://www.riskgrades.com/retail/riskchart.cgi?tickers=SPY:US&sdate=19990101&edate=20031128&...

In a rough comparison, it seems that the idiot wave seems to jump to high risk earlier than the riskgrade tracking.

But how to correlate this information, which is available and changing daily, to come up with the %cash mix. Well here are my thoughts.

Tom's page indicates that in the last 5 years we have experienced both the highs and lows for the IW. Therefore, I took an individual stock, looked at it's Riskgrade Max and Min(s) over the same period. Let's uze ZRAN as an example since it has been a topic of interest on the board.

http://www.riskgrades.com/retail/riskchart.cgi?tickers=ZRAN:US&sdate=19990101&edate=20031128...

Max Riskgrade=764 (Nov 2000)
Min Riskgrade=240 (June/July 2003)

Using this range, I just normalize it to the IW's settings.

Therefore, ZRAN's current Riskgrade of 307 calculates to a % cash value of

((307-240)/(764-240)*(74-18)+18=25

While the IW shows a cash holding of 40% for the overall market, this calculation indicates that ZRAN is at a low risk (per it's history) and more cash can be invested. But remember, that with a Riskgrade of 307, this stock is more risky than the benchmark standard of 100 and is considered a speculative stock. (Riskgrade >125)

This provides a somewhat crude method of establishing a %cash setting for each stock based on where that stock's Riskgrade lies within it's historical range. One could substitute this %cash to determine whether to take a vealie or not, just the same as the IW is currently being used.

Check out the site yourself and see what you think. You can load portfolio's, take a course, and download some PDF documents that describe the Riskgrade calculations in detail. I am sure there are plenty lurkers out there who can improve on my math and provide greater insights.

Happy Holidays.