The One Ring Conjecture

When arrested in Asia (many countries, not everywhere) never step into the station.

Once you put a foot inside, there's an unstoppable force pulling you deeper into the bowels of the judicial system.

Conviction rates in Japan, Korea and China are 99%+.

For comparison, conviction rates are in the 70s in the UK and US.


Many Asian countries are ruled by law, they don't have a 'rule of law' protecting individual's rights per se.

Indonesia's ex-dictator for example slapped down Time's reporting of his corruption, by bringing a $100m suit, backed by the Indonesian supreme court.

Which is why, when you hear a politician has been thrown into prison in China, you should look past the public reporting and figure out what's the over-arching motive.

Trading in Conspiracy

This leads to fantastic conspiracy theory books in Hong Kong airport, gobbled up by Chinese returning home.

In between the volumes on killer bees sent by Zhou Yongkang to attack Xi Jinping you will find the odd one about financial trading.

There are hundreds of 'anomalies' which authors conspiratorially share.

But is there one to rule them all? How would you go about proving it?

A good start is a falsifiable conjecture.

If a stock's returns looked like this over time, what would you do?

You'd probably buy after large losses and sell after large returns, right?

If there's a slope to be fit, it is -1; that's the longer radius of the ellipse; and implies the stock returns are chiefly generated by a mean reverting process.

So the conjecture is,

Every profitable 'timing strategy' results in more circular ellipses

If you own that stock, you can time buying and selling according to any scheme you wish, the upshot will be the returns you accrue on your account will show a more circular ellipse (if you do it right) and higher average return.

And in so doing, you will also round the ellipse of the plain vanilla stock returns quoted on the market a little also.

A related conjecture, is that portfolios with more circular ellipses will show better risk adjusted returns, ceteris paribus.

In essence, think of momentum and mean reversion as the two big ideas driving returns of every portfolio over time.

Equalise them and their marginal contribution to total portfolio risk is optimised. Leading to superior Sharpe ratios.

Every timing strategy boils down to equalising returns generated due to momentum and mean reversion

This is a 'clay pidgeon' of a conjecture - let the shooting begin!