Asset Rotation: The Demise of Modern Portfolio Theory and the Birth of an Investment Renaissance

CHAPTER 7BUILDING A BETTER MOUSETRAPAdvanced Asset Rotation

Edmond Halley was a seventeenth-century English astronomer, perhaps most well-known today for deciphering the orbit of the eponymous Halley’s Comet. During his time, the prevailing astronomical opinion was that comets traveled the universe in a straight line, passing by the Earth on only a single occasion.

Sir Isaac Newton believed that comets could travel in an orbit, but he never fully developed this theory. It was Edmond Halley who used Newton’s laws of motion to calculate the effect the gravitational fields of Saturn and Jupiter would have on comets. Utilizing Newton’s theorems, Halley was able to determine that a comet observed in 1682 followed the same path as one observed in 1607, and another in 1531. Halley postulated that each of these three observations was in fact the same comet and he predicted it would return in 76 years. Seventy-six years later Halley’s Comet returned and continues to this day to pass by the Earth every 75 to 76 years.

Newton’s laws of motion provided the foundation for future discoveries; for Edmond Halley to ultimately determine not only that comets traveled in an elliptical path around the universe, but, more important, that by studying their path, their return could be predicted.

In, Chapter 6, we provided a rather lengthy and elaborate illustration of a very elementary two-asset-class rotational investment discipline, based on only a single catalyst—one-month price return—and drew ...