SCAR Ratio

[stillingame 10]

Hi People,

 

I just ran across the Scar Ratio in a book I just read. Scar stands for "Simple to Compounded Accelerated Returns" Ratio. Anyone have any experience with this? The book is entitled "Investment Catch-Phrase Fallacy: The New Risks of Traditional Investing". The author is apparently a top hedge fund manager. This is a quant guy whose fund uses the formula because of the frequency of the exits of their trades which invokes a substantial compounding effect. I just ran my SCAR ratio using their excel download http://www.scarratio.com and it was interesting because it does kind of make you keenly aware of the impact of the compounding effect in your trading methods. BTW my scar ratio wasn't very good :-(

 

Anyone else using this?

Todd

[sevensa 10]

According to the website, the formula is:

 

The SCAR ratio formula:

 

SCAR = ((CV-IV)/IV)+1

 

Where:

 

IV = Initial Value (beginning portfolio value of time-frame being measured)

CV = Current Value (portfolio value as of last trade of time-frame being measured)

 

I don't really see how this is really different than calculating percentage return over a period? Looks to me to be the same thing, just slightly repackaged with a new fancy name.

 

I am always suspicious when someone do that as in many cases they just do that to market themselves so that they can sell you something.

[stillingame 10]

Yes thanks. In my case I actually bought the book first then learned about the scar ratio. Yeah I think you are right about it being a simple measure, which is exactly what I thought until I started to think about what the measure told me about my trade losses. I actually lost 11% in 2008. So my scar ratio is .85 which I guess means that I’m still suffering the effects of my previous losses in my current trades, it being a measure of the previous 12 months. Oh yeah they did try to sell me a tee-shirt lol.

[sevensa 10]

I actually lost 11% in 2008. So my scar ratio is .85 which I guess means that I’m still suffering the effects of my previous losses in my current trades, it being a measure of the previous 12 months.

 

This means that you have lost 15% of your account over the last 12 months and has nothing to do with the previous losses. This is a simple calculation to see what your return is over the last 12 months. Just because he decided to give it a fancy name, doesn't mean it is something fancy.

[stillingame 10]

hmmmm. Well you are right in that it's not fancy. In fact I think the author stated in his book that it was very basic and wasn't fancy. However if it was simply another way of calculating loss (or gain for that matter) then in my case my scar ratio would be 15. However my scar ratio was .85 so... clearly there is something more here.

 

Hyder says it's always the "current value of a 1% trade gain in relation to my principal of one year ago." So I’m going to go ahead and disagree with you about what this is and agree with you that it's not complex.

 

I'm not a rocket scientist (I’m sure some of you here actually are) lol. But I think we as investors have a "can't see the forest for the trees" situation about this. Which is why I thought the ratio was so interesting. Yes clearly it’s simple, even Hyder says it is, but I think the point is to look at your trade methodology in a new way as it relates to the acceleration of the compounding effect.

 

For example, I've made several good trades this year and it changed my scar ratio because at the same time old losing trades are dropping off. This is what I think the author was attempting to make investors aware of... the style of trading as it relates to your daily advancing year old principal.

 

For what it’s worth...

[sevensa 10]

The formula to calculate SCAR over a specific period is:

 

SCAR = ((CV-IV)/IV)+1

Where:

IV = Initial Value (beginning portfolio value of time-frame being measured)

CV = Current Value (portfolio value as of last trade of time-frame being measured)

 

The formula to calculate return on account over a specific period is:

 

Return = ((CV-IV)/IV) * 100

Where:

IV = Initial Value (beginning portfolio value of time-frame being measured)

CV = Current Value (portfolio value as of last trade of time-frame being measured)

 

The only difference is that in one case you add 1 and the other case you mulitply with 100. Multiplying or adding a result with a different constant, doesn't give you any new information, but if you think it does, then more power to you.

[Dacamic 10]

Sevensa is correct. SCAR Ratio is a re-labeled and re-packaged simple return calculation (a rose by any other name). In answer to your earlier question, I constantly use return calculations.

 

Yes, return will increase as performance improves during any given period of time.

Edited February 11, 2009 by Dacamic
Clarification

[stillingame 10]

I'm sorry but you both are incorrect. It is not a simple return calculation it is a compound return calculation that always measures its relation to the first 1% non-compounded gain. I agree that it is simple to understand and simple to calculate but the value of the ratio is that it keeps you aware of how your next trade gains compare to your original principal. The real reason you dismiss the scar ratio is because you are too "smart" to see the forest. According to your comments it has to be complex to have value. Tell me what does a 2.15 scar ratio tell you? It tells you that a 1% return gives you a 2.15% return in relation to your original principal. Are you telling me that knowledge isn't important in a trading methodology? Telling yourself you made 115% doesn't give you that information. You both have completely missed the point because of your (not invented here) superior intelligence. I've read the book (which is now free on the author’s web site) and this guy had made 82% in the last 12 months with a full 15% of that 82% because of the scar ratio concept. Have either of you made 82% in a 12 month window? I know I haven’t.

[sevensa 10]

Tell me what does a 2.15 scar ratio tell you? It tells you that a 1% return gives you a 2.15% return in relation to your original principal.

 

It tells me that for every $1 I had in the beginning of the calculated period, I now have $2.15. In other words, each dollar returned 115%.

 

Here is an example:

 

12 months ago you had $100 in your account and today you have $215.

 

SCAR = ((215 - 100)/100) + 1 = 1.15 + 1 = 2.15

 

Return on Account = (215 - 100)/100) * 100 = 1.15 * 100 = 115

 

The only difference is that for SCAR you add 1 to 1.15 to get 2.15 and in case of ROA you multiply 1.15 with 100 to get to percentage return of 115. Why do you think adding 1 instead of multiplying with 100 gives you more information?

 

According to your comments it has to be complex to have value.

Talk about missing the point. We have said it is virtually the same thing than return on account and doesn't give you additional information. Please read the previous posts again.

 

You both have completely missed the point because of your (not invented here) superior intelligence.

 

There is no reason to come with personal attacks because we have shown you that mathematically SCAR ratio is virtually the same thing as Return on Account calculated over the specified period. Math is math.

 

Have either of you made 82% in a 12 month window?

What does that have to do with anything? Just because someone made 82% last year doesn't mean he what he say about math has more credibility or that someone who didn't, has less. If you stop believing whatever that guy is telling you because he made 82% and look at the math, you will see yourself. Edited February 28, 2009 by sevensa

[Dacamic 10]

There is the possibility this thread is more about promotion than enlightenment. On the chance my skepticism is unwarranted, I offer a link to the ROI calculation per Investopedia:

 

http://www.investopedia.com/terms/r/returnoninvestment.asp.

 

With respect, as Sevensa has said, SCAR is mathematically identical to ROI. Furthermore, the suggested interpretation for SCAR is to describe 1% x $20,000 as 2% x $10,000, which doesn't seem a revolutionary idea, either.