Revealing the 10% in the Sterling Ratio

We truly love hearing what our readers think about our research and writings. We love it even more when they can help provide additional information, and start a conversation. Today, we got an email from, Curt Breitfuss, owner of Jones & Company, offering not only new information on our post yesterday, but a little bit of history on the Sterling Ratio that we couldn’t resist sharing with all of you. As a reminder, we delved into explaining the Sterling Ratio. Here is the equation again. 

Sterling Ratio = (Compound ROR) / ABS(Avg. Ann DD – 10%)

Even after a good amount of research, we were unable to definitively define what that arbitrary 10% represented. So, we provided our own take of what it might mean. Breitfuss offers some insight as to the origins of the 10% in the ratio. Turns out, friend of the blog, Jeffery Jones of Alpine Advisor is the son of Sterling ratio creator, Deane.

The ratio was invented by my father-in-law and Jeff Jones’ dad, Deane Sterling Jones.  To clarify the reason he (Deane Sterling Jones used 10% in the denominator was to compare any investment with a return stream to a risk-free investment (T-Bills). He invented the ratio in 1981 when t-bills were yielding 10%. Since bills did not experience drawdowns (and a ratio of 1.0 at that time), he felt that any investment with a ratio greater than 1.0 had a better risk/reward tradeoff. The average drawdown was always averaged and entered as a positive number and then 10% was added to that value.

We used the ratio to choose Paul Tudor Jones, Louis Bacon and Monroe Trout in 1987/1988 as our initial allocations within the High Sierra Fund. After Deane’s passing in 1993, we did not continue to promote or use the ratio in a public fashion as Deane had done.

There you have it. If you have anything to add to any post, be sure to leave a comment or tweet us!

 

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