Understanding Fat Tail Returns
Much statistical analysis in finance depends on the assumption that variables have normal distributions. This assumption is far from correct. As a result, as Nassim Nicholas Taleb has rightly pointed out, most statistical results in finance are wrong. Now, a disciple of Taleb has tried to extend Taleb’s research by relating it to an obscure mathematical concept.
The Fallacy of Rebalancing Revisited
Financial advisors routinely adhere to the discipline of rebalancing portfolios, so much so that they invest tens of thousands of dollars in software to automate the process. That adherence has been regularly reinforced by financial writers. I show why this conventional wisdom is wrong and rebalancing may be as unwise an investment as the software used to do it.
Empirical Support for Tail Risk Strategies
The conventional wisdom is that put options are too expensive to use as “tail risk” insurance against extreme losses in equities. But reports earlier this year of their spectacular success in a fund advised by Nassim Nicholas Taleb prompted me to evaluate whether investors should use them.
Modern Monetary Muddle
Incredible as it may sound to nearly all observers – once they learn what MMT says – its basic economic tenets are agreed to by most knowledgeable economists. The dispute is not really over its core economic model; it is over fears of its perceived political implications.
Living in a World of Radical Uncertainty
Suppose that three months ago someone had asked you what the probability was that a virus would cause the stock market to crash in 2020 – not a computer virus, mind you, but a microorganism. You might have said the probability was infinitesimal. You might have said one in 10,000. Or you might have done a study – albeit utterly lacking in statistical significance – of what happened to the stock market when diseases spread in the past.
How the Rich Dodge Taxes
Awareness has become widespread that incomes before taxes of the bottom half – or more – of the American population have stagnated in the last 40 years, while incomes at the top rungs have soared. A new book shows that the divide is even greater after taxes.
Was Renaissance’s Success Luck or Skill – And Was It Behind Trump’s Victory?
The hedge fund firm Renaissance Technologies, founded by James Simons, has been an object of amazement, admiration, and envy for years, because of the incredibly high investment returns of its flagship Medallion fund. In a new book, author Gregory Zuckerman explains how Renaissance did it. He also shows how a key Renaissance employee used his riches to get Donald Trump elected president.
The Downside to Deregulation
The deregulation initiated by Thatcher and Reagan in the 1980s was a corrective, inspired by economic theory, for the U.S. and U.K. governments that had gone too far in their zeal to protect consumers. A new book argues that now the corrective has gone too far.
America is No Longer Great
America is no longer great, according to two prominent economists. In a new book, they present a compelling argument that the U.S. is rapidly losing its technology edge to China. The culprit is a lack of public investment in research and development, something not easily remedied.
Four Reasons Why Libra Could Fail
Once again Facebook is at the center of controversy, this time with its plans to introduce its own cryptocurrency, Libra. It must overcome four key challenges, however, and even then it is not clear what Facebook ultimately hopes to accomplish with this venture.
Why Are ESG Funds Fighting Against Climate Change Solutions?
Vehement opposition to nuclear energy has been a core tribal marker for 40 years, despite the consensus among scientists that it must be part of the solution to climate change. But that could be on the verge of a change. The asset management industry could play an important role in that change – but, first, it must end the practice of excluding nuclear energy from ESG and SRI mandates.
The Most Extravagant Networking Ever
The secret of a great success is a crime that has never been found out because it was properly executed. The crime of Jho Low, the shadowy figure behind the 1MDB sovereign wealth fund, was well-executed. But it was found out, only because it was just too big – including the most lavish networking ever done.
Are Annuities the Best Strategy to Fund One’s Retirement?
Suppose you are retired, or soon-to-be retired, and you have no reason to leave a bequest. You just want to assure yourself of as much income as possible while you are alive. What is your best course of action? My research shows it’s almost impossible to beat an annuity.
Klarman, Fink and Grantham and the Threat to American Capitalism
An extreme, utopian political and economic philosophy has been embraced in America by a network of highly influential and well-placed apostles. And just as Communism ultimately brought about the collapse of the regime that established it in its most extreme form, the Soviet Union, this new extreme philosophy threatens to bring about the collapse of American capitalism.
A Close Look at Ibbotson’s Research on FIAs
We did a careful analysis of two fixed-indexed annuities (FIAs) that were the basis of a recent research study by Roger Ibbotson. Our conclusion is that these products are not a bad choice for an investor who is extremely sensitive to loss of capital. But a simpler, do-it-yourself alternative is better.
What’s Behind the Shrinking Public Equity Market?
One of the most remarkable trends in the financial markets has been the decline of publicly traded U.S. equities. About half as many stocks are listed as there were 25 years ago. What is driving this phenomenon and what are the implications for investors?
What Will Cause the Next Big Market Drop?
Quick – what was the second-worst U.S. stock market drop since the 1930s? What caused it? It wasn’t the pricking of the tech bubble in the early 2000s. It was the bursting of the oil bubble in 1973. Fossil fuels have been the life blood of economic growth for the entire time that economies have been growing – almost 200 years – and they have been responsible for many of their ups and downs.
Our Misguided Trust in Quantitative Measurement
The belief that detailed quantitative measurement will make performance easier to evaluate, manage efficiently, and improve has survived repeated failures of the doctrine. In fact, the failures serve only to bring forth calls for more of the treatment. Only very rarely is it admitted that quantification doesn’t work and should be scrapped.
How a Facebook Founder Wants to Solve Income Inequality
The thesis of Chris Hughes’s book Fair Shot: Rethinking Inequality and How We Earn is stated right up front: “Most Americans cannot find $400 in the case of an emergency like a car accident or a hospitalization, yet I was able to make half a billion dollars for three years of work. Something is profoundly wrong with our economy and in our country, and we have to fix it.” But is Hughes’s solution the answer?
Comey’s “Higher Loyalty” and Its Message for Wall Street
In his controversial book, A Higher Loyalty, James Comey says, “We are experiencing a dangerous time…” a time in which “basic facts are disputed, fundamental truth is questioned, lying is normalized, and unethical behaviour is ignored, excused, or rewarded.” What has precipitated this disastrous ethical decline? I will argue that as much as anything, it is Wall Street.
Does Capitalism Lead to Fraud?
David Enrich’s The Spider Network is an engaging chronicle of how employees of financial companies conspire to move LIBOR and its offshoots by small amounts for the sole purpose of benefiting derivatives traders who profited from the moves. The book implicitly raises a key question for the financial industry, indeed for the entirety of capitalism: Is there an ethical code that must be followed, apart from and beyond the requirements of the law; or is all that is necessary to be ethical merely to adhere to the law?
Investors Do Not Underperform their Investments
For 23 years DALBAR, Inc. has been publishing a research report reaching the conclusion, year after year, that investors underperform the investment vehicles that they invest in due to “poor investor decision making.” Wade Pfau recently discovered, however, that this conclusion is the result of a serious calculation error. Now, using Pfau’s results, I will prove that the evidence actually shows that investors do not underperform their investments.
The Trend that is Ruining Finance Research
According to Andrew Ang, a guru of factor-based investing and former chair of the finance and economics division of Columbia Business School’s Data Science Institute, the “anomalies” literature is the scientific foundation for quantitative asset management. But this focus, which was not very scientific to begin with, is proving its utter ruin.
The Absurdity of Asset Allocation Studies
“Determinants of Portfolio Performance,” the seminal 1986 paper on asset allocation by Gary P. Brinson, Randolph Hood, and Gilbert L. Beebower (BHB), is one of the most frequently cited – and misunderstood – examples of financial research. But if you correctly interpret its findings, you will realize that they are absurd.
What Advisors Need to Know About Cryptocurrencies
You may have heard about bitcoin. Spurred on by breathtaking price runups, some clients may even have asked you if they should invest in them, or if it’s safe to buy them and use them to make payments. Most likely you dismissed the whole thing as some sort of a tulip bubble. But it’s not as simple as that.
What Do We Know about Investor Irrationality?
It has become conventional wisdom that underperformance is due to the irrational investment behavior of individuals. For the creation and propagation of this conventional wisdom, we have DALBAR to thank. Now that Wade Pfau has shown that DALBAR’s research is likely to be worthless because it calculates its numbers wrong, it is time to question whether the conventional wisdom has even a scintilla of meaning.
Is It Possible to Identify “Bubbles”? Can Investors Profit from This?
How is it possible that stock market bubbles are so obvious after they burst, but are almost never identified in advance – except by what seem, after the fact, to have been a highly perspicacious few? A new study found that there is a way to tell before it bursts that the market, or a segment thereof, is in a bubble. But profiting from an investment strategy designed to exploit bubbles is incredibly difficult.
Robos are Taking Away Our Jobs (and it’s not just advisors)
When robots and automation have taken over not only the agriculture and manufacturing jobs but even the high-level service jobs, who will drive consumption? Will the economy stagnate? These are the questions posed by Martin Ford in his challenging, important and well-researched book, Rise of the Robots: Technology and the Threat of a Jobless Future.
Taleb, the Barbell Portfolio and Safety-First Financial Planning
The “barbell” portfolio has long been considered an investment strategy. Since his fame after the 2010 publication of the book The Black Swan, Nassim Nicholas Taleb has often been associated with the strategy. Recent research illustrates the critical connection between the barbell, core-satellite portfolios and safety-first financial planning – and how advisors can improve on using standard deviation as a measure of risk.
The Myths and Fallacies about Diversified Portfolios
For many years “alpha” – outperformance of the market on a risk-adjusted basis – was the Holy Grail of investment. Almost all money managers claimed they could produce it. It turned out that few could. Now a new Holy Grail: diversification. But there is little agreement as to what it means.
The Damage Done by the Nobel Prize in Economics
Has the institution of the Nobel Prize in economics been a cause of the global economic woes of the last 20 years – its financial crises, its economic slowdowns and its increasing intra-national inequalities? In their recent book, The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn, authors Avner Offer and Gabriel Söderberg make a good, if somewhat haphazard, case that it has.
Can Options Help Retirees Reach their Investment Goals?
Can options cost-effectively enhance investment returns? The answer depends partly on whether the investment manager takes an active view and partly on whether the options can be used efficiently to address an investor’s risk preferences.