Cliff Asness Weekend

Cliff Asness of AQR Capital Management was all over the media this weekend as the interview in Barron’s and as the sole guest on WealthTrack with Connie Mack. The WealthTrack interview seemed to be of more interest.

He started out talking about the fact that the market does not go up every year. He really drove home the point in a way that I think is similar to how I have tried to convey it (probably the only thing I have in common with him). He was very matter of fact, the market goes down some years, this has always been the case and always will be the case. I would add that no one can “beat” the market every year. There will be periods where someone will be ahead of the market and periods where they will not. What matters is that you have enough accumulated for when you need it. The two biggest determining factors to having enough are savings habits and avoiding the urge to act on market induced fear (panic selling).

Asness also spelled out a little philosophical detail on how AQR does things. He said that stocks are about making money so people tend to be overweight stocks versus other types of assets, like bonds and commodities, which are about reducing risk.

I might add to that thought that knowing what to avoid can be more important than knowing what to buy.

The asset allocation target they use is to put 25% each into equities, government bonds, real assets (TIPS and commodities) and 25% into the rest of the bond market. Where it gets a little trickier is that the 25% refers to volatility not dollars. To simplify the idea if stocks have twice the volatility of bonds then equal weight between the two would work out to 33.3% of the dollars into stocks and 66.6% of the dollars into bonds.

This approach should get you to think about how important it is to smooth out the ride. This is how I take what AQR is doing to be about. I’ve written many times about this as a goal of how I try to do things. The panic and emotional distress that results from too much equity exposure at the wrong time can be ruinous yet very people pay enough heed to avoiding situations that would trigger panic.

For anyone who cares Nassim Nicholas Taleb will be on WealthTrack next week.

9 Comments

  1. Hmmm. Wealthtrack doesn’t appear to be on an HD cable channel here in Chicago (yeah, I’m an HD snob).

    I’ve been reading When Genius Fails: The Rise and Fall of Long Term Capital Management.

    It is disgusting how closely it parallels (at least to my amateur eye) the situation last October. I’m really starting to wonder what good derivatives actually do for those who buy them.

    Reply
  2. to the extent you care the show is on the website, the URL is probably wealthtrack.com

    Reply
  3. Derivatives = cheap leverage. But I’m sure your question was rhetorical. The old double edged sword. Couple some leverage with arrogance and what do you get? 🙂

    Well, something to write a book about, anyway.

    Reply
  4. I’m beginning to wonder if the derivative sword only has 1 edge.

    I keep reading about companies who hedge their risk using derivatives. This allows them to “move the risk off the balance sheet.”

    I’m sure they technically work all the time. You make a (slightly smaller) profit, you unwind your hedge. But I haven’t ready about a hedge that actually helped when something went wrong. In other words, a bet that did anything besides move a number off a balance sheet, therefore allowing more leverage.

    Of course, no one’s going to write an article or book about it unless there’s some kind of crisis, so I wouldn’t have a change to read about it.

    Reply
  5. Good comment about having enough “at the end”. Having more chips than your neighbor (or brother-in-law) is not a relevant guage of success during the lifetime investment process.

    Investing and living beneath your means does not have to be a game of winners and losers if you play wisely.

    T

    Reply
  6. No one can beat the market every year is true, but if we are not trying to beat the market why not just buy index funds, rebalance once a year, and spend the rest of the time riding my bike.

    Reply
  7. anon 1:35, your comment appears to ignore the concept of risk adjusted returns.

    if your interest is to always “beat” the market in nominal terms regardless of anything else then, although different than what I try to do, i agree with your comment but risk adjusted a a huge part of what I’m trying to do

    Reply
  8. problem is market has gone nowhere in ten years.

    Reply

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing

Cliff Asness Weekend

Cliff Asness of AQR Capital Management was all over the media this weekend as the interview in Barron’s and as the sole guest on WealthTrack with Connie Mack. The WealthTrack interview seemed to be of more interest.

He started out talking about the fact that the market does not go up every year. He really drove home the point in a way that I think is similar to how I have tried to convey it (probably the only thing I have in common with him). He was very matter of fact, the market goes down some years, this has always been the case and always will be the case. I would add that no one can “beat” the market every year. There will be periods where someone will be ahead of the market and periods where they will not. What matters is that you have enough accumulated for when you need it. The two biggest determining factors to having enough are savings habits and avoiding the urge to act on market induced fear (panic selling).

Asness also spelled out a little philosophical detail on how AQR does things. He said that stocks are about making money so people tend to be overweight stocks versus other types of assets, like bonds and commodities, which are about reducing risk.

I might add to that thought that knowing what to avoid can be more important than knowing what to buy.

The asset allocation target they use is to put 25% each into equities, government bonds, real assets (TIPS and commodities) and 25% into the rest of the bond market. Where it gets a little trickier is that the 25% refers to volatility not dollars. To simplify the idea if stocks have twice the volatility of bonds then equal weight between the two would work out to 33.3% of the dollars into stocks and 66.6% of the dollars into bonds.

This approach should get you to think about how important it is to smooth out the ride. This is how I take what AQR is doing to be about. I’ve written many times about this as a goal of how I try to do things. The panic and emotional distress that results from too much equity exposure at the wrong time can be ruinous yet very people pay enough heed to avoiding situations that would trigger panic.

For anyone who cares Nassim Nicholas Taleb will be on WealthTrack next week.

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing