Predicting The Next Black Swan

Of course the title is a joke as a true black swan is not reasonably predictable, at least not by more than a couple of people. Businessweek has an recent interview with Nassim Taleb whom I always enjoy reading. Here is one quote I liked; “People think they need to make money with their savings rather with their own business.” I’ve mentioned many times his idea of going ultra conservative in t-bills with 90% of the portfolio and being very aggressive with the other 10% many times. While this is not really practical for most people the concept embedded in the quote and in the 90/10 portfolio concept is practical which I take as focusing on reducing volatility of the overall portfolio so that there is less personal consequence when the market goes down a lot. As I’ve said in the past, finding out the hard way you had to much volatility is a bad place to be. In this article he offered a slightly different angle on the 90/10 which was making money in your business as one source of income, the most important source, with the 90% of savings being another followed by the 10%. In saying “you should have the consciousness that there is something called inflation” he might be suggesting TIPS. If he is suggesting TIPS he has company with Zvi Bodie. The newer TIPS can only have the par values go up or stay the same so if we continue on a deflationary path holders of the newer TIPS won’t have a problem (well, unless there is a default). The last quote I’ll throw...

Predicting The Next Black Swan

Of course the title is a joke as a true black swan is not reasonably predictable, at least not by more than a couple of people. Businessweek has an recent interview with Nassim Taleb whom I always enjoy reading. Here is one quote I liked; “People think they need to make money with their savings rather with their own business.” I’ve mentioned many times his idea of going ultra conservative in t-bills with 90% of the portfolio and being very aggressive with the other 10% many times. While this is not really practical for most people the concept embedded in the quote and in the 90/10 portfolio concept is practical which I take as focusing on reducing volatility of the overall portfolio so that there is less personal consequence when the market goes down a lot. As I’ve said in the past, finding out the hard way you had to much volatility is a bad place to be. In this article he offered a slightly different angle on the 90/10 which was making money in your business as one source of income, the most important source, with the 90% of savings being another followed by the 10%. In saying “you should have the consciousness that there is something called inflation” he might be suggesting TIPS. If he is suggesting TIPS he has company with Zvi Bodie. The newer TIPS can only have the par values go up or stay the same so if we continue on a deflationary path holders of the newer TIPS won’t have a problem (well, unless there is a default). The last quote I’ll throw...

Elusive Low Correlations

Two items today from yesterday’s FT Alphaville. One was part of an ongoing dialogue about correlation having increased lately and the extent to which high frequency trading (HFT) and the popularity of ETFs might be contributing to the problem. Concerns over correlation sprang up in 2008 when “diversification didn’t work” and this has been a front burner topic ever since. It will not be a front burner topic forever however. Whether it is HFT, ETFs or something else that has caused correlation to go up it will at some point recede. I’ve referred to this in the past, before the financial crisis, as an ebbing and flowing of correlations. Many things in the investment world ebb and flow and correlation is just one thing that does this. In this case the correlation issue is simply a problem to be solved. A first step that anyone can do is to simply not expect inter-asset class relationships to remain constant. 2008 was a great example of why correlations go up and while the odds are against that magnitude of melt down in so many disparate asset classes it is possible. This is an argument against set and forget, if anyone still does that anymore. One thing I’ve harped on WRT correlations has been the relative ineffectiveness of broad based funds with the idea being that the attributes of components get blended away in a broad based fund or components might be too small to move the needle. As two cases in point of countries I talk about all the time, in the last four years Norway’s OBX is up a little...

Elusive Low Correlations

Two items today from yesterday’s FT Alphaville. One was part of an ongoing dialogue about correlation having increased lately and the extent to which high frequency trading (HFT) and the popularity of ETFs might be contributing to the problem. Concerns over correlation sprang up in 2008 when “diversification didn’t work” and this has been a front burner topic ever since. It will not be a front burner topic forever however. Whether it is HFT, ETFs or something else that has caused correlation to go up it will at some point recede. I’ve referred to this in the past, before the financial crisis, as an ebbing and flowing of correlations. Many things in the investment world ebb and flow and correlation is just one thing that does this. In this case the correlation issue is simply a problem to be solved. A first step that anyone can do is to simply not expect inter-asset class relationships to remain constant. 2008 was a great example of why correlations go up and while the odds are against that magnitude of melt down in so many disparate asset classes it is possible. This is an argument against set and forget, if anyone still does that anymore. One thing I’ve harped on WRT correlations has been the relative ineffectiveness of broad based funds with the idea being that the attributes of components get blended away in a broad based fund or components might be too small to move the needle. As two cases in point of countries I talk about all the time, in the last four years Norway’s OBX is up a little...

Damn, Three Two Times

On Monday the S&P 500 closed above it’s 200 DMA so I was prepared to sell our current inverse ETF position which is the ProShares Ultra Short Dow 30 (DXD) on Tuesday near the close. Typically I wait for a second straight day, which would have been Tuesday, as a sort confirmation in the hopes of reducing the chance of getting whipsawed. As a reminder the goal with defensive action is avoiding the full brunt of down a lot should it happen, not every breach will result in down a lot so there will be times where a position is entered and then sold without the market having dropped a lot. My plan yesterday was to sell the DXD, if necessary which would have been of the SPX was above the 200 DMA, five minutes before the close. Any closer to 4:00 and I can’t be certain of getting the trade complete which would be a huge headache. For most of the last hour yesterday the SPX was a few tenths of a point above or a few tenths of a point below the 200 DMA which stockcharts.com had at 1113.93; it will be a little different today. Given how the market was trading, within a few tenths of a point either way, I decided about ten minutes to the close to not place any trade even if it ticked back over the 200 DMA. The thinking was if the market continues higher on Wednesday I can always sell it then as missing by one day would not be a crisis and if it goes lower then the chance...