ANTS

How Stock Market Indices Underperform

So, why is it that active management cant outperform the "underperforming" index. More to think about.

How Low Can They Go?

Im with Chubb in that sometimes Bespoke does print interesting things that otherwise miss my attention. The problem for me is that its scatter gun. Even if there is an aspect of the market that appears interesting, it could well be the last time it gets a mention. Without follow through, it becomes entertainment rather than a base for analysis.

Commodities: On the Downhill Slope?

I handle the allocation question by reference to a risk reward ratio, similar to say a Sharpe ratio or Sortino ratio. Six months ago these ratio's implied to me that the resources area was favorable and deserved a higher allocation. While the outlook for commodities probably hasn't changed that much, the stock market risk/reward structure has, and it is appropriate to scale back the allocation to resources until these ratio's become acceptable.

The other thing is the psychology of seeing stocks fall 10% in one day and recover 6% the next day. It is very very hard to maintain investment discipline while moves of this magnitude occur on a regular basis, and I would rather have my mind (and pocket) free of the distraction.

Finding Meaning in Volatility

Tao Man would have to agree that volatility is high at the moment, but we don't see too many people doing what he suggests. The fact is buying into this market exposes the investor to a wild ride at best. If we take BHP the current price is around $40, near term low $33 and near term high $49. So do you buy and watch the stock perform a round robin up and down, or do you conclude that the future is uncertain and very risky, and therefore why bother. Better to have invested 5 years ago when it was $15, low volatility and gradual but consistent upside returns.

Finding Meaning in Volatility

I don't see that that "volatility and correlation...are amenable to analytical prediction". Volatility is derived from prices. If you can't predict price, then you can't predict volatility. What you may be able to do is to say that volatility reaches upper or lower bounds, and in the world of options trading there is possibility of making money from that.

What it says to me is that the lower the volatility, then the more one can invest in the asset class. When vol was low in the stock market, then it was safer to have an overallocation to stocks. Now that vol has increased, then stock allocation should be reduced.