As you have probably noticed, stocks are a wee bit more volatile these days. We’ve reached levels of volatility similar to what we experienced during the financial crisis in 2008, and before that, the Great Depression. It’s pretty intense.
Nothing is working All kinds of wacky stuff is happening in the bond market, and bonds aren’t really providing any diversification benefits anymore, as risk-parity strategies unwind. Correlation is the risk that nobody sees. Correlation is the risk that nobody saw in 2008, which was precisely the cause of collateralized debt obligations and such blowing up. Correlation is always lurking. It’s the relationship between currencies and bonds and stocks and banks and people that you don’t see until it’s too late.
Fragility I will borrow a little Nassim Taleb for a paragraph — it’s about the difference between building portfolios that are fragile versus those that are antifragile. As most people have found out in the past few weeks, they had fragile portfolios. Most people did. The nice thing about this is that it frequently puts you in low-risk trades where there is significant asymmetry — you can make more than you can lose.
Value investors do this, too — they invest in things with a margin of safety. Sentiment trading is a distant cousin of value investing.
Cash BE DA KING!
The government should allow short positions in retirement accounts! This leaves people vulnerable to these huge swings.
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