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Why We’re ‘More Vulnerable Now’: Modern Market Structure Meets Low ‘Ammo’

Fragility and a lack of policy breathing room.

Fragility and a lack of policy breathing room.
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7 comments on “Why We’re ‘More Vulnerable Now’: Modern Market Structure Meets Low ‘Ammo’

  1. “…we find that funds investing in less popular assets generally outperform those investing in more popular
    financial instruments, even when correcting for standard factors”, from “Better to stay apart: asset commonality, bipartite network centrality, and investment strategies” https://arxiv.org/pdf/1811.01624.pdf

    So it’s enough to avoid the crowded trades? It’s a bi more complicated, this article is brilliant on (de)correlation, alpha, beta, and diversification: https://www.institutionalinvestor.com/article/b1bpqyp4684v06/The-Wall-Street-Math-Hustle

    Funny coincidece, both published the 5th November.

    Personally I saw that during the nasdaq100 slaughter days of October the usual correlation 100% fire sales on everything wasn’t occurring. Some stocks held rather well, technically they are still well positioned. Examples are Adbe, Csco, Pep, Costco, Comcast, Broadcom, Msft, Paypal. Apart from Msft, most of them rank after position 15th in the ndx100. So there was a rotation from heavy weight stocks to medium weight stocks. Funds that are overweight these stocks and underweight Faang are likely doing fine.

    In perspective the nasdaq100 might be getting healthier, less concentrated in just a dozen stocks.

  2. “…we find that funds investing in less popular assets generally outperform those investing in more popular financial instruments, even when correcting for standard factors” https://arxiv.org/pdf/1811.01624.pdf

    This article is brilliant as concerns the correlation, diversification, beta, alpha issue https://www.institutionalinvestor.com/article/b1bpqyp4684v06/The-Wall-Street-Math-Hustle

  3. In a recent academic paper the conclusion was “…we find that funds investing in less popular assets generally outperform those investing in more popular financial instruments, even when correcting for standard factors”

  4. Franceska

    Thanks for the links. Very interesting. Scrabble indicator, seriously? Wow.

  5. Hey sorry for the three postings, but after the first comment I couldn’t see it, I posted a 2nd time, and couldn’t see it so I thought maybe Akismet interprets my links as spam. So I gave up an posted a simple comment without any link for a 3rd time. A mess.

  6. As always the key is to buy great businesses with moats with good, solid balance sheets at good to great prices. The market creates opportunities a few times every few years. When the prices get overvalued raise cash and be patient for the next opportunity. Watch your exposure to individual stocks (some % limit) and to industry and sector. Know what you invest in. Understand revenue drivers (price, units, new products, competition, etc), understand cost drivers (fixed, variable, labor, materials, etc), look at R&D, sales and mktg spend, make sure you look at the balance sheet (debt, leases, off bal sheet), look at cash flow (working capital, cap spending). And NEVER use leverage as the market can remain irrational longer that a person can remain solvent. Use the performance pressures of institutional investors to your advantage and think rationally and be smart. The goal is to do well over cycles not outperforn in any given quarter or year. One of the next few downturns could very well be the worst we have seen in almost a century due to debt levels (corp and govt), structural issues (productivity, wealth gap, etc) so monitor Heisenberg and others and factor in macro black swan/tail risk to your equity allocation. The goal is to build wealth avoiding large drawdowns which tge above will hopefully help. The more uncertainty and the more volatility the more I love investing. Too bad most of the institutional space can’t manage money like this. But you have to be aware, smart, nimble, and humble. Hope this helps, good investing.

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