"The Risk-Return Trade-Off Is Phony"

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Ciel
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"The Risk-Return Trade-Off Is Phony"

Post by Ciel »

Any thoughts on this NYT opinion piece? https://www.nytimes.com/2021/11/15/opin ... hedge.html

As it notes, this isn't a novel concept, but does it hold relevance for the average Boglehead approach to investing? An optimized version of it, maybe?

Would it be better in the long run to focus on finding the right balance of very negatively-correlated investments instead of the usual focus on allocation of stocks and bonds?

Of course, the data for this particular firm's results are extremely limited. But is it the right idea in theory for the long term?
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Nathan Drake »

Can't read it. Have a summary?
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Re: "The Risk-Return Trade-Off Is Phony"

Post by David Jay »

Paywall so no way to comment.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by 9-5 Suited »

Oof that’s not the quality of journalism that I pay to read in the New York Times. The risk return trade off isn’t phony, that’s absurd clickbait. He is being spoon fed marketing talking points from a hedge fund manager. Larry Swedroe and others have shown consistently that hedge funds aren’t worthwhile investments, they’re just fashionable clubs for the wealthy. Hard pass.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Ciel »

Sorry about that. Not sure if I'm allowed to copy and paste the full piece but here is the key paragraph, discussing an alternative to usual diversification strategies:
Spitznagel’s alternative is insurance. In his funds he shaves off a small portion of the portfolio — 3 percent or so, depending on circumstances — and puts it into an asset that isn’t expected to make any money on average but will go up a lot when everything else goes down. In my interview, he declined to discuss the nature of this insurance, but put options would be one natural choice. (A put option gives its holder the right to sell an asset such as a stock index futures contract to a counterparty for a set price. The option becomes valuable when the market price of the asset falls below the strike price of the option.)
Spitznagel's hedge fund argues that it simultaneously reduces risk and increases returns with this approach, netting >3% over the S&P on an annualized basis. All I can tell from the piece is that the time period is somewhere between 10-19 years.

I'm not advocating hedge funds but I'm curious if this general approach has any reasonable basis in the long term.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by willthrill81 »

Ciel wrote: Mon Nov 15, 2021 10:48 pmNot sure if I'm allowed to copy and paste the full piece
You aren't as that would be a violation of copyright law and the forum's rules.
Ciel wrote: Mon Nov 15, 2021 10:48 pmSpitznagel's hedge fund argues that it simultaneously reduces risk and increases returns with this approach, netting >3% over the S&P on an annualized basis. All I can tell from the piece is that the time period is somewhere between 10-19 years.
I'm not sure if he's talking about a backtested strategy or what his fund actually did, but I really doubt that the latter would be accurate.

That said, if they did something like the HFEA approach, it's possible that they might have had such returns.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Nathan Drake »

Ciel wrote: Mon Nov 15, 2021 10:48 pm Sorry about that. Not sure if I'm allowed to copy and paste the full piece but here is the key paragraph, discussing an alternative to usual diversification strategies:
Spitznagel’s alternative is insurance. In his funds he shaves off a small portion of the portfolio — 3 percent or so, depending on circumstances — and puts it into an asset that isn’t expected to make any money on average but will go up a lot when everything else goes down. In my interview, he declined to discuss the nature of this insurance, but put options would be one natural choice. (A put option gives its holder the right to sell an asset such as a stock index futures contract to a counterparty for a set price. The option becomes valuable when the market price of the asset falls below the strike price of the option.)
Spitznagel's hedge fund argues that it simultaneously reduces risk and increases returns with this approach, netting >3% over the S&P on an annualized basis. All I can tell from the piece is that the time period is somewhere between 10-19 years.

I'm not advocating hedge funds but I'm curious if this general approach has any reasonable basis in the long term.
There’s a guy that has done a lot of that. His name is Hussman. His fund has done atrociously over 20 years because he’s always planning on the next 1-3 year correction.

Fear of corrections leads to lots of missed opportunities.

If there was no risk of such corrections in the stock market, there would be no premium. You must embrace them.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Ciel »

I'm not sure if he's talking about a backtested strategy or what his fund actually did, but I really doubt that the latter would be accurate.

That said, if they did something like the HFEA approach, it's possible that they might have had such returns.
He's saying it's the actual data from the fund's "risk-mitigated portfolios."
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Re: "The Risk-Return Trade-Off Is Phony"

Post by iceport »

The underlying concept is interesting. The development and implementation of a strategy to "insure" against the big losses is the real challenge.
The math is interesting. Consider the difference between 300 people each rolling a six-sided die once and one person rolling the die 300 times in a row. Modern Portfolio Theory implicitly assumes that the outcome would be the same, but it’s not, as Spitznagel describes with examples.

Let’s say the payoff from rolling a one is minus 50 percent, the payoff from rolling a six is plus 50 percent, and the payoff from the other four sides is plus 5 percent. The average return for the 300 people who roll once each would be 3.3 percent — not bad for a moment’s work. Things are likely to turn out far worse for the poor person who rolls 300 times. Now those ones with their negative payoffs are like land mines. The compound growth rate here will be around negative 1.5 percent, and after 300 rolls the starting stake of $1 will most likely be down to a mere penny. A person who played that game and by chance never rolled a one would make a killing, but it’s probably not going to be you.

As an investor, you’re not the 300 people rolling once each. You’re more like the lone person rolling again and again, repeatedly exposing yourself to the chance of a big loss.

[Can't you guys just use the "reader view" in Firefox or its equivalent in other browsers to read the text? There are no graphics that would be lost. Or have you ever tried just hitting the "Esc" or "stop loading" button to freeze the partially loaded page before the paywall crops up? Works for me at the NYT...]
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Crustus »

Haven't read the article. My first guess is that these aren't the same experiment. 300 individual rolls giving an estimate of one periods volatility versus 300 rolls mimicking a sequence of returns? I think that's the only way the math comes out different.
And . . .
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Re: "The Risk-Return Trade-Off Is Phony"

Post by bottlecap »

Hmmm… Let's see. Which is more likely to be phony? A theory that investors require greater potential reward for riskier investments or a New York Times opinion piece?

Tough call.

JT
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Re: "The Risk-Return Trade-Off Is Phony"

Post by ScubaHogg »

The book goes into more detail about the idea. I found it an interesting read. Spitznagel doesn’t talk about how to actually implement his concepts (his is very upfront at the beginning of the book he won’t) but there are some interesting discussions about geometric median of your ending wealth if you lived many times over. He also demonstrates, in theory, how an asset with a zero arithmetic average can raise the ending wealth of a portfolio. Sort of like the Kelly Criterion for a portfolio.

For history buffs there some interesting history about probability theory as well.

Again, he doesn’t say how one can do this. File it under theory. Still a good read though.

https://www.google.com/url?sa=t&rct=j&q ... 7IRrK_5z4E
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Re: "The Risk-Return Trade-Off Is Phony"

Post by ScubaHogg »

Nathan Drake wrote: Mon Nov 15, 2021 11:20 pm
Ciel wrote: Mon Nov 15, 2021 10:48 pm Sorry about that. Not sure if I'm allowed to copy and paste the full piece but here is the key paragraph, discussing an alternative to usual diversification strategies:
Spitznagel’s alternative is insurance. In his funds he shaves off a small portion of the portfolio — 3 percent or so, depending on circumstances — and puts it into an asset that isn’t expected to make any money on average but will go up a lot when everything else goes down. In my interview, he declined to discuss the nature of this insurance, but put options would be one natural choice. (A put option gives its holder the right to sell an asset such as a stock index futures contract to a counterparty for a set price. The option becomes valuable when the market price of the asset falls below the strike price of the option.)
Spitznagel's hedge fund argues that it simultaneously reduces risk and increases returns with this approach, netting >3% over the S&P on an annualized basis. All I can tell from the piece is that the time period is somewhere between 10-19 years.

I'm not advocating hedge funds but I'm curious if this general approach has any reasonable basis in the long term.
There’s a guy that has done a lot of that. His name is Hussman. His fund has done atrociously over 20 years because he’s always planning on the next 1-3 year correction.

Fear of corrections leads to lots of missed opportunities.

If there was no risk of such corrections in the stock market, there would be no premium. You must embrace them.
FWIW that’s not what Spitznagel says he does. He elaborates in the book. He claims over and over not to predict returns and he’s definitely not a perma bear in his writing. So he’s not predicting a crash and getting out of the market. It’s a different concept entirely.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Sandtrap »

bottlecap wrote: Tue Nov 16, 2021 6:39 am Hmmm… Let's see. Which is more likely to be phony? A theory that investors require greater potential reward for riskier investments or a New York Times opinion piece?

Tough call.

JT
+1
I stopped at the heading, "New York Times 'opinonion piece'.

j :D
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Re: "The Risk-Return Trade-Off Is Phony"

Post by TimeRunner »

I read the article this morning and also honed in on the key paragraph about the book's author declining to state how to implement his strategy. My next thought was that at least Ken Fisher gives away his marketing books for free! "Whatever."
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Re: "The Risk-Return Trade-Off Is Phony"

Post by asif408 »

The problem is most risky assets you can buy and sell with the click of a button aren't going to have negative or even zero correlation with the stock market, particularly when things are rough. The only way you get zero to negative correlation with a risky asset is when it is difficult to purchase or obtain and you are early to the party. Most of us don't have either option.

At some point if their strategy gets copied by enough people that diversification will go away, then they will have to find something else. Taleb is one of his scientific advisers, so maybe he'll stay ahead of the masses. But our best bet here is to be patient and globally diversified, accept that diversification for us commoners won't work during the short term chaos, but should do just fine over the long haul. Most of these hedge funds care about short term returns a lot more than we need to. The biggest advantage we have compared to the hedgies is patience to wait and a lack of clients looking over our shoulder ready to pull out when things get rough for a few months or years. They don't have that luxury.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Grogs »

iceport wrote: Tue Nov 16, 2021 6:18 am The underlying concept is interesting. The development and implementation of a strategy to "insure" against the big losses is the real challenge.
The math is interesting. Consider the difference between 300 people each rolling a six-sided die once and one person rolling the die 300 times in a row. Modern Portfolio Theory implicitly assumes that the outcome would be the same, but it’s not, as Spitznagel describes with examples.

Let’s say the payoff from rolling a one is minus 50 percent, the payoff from rolling a six is plus 50 percent, and the payoff from the other four sides is plus 5 percent. The average return for the 300 people who roll once each would be 3.3 percent — not bad for a moment’s work. Things are likely to turn out far worse for the poor person who rolls 300 times. Now those ones with their negative payoffs are like land mines. The compound growth rate here will be around negative 1.5 percent, and after 300 rolls the starting stake of $1 will most likely be down to a mere penny. A person who played that game and by chance never rolled a one would make a killing, but it’s probably not going to be you.

As an investor, you’re not the 300 people rolling once each. You’re more like the lone person rolling again and again, repeatedly exposing yourself to the chance of a big loss.

[Can't you guys just use the "reader view" in Firefox or its equivalent in other browsers to read the text? There are no graphics that would be lost. Or have you ever tried just hitting the "Esc" or "stop loading" button to freeze the partially loaded page before the paywall crops up? Works for me at the NYT...]
I think the math is just looking at the difference between arithmetic and geometric means. If you have a 50% loss, it takes a +100% gain to recover it. That means it takes 2 sixes to offset each one, which is extremely unlikely. Of course such dice would be an extremely poor investment and the smart investor would avoid them.

Overall, I think it's very convenient that the hedge fund manager claims to have the secret insurance sauce, but won't let anyone else in on what it is. So he has given us a problem that can only be solved by using his hedge fund I suppose. Giving the benefit of the doubt that he has actually beaten the S&P by 3% per year, I believe the typical "two and twenty" hedge fund fees would wipe out that advantage and still make it a net loser.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by langelgjm »

I read the piece last night and was curious if there'd be a discussion here.

The title is vey click-baity, probably written by an editor and not Peter Coy himself. However, I basically shrugged when I reached this line in the 3rd paragraph:
“Universa’s risk-mitigated portfolios have, over their decade-plus life to date, outperformed the S&P 500 by over 3 percent on an annualized, net basis.”
"Decade-plus" means since roughly 2007, so about 14 years. We all know that some managers can beat the market, sometimes for a long time. But almost certainly not forever.

There are some other useful points in the piece, like (as KlangFool often reminds us), "Survival is essential. If a portfolio does well on average but by bad luck has a series of big losses, it may never be able to recover."

There's another important point about not confusing average returns with your specific, non-average experience:
“If we have our arm mauled off by a lion on the African veldt, we cannot simply ‘average’ our experience with others in the tribe and end up with 97 percent of an arm.”
So sure, you need to survive to thrive, and you in particular should not bank of achieving the average return. Folks around here would probably say this just means you should pick an appropriate asset allocation.

Then piece finishes up with this gem: "he said he wouldn’t fault risk-averse investors for spreading their bets, say, in a typical mix of 60 percent stocks and 40 percent bonds."
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Re: "The Risk-Return Trade-Off Is Phony"

Post by dbr »

Modern portfolio theory is legitimate. I don't know about any specific claims for practical investing in that article.

Bogleheads are implementing MPT when the try to understand the risk and return of a whole portfolio comprising different assets.

A practical illustration of risk and return interacting in a not necessarily intuitive way is the fact that the optimum asset allocation for the safe withdrawal rate from a portfolio is about 60/40 and not either 0/100 (no risk) or 100/0 (highest return). I think he alludes to that a little, but the rest of the article is going somewhere else maybe.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by David Jay »

Ciel wrote: Mon Nov 15, 2021 10:48 pmSpitznagel's hedge fund argues that it simultaneously reduces risk and increases returns with this approach, netting >3% over the S&P on an annualized basis.
If his hedge fund actually outperforms the SP500 by 3% annually, it is a loser to a simple SP500 fund after the investor pays 2-and-20
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Ciel »

I agree that this piece and his book scream "marketing strategy." However, the ideas involved are very interesting. I might check out the book.
David Jay wrote: Tue Nov 16, 2021 9:38 am
Ciel wrote: Mon Nov 15, 2021 10:48 pmSpitznagel's hedge fund argues that it simultaneously reduces risk and increases returns with this approach, netting >3% over the S&P on an annualized basis.
If his hedge fund actually outperforms the SP500 by 3% annually, it is a loser to a simple SP500 fund after the investor pays 2-and-20
It wasn't clear to me whether the "net returns" mentioned include their fees.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by vanbogle59 »

Nathan Drake wrote: Mon Nov 15, 2021 11:20 pm
Spitznagel’s alternative is insurance. In his funds he shaves off a small portion of the portfolio — 3 percent or so, depending on circumstances — and puts it into an asset that isn’t expected to make any money on average but will go up a lot when everything else goes down.
That sounds like Taleb's barbell, irreverently oversimplified to: Piddle around all you want, eventually some tidal wave will overwhelm the system. All that really matters is how you survive that.

Believers point to great successes (like "winning" the GFC).
Non-believers point to the undeniable, ongoing and non-trivial portfolio drag.

I have never seen anything along these lines that made sense for a real-world, personal retirement portfolio (this side of Elon's IRA).
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Ciel »

The reason why I created this thread is that I was curious if these concepts might be applicable/practicable for individual, Boglehead-type investors. It looks like the answer to that question is "no."
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Re: "The Risk-Return Trade-Off Is Phony"

Post by ScubaHogg »

vanbogle59 wrote: Tue Nov 16, 2021 9:49 am
Nathan Drake wrote: Mon Nov 15, 2021 11:20 pm
Spitznagel’s alternative is insurance. In his funds he shaves off a small portion of the portfolio — 3 percent or so, depending on circumstances — and puts it into an asset that isn’t expected to make any money on average but will go up a lot when everything else goes down.
That sounds like Taleb's barbell, irreverently oversimplified to: Piddle around all you want, eventually some tidal wave will overwhelm the system. All that really matters is how you survive that.

Believers point to great successes (like "winning" the GFC).
Non-believers point to the undeniable, ongoing and non-trivial portfolio drag.

I have never seen anything along these lines that made sense for a real-world, personal retirement portfolio (this side of Elon's IRA).
To try and guess how they might say this is actionable, an average investor could focus on building more of a “safety first” portfolio (social security, annuities, guaranteed pensions) to ensure a minimum income then go all risk, even leveraged risk, with the risky part of their portfolio. In contrast to what others have referred to as the “probability based approach” (ie, 4% rule and its like).
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Re: "The Risk-Return Trade-Off Is Phony"

Post by livesoft »

vanbogle59 wrote: Tue Nov 16, 2021 9:49 am That sounds like Taleb's barbell, irreverently oversimplified to: Piddle around all you want, eventually some tidal wave will overwhelm the system. All that really matters is how you survive that.
Guess who is has the title of "distinguished scientific advisor" with Spitznagel's firm?

Generally, the only reason to write such a book as reviewed in this piece is to satisfy one's ego and to get more clients. At least Bogle spilled the beans and described exactly what to do in his books.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by vanbogle59 »

livesoft wrote: Tue Nov 16, 2021 10:30 am Guess who is has the title of "distinguished scientific advisor" with Spitznagel's firm?
HA! I got one!
This must be what a blind pig feels like when it finds a truffle!
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Bill Bernstein »

About what you'd expect from Taleb's direction:

1) How much leverage is the fund carrying to get that 3% excess return?

and

2) Ignore the 2, 3, 4, and 5 on the die. The other two sides have returns of -50% and + 50%, for an expected arithmetic return of zero and median geometric return of -25%. Isn't that AMAZING :wink:

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Re: "The Risk-Return Trade-Off Is Phony"

Post by Rob_Burke »

Certainly it is an alternative strategy. Just because it’s new or different does not mean the person or the idea needs to be vilified. Simple choose to incorporate it or disregard it. Either way you know something new.
Last edited by Rob_Burke on Tue Nov 16, 2021 11:28 am, edited 1 time in total.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by edgeagg »

I read the article. The article by itself is not completely wrong and here are some of the key statements:

1) A very high risk investment also has a non-zero probability of complete ruin, in which case you can't play any more - ever, like Russian roulette since if you play the game (of high risk investments) over many iterations, the chance of complete ruin is guaranteed.
2) There is complete BS in the article about diversification, in fact the point is that correct diversification lowers the variance of outcomes, thus rendering the probability of extreme outcomes smaller
3) In some ways the article reinforces Boglehead principles. We aren't gamblers or Russian Roulette enthusiasts, but rather variance minimizers through diversification AND by not panicking (just stand there).

ea
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Re: "The Risk-Return Trade-Off Is Phony"

Post by vanbogle59 »

Rob_Burke wrote: Tue Nov 16, 2021 10:53 am Certainly it is an alternative strategy. Just because it’s new or different does not mean the person or the idea needs to be vilified. Simple choose to incorporate it or disregard it. Either way you know something new.
I actually like Taleb a lot.
I've read all of his books.

But the only thing I took away for my personal retirement portfolio was to have 10 years in fixed income instead of 5.
Then back to the 3-fund portfolio for me.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Ben Mathew »

iceport wrote: Tue Nov 16, 2021 6:18 am The underlying concept is interesting. The development and implementation of a strategy to "insure" against the big losses is the real challenge.
The math is interesting. Consider the difference between 300 people each rolling a six-sided die once and one person rolling the die 300 times in a row. Modern Portfolio Theory implicitly assumes that the outcome would be the same, but it’s not, as Spitznagel describes with examples.

Let’s say the payoff from rolling a one is minus 50 percent, the payoff from rolling a six is plus 50 percent, and the payoff from the other four sides is plus 5 percent. The average return for the 300 people who roll once each would be 3.3 percent — not bad for a moment’s work. Things are likely to turn out far worse for the poor person who rolls 300 times. Now those ones with their negative payoffs are like land mines. The compound growth rate here will be around negative 1.5 percent, and after 300 rolls the starting stake of $1 will most likely be down to a mere penny. A person who played that game and by chance never rolled a one would make a killing, but it’s probably not going to be you.

As an investor, you’re not the 300 people rolling once each. You’re more like the lone person rolling again and again, repeatedly exposing yourself to the chance of a big loss.

[Can't you guys just use the "reader view" in Firefox or its equivalent in other browsers to read the text? There are no graphics that would be lost. Or have you ever tried just hitting the "Esc" or "stop loading" button to freeze the partially loaded page before the paywall crops up? Works for me at the NYT...]

For those interested in the math described above, the effect is plainly visible when you run a Monte Carlo simulation. The median payout is less than the average payout. In other words, there are a few spectacular outcomes (a sequence of mostly good returns), and many below average returns (a sequence of mixed returns or worse). But this doesn't necessarily mean that the median payout is terrible. Just that it's lower than the average payout.

Here for example is a Monte Carlo simulation of withdrawals in TPAW:

Image

The upper end is spread out, making the average higher than the median.

This is just the math of how returns compound over time. It does not imply that there is a free lunch to be had by purchasing insurance.

The article might be suggesting that Universa is able to find underpriced insurance:
Some Universa wannabes load up on this kind of insurance, but that gets expensive because most of the time the market or asset doesn’t crash and those options expire worthless. Universa’s secret sauce is how to buy “sufficient bang for the buck” to offset losses when things go south, Spitznagel says. In the book, he calls this “cost-effective risk mitigation.”
Any underpriced asset is a good deal. It has nothing to do with the math of how returns compound over time.

But if the article is saying instead that Universa is increasing returns by buying the right amount of fairly priced insurance, then that's just not possible. You can't get 3% extra risk-adjusted returns over the market by buying fairly priced assets. Purchasing insurance will reduce returns and reduce risk. Increasing the bond allocation would be "cost-effective risk mitigation." There is no magic that will get fairly priced insurance to increase return and reduce risk.
Last edited by Ben Mathew on Tue Nov 16, 2021 11:44 am, edited 1 time in total.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by shelanman »

I'm not an expert in this stuff, I tend to stay away from all of the complex strategies, but...

...I feel like this is yet another exercise in "everything looks rosy when we ignore counterparty risk"
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Re: "The Risk-Return Trade-Off Is Phony"

Post by hdas »

hhhhhhh
Last edited by hdas on Tue Nov 23, 2021 12:34 pm, edited 1 time in total.
....
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Re: "The Risk-Return Trade-Off Is Phony"

Post by prioritarian »

Ciel wrote: Mon Nov 15, 2021 10:33 pm Any thoughts on this NYT opinion piece? https://www.nytimes.com/2021/11/15/opin ... hedge.html

As it notes, this isn't a novel concept, but does it hold relevance for the average Boglehead approach to investing? An optimized version of it, maybe?

Would it be better in the long run to focus on finding the right balance of very negatively-correlated investments instead of the usual focus on allocation of stocks and bonds?

Of course, the data for this particular firm's results are extremely limited. But is it the right idea in theory for the long term?
The investor Mark Spitznagel says that reducing risk actually increases returns, and he has evidence. He is the founder and chief investment officer of the Miami-based hedge fund Universa Investments LP, where Nassim Nicholas Taleb, the best-selling author of “The Black Swan” and other books, holds the title of distinguished scientific adviser.
Sounds like this hedge-fund speculator is talking his own book. I also generally distrust anyone who has a strong "outsider" opinion on something that directly relates to their own compensation.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by minimalistmarc »

Ciel wrote: Mon Nov 15, 2021 10:48 pm Sorry about that. Not sure if I'm allowed to copy and paste the full piece but here is the key paragraph, discussing an alternative to usual diversification strategies:
Spitznagel’s alternative is insurance. In his funds he shaves off a small portion of the portfolio — 3 percent or so, depending on circumstances — and puts it into an asset that isn’t expected to make any money on average but will go up a lot when everything else goes down. In my interview, he declined to discuss the nature of this insurance, but put options would be one natural choice. (A put option gives its holder the right to sell an asset such as a stock index futures contract to a counterparty for a set price. The option becomes valuable when the market price of the asset falls below the strike price of the option.)
Spitznagel's hedge fund argues that it simultaneously reduces risk and increases returns with this approach, netting >3% over the S&P on an annualized basis. All I can tell from the piece is that the time period is somewhere between 10-19 years.

I'm not advocating hedge funds but I'm curious if this general approach has any reasonable basis in the long term.
Of course it doesn’t, otherwise there would be loads of us funds beating the index by doing it.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by jarjarM »

Ciel wrote: Tue Nov 16, 2021 9:50 am The reason why I created this thread is that I was curious if these concepts might be applicable/practicable for individual, Boglehead-type investors. It looks like the answer to that question is "no."
Probably won't help buy-and-hold-type investors but Taleb's approach does work to certain extent for individual investors. It helps with the understanding that some of the asset allocation is design for safety, which by its nature won't generate great return during good time but likely to be a ballast during bad time. Also, doing so allow the investor, depending to their risk appetite, to take on more risk on the risky asset.

Full disclosure, I believe in Taleb's work and invest as such. :mrgreen:
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Re: "The Risk-Return Trade-Off Is Phony"

Post by vanbogle59 »

jarjarM wrote: Tue Nov 16, 2021 12:32 pm
Ciel wrote: Tue Nov 16, 2021 9:50 am The reason why I created this thread is that I was curious if these concepts might be applicable/practicable for individual, Boglehead-type investors. It looks like the answer to that question is "no."
Probably won't help buy-and-hold-type investors but Taleb's approach does work to certain extent for individual investors. It helps with the understanding that some of the asset allocation is design for safety, which by its nature won't generate great return during good time but likely to be a ballast during bad time. Also, doing so allow the investor, depending to their risk appetite, to take on more risk on the risky asset.

Full disclosure, I believe in Taleb's work and invest as such. :mrgreen:
I would love to hear how you structured your portfolio. :D
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Re: "The Risk-Return Trade-Off Is Phony"

Post by jarjarM »

vanbogle59 wrote: Tue Nov 16, 2021 1:02 pm
jarjarM wrote: Tue Nov 16, 2021 12:32 pm
Ciel wrote: Tue Nov 16, 2021 9:50 am The reason why I created this thread is that I was curious if these concepts might be applicable/practicable for individual, Boglehead-type investors. It looks like the answer to that question is "no."
Probably won't help buy-and-hold-type investors but Taleb's approach does work to certain extent for individual investors. It helps with the understanding that some of the asset allocation is design for safety, which by its nature won't generate great return during good time but likely to be a ballast during bad time. Also, doing so allow the investor, depending to their risk appetite, to take on more risk on the risky asset.

Full disclosure, I believe in Taleb's work and invest as such. :mrgreen:
I would love to hear how you structured your portfolio. :D
A dash of treasury, a dash of high grade investment bonds, some cash, a bit of VIX hedging (insurance), tons of risk assets in 3x LETFs (run with adaptive asset allocation) and definitely a bit of market timing (very bad :oops: ) on risk on/off asset allocation. I'm definitely not a traditional BH but does believe in the index fund (no individual stock) approach.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by vanbogle59 »

jarjarM wrote: Tue Nov 16, 2021 2:17 pm
vanbogle59 wrote: Tue Nov 16, 2021 1:02 pm
jarjarM wrote: Tue Nov 16, 2021 12:32 pm
Ciel wrote: Tue Nov 16, 2021 9:50 am The reason why I created this thread is that I was curious if these concepts might be applicable/practicable for individual, Boglehead-type investors. It looks like the answer to that question is "no."
Probably won't help buy-and-hold-type investors but Taleb's approach does work to certain extent for individual investors. It helps with the understanding that some of the asset allocation is design for safety, which by its nature won't generate great return during good time but likely to be a ballast during bad time. Also, doing so allow the investor, depending to their risk appetite, to take on more risk on the risky asset.

Full disclosure, I believe in Taleb's work and invest as such. :mrgreen:
I would love to hear how you structured your portfolio. :D
A dash of treasury, a dash of high grade investment bonds, some cash, a bit of VIX hedging (insurance), tons of risk assets in 3x LETFs (run with adaptive asset allocation) and definitely a bit of market timing (very bad :oops: ) on risk on/off asset allocation. I'm definitely not a traditional BH but does believe in the index fund (no individual stock) approach.
"I'm definitely not a traditional BH " - Agreed. LOL

"A dash of treasury, a dash of high grade investment bonds, some cash, a bit of VIX hedging (insurance), tons of risk assets in 3x LETFs"
If I'm understanding the terms correctly, doesn't sound like so much of a barbell.
More of a "wheelbarrow" of safety and "back up the truck" of risk. :beer Pretty lopsided. But I see the structure at least.

Any estimate as to what fee % you pay every year?
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Re: "The Risk-Return Trade-Off Is Phony"

Post by jarjarM »

vanbogle59 wrote: Tue Nov 16, 2021 2:40 pm "I'm definitely not a traditional BH " - Agreed. LOL

"A dash of treasury, a dash of high grade investment bonds, some cash, a bit of VIX hedging (insurance), tons of risk assets in 3x LETFs"
If I'm understanding the terms correctly, doesn't sound like so much of a barbell.
More of a "wheelbarrow" of safety and "back up the truck" of risk. :beer Pretty lopsided. But I see the structure at least.

Any estimate as to what fee % you pay every year?
According to personal capital, my fee is averaging ~0.6%. Part of it is due to some higher fee 401K but lots of it is also because of the leveraged funds as well. But I guess as long as I get a bit more out of the overall portfolio, the elevated fee is worth it.

I'm transition to a more Taleb-approved (?) portfolio slowly since we have a large taxable and are in the highest tax bracket over the last few years.
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vanbogle59
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Re: "The Risk-Return Trade-Off Is Phony"

Post by vanbogle59 »

jarjarM wrote: Tue Nov 16, 2021 8:15 pm
vanbogle59 wrote: Tue Nov 16, 2021 2:40 pm "I'm definitely not a traditional BH " - Agreed. LOL

"A dash of treasury, a dash of high grade investment bonds, some cash, a bit of VIX hedging (insurance), tons of risk assets in 3x LETFs"
If I'm understanding the terms correctly, doesn't sound like so much of a barbell.
More of a "wheelbarrow" of safety and "back up the truck" of risk. :beer Pretty lopsided. But I see the structure at least.

Any estimate as to what fee % you pay every year?
According to personal capital, my fee is averaging ~0.6%. Part of it is due to some higher fee 401K but lots of it is also because of the leveraged funds as well. But I guess as long as I get a bit more out of the overall portfolio, the elevated fee is worth it.

I'm transition to a more Taleb-approved (?) portfolio slowly since we have a large taxable and are in the highest tax bracket over the last few years.

"more Taleb-approved (?) portfolio"
What would the structure of that be? When I read the books, I convinced myself it would cost north of 2% per year, with 90+% of my portfolio squirreled away in super-safe instruments (e.g. TIPS and naked puts).
Even if I got it right, it would have been so "lumpy" as to make it unrealistic for an individual (at least for THIS individual).
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Re: "The Risk-Return Trade-Off Is Phony"

Post by telemark »

I read the article and "phony" is not a word I would choose: the correlation between risk and return is real enough, based on the simple principle that investors want to be compensated for taking on risk. As for Spitznagel's proposed solution, sure: if you can find assets with a high negative correlation to stocks, you can construct a portfolio with a better risk/return ratio. The trick is in finding those assets, and it's not surprising that this is where the author gets cagey.
In my interview, he declined to discuss the nature of this insurance
I'm not convinced that the reporter is doing a competent job of summarizing the book, as he seems confused about what MPT does and doesn't claim, but I haven't read the book.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by crystalbank »

I read a few chapters so far and skimmed the book through out. As a huge fan of Taleb and Mandelbrot this book so far doesn't really do anything to me. Going in, I did know that the author doesn't reveal his secret sauce but still thought it would be an interesting read. After all, Taleb and Mandelbrot don't advocate any special investing strategies directly.

So far I have to say that this book comes short. There are a few interesting chapters about Bernoulli and Geometric returns but the writing style is very dull and almost felt like a word salad at times. I might revisit this later but it's being shelved (literally) for now.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by HomerJ »

ScubaHogg wrote: Tue Nov 16, 2021 8:19 am Again, he doesn’t say how one can do this.
Completely worthless from a practical viewpoint, and completely suspect from a theoretical standpoint as well.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by JoMoney »

Article is pay-walled, and I don't expect there's much in the NYT worth the effort to read.

FWIW, the idea of "risk premiums" has at lot of problems. There was a pretty good book (and some articles about the book, and a few academic papers on) "The Missing Risk Premium" (by Eric G. Falkenstein)

Many of the value-tilting investors suggest a "Behavioral Story" rather than a "risk premium" story for explaining returns in value stocks.

Benjamin Graham in The Intelligent Investor explained that his theory/belief parted with the Efficient Market Hypothesis proponents when it comes to the idea that one can aim for some level of return simply by the level of risk they are willing to run.

Casinos are thriving examples that you don't have to offer a "risk premium" (or any expected advantage) to get people to make volatile bets.

... and then there's GameStop/AMC stocks :twisted:
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Northern Flicker »

The same or very similar ideas as in the NYTimes opinion piece are presented here:

https://taylorpearson.me/ergodicity/
Last edited by Northern Flicker on Sun Nov 28, 2021 4:19 pm, edited 1 time in total.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by Northern Flicker »

Ciel wrote: Would it be better in the long run to focus on finding the right balance of very negatively-correlated investments instead of the usual focus on allocation of stocks and bonds?
How negative of a correlation do you need?

https://www.portfoliovisualizer.com/ass ... &months=36
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Re: "The Risk-Return Trade-Off Is Phony"

Post by ScubaHogg »

HomerJ wrote: Sun Nov 28, 2021 12:36 pm
ScubaHogg wrote: Tue Nov 16, 2021 8:19 am Again, he doesn’t say how one can do this.
Completely worthless from a practical viewpoint, and completely suspect from a theoretical standpoint as well.
Having read the book I disagree it’s “worthless.” There is some interesting stuff on geometric returns and the value of insurance in other industries (maritime) even when it has a negative “expected value.”
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Re: "The Risk-Return Trade-Off Is Phony"

Post by AnEngineer »

willthrill81 wrote: Mon Nov 15, 2021 11:16 pm
Ciel wrote: Mon Nov 15, 2021 10:48 pmNot sure if I'm allowed to copy and paste the full piece
You aren't as that would be a violation of copyright law and the forum's rules.
I believe the latter, but not necessarily the former (in some cases full copying has been deemed fair use).

iceport wrote: Tue Nov 16, 2021 6:18 am
The math is interesting. Consider the difference between 300 people each rolling a six-sided die once and one person rolling the die 300 times in a row. Modern Portfolio Theory implicitly assumes that the outcome would be the same, but it’s not, as Spitznagel describes with examples.
...
It is the same. 300 dice rolls are 300 dice rolls. The subsequent explanation is about what happens when you assign different meaning to the two sets of dice rolls.
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Re: "The Risk-Return Trade-Off Is Phony"

Post by dertere »

shelanman wrote: Tue Nov 16, 2021 11:27 am I'm not an expert in this stuff, I tend to stay away from all of the complex strategies, but...

...I feel like this is yet another exercise in "everything looks rosy when we ignore counterparty risk"
This was the first thing to pop into my mind while reading the piece. During 2008 black swan event a lot of the smart folks holding short positions would still have been up a creek if the feds hadn't taken steps to stabilize their counterparties.
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