Pragmatic Capitalism

Practical Views on Money & Finance

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What’s Your Max Pain Point?

My biggest gripe with Modern Portfolio Theory is that it tends to lead investors into very stock heavy portfolios.  The thinking usually goes something like this: Stocks tend to go up over the long-term which means if you are somewhat young then you can afford to ride out the higher volatility of stocks and allocate your assets… Read More

The Cost of Getting Scared out of Stocks in 1998

We were late in the business and market cycle and the global economy looked shaky. Emerging market stocks cratered 40%.  Commodities fell over 25%. The dollar rallied over 20% against most major currencies. Asia looked liked it was falling apart.  No one knew what the impact would be in the USA and stocks seemed to… Read More

Tobin’s Q Is Not a Valid Market Timing Metric

Over the course of the last seven years many market pundits have relied on Tobin’s Q to argue that the stock market is overvalued and I’ve argued that the indicator is misleading (see here for a sampling of the many predictions made with this metric).  And then today I noticed this piece on MarketWatch arguing… Read More

Don’t Read this Post

The hardest part is not paying close attention. I know. You want to read everything. We have access to so much information. Real-time stock quotes and real-time news and it’s all jammed in our faces 24/7.  But as I noted previously, all of this information isn’t making us better investors. It’s making us worse. Because… Read More

The One Factor to Explain Them All

Yesterday’s post on hedge funds got me thinking again about how vague “risk factors” are.  CAPM uses a one factor model showing that risk explained why certain assets performed better than others.¹ Basically, take more risk and you’ll generate a better return. That didn’t exactly explain things though. In fact, higher risk often correlates with worse… Read More

Hedge Funds Aren’t Passive

This was a weird research piece arguing that hedge funds are “passive”.  Here’s the basic conclusion from the paper: “Over the long run many hedge funds behave like alternative beta portfolios and maintain linear exposures to systematic risk factors.” The very smart Matt Levine notes that the researchers are being very specific here when they… Read More