Correlation

Correlation has been a hot topic over the past decade, wouldn't you agree? Academics are hootin'-n-hollerin' about how correlations shoot up to 1 in times of panic. Delta, gamma, vega, etc.. - neutral portfolios are all based on some form of correlation. Quants are using ever more complex copula functions to model changing correlations. But here's the rub. Anyone that knows how to play rock paper scissors can understand a copula. I'll demonstrate with an example.

A few years ago I was investing money I couldn't afford to lose (because I don't listen to rules until I know how much breaking them costs me). Anyway, at the time, I figured it this way: I'm a long only investor so if I lose my bank loan on stocks that means the economy is really in the dumps. If I lose it ALL that means the stock market has been halted and money is no longer my primary concern.

You see? I understood that a dramatic change in the stock market is going to change how the stock market changes my net worth. I used the verb change in that sentence twice to give you the sense of derivation.

"And if you don't know, now you know.." - Biggie

Be Lazy

Because I sure am. Everyone is always saying, do your own homework, do your own research, etc. I think the idea there is that you will eventually come across a rare investment idea or thesis that you will be able to capitalize on. This is where I start to believe there is more than one way to skin a cat.

These days, there is so much valuable commentary (and exponentially more bullshit that must be ignored of course..) that I do believe, when appropriately synthesized, can generate excess market returns without additional risk. If you wanted to call it something so you could look cool to your friends you'd probably head to the first greek letter.

Enough baffoonery. Now obviously this synthesis process requires you not to be lazy and among other things have an excellent memory, vigiliance, and a feel for what information to filter out. This is a top-down approach, except that, instead of doing the time intensive micro research we take a leap of faith.

More on the justification of this 'bottom jump' in the future.

What Now?

I have never been more unsure of where the market is going. I really don't have a clue. I'm 50% long, 50% cash right now, and looking to sell some of my small caps if the price is right. I can see this market going either way and thus I am not doing anything besides trying to get back to neutral. It's hard to sit on my hands (and on the opprotunity cost of the cash) but there is too much uncertainty behind the skewness of being long and short. What I mean is I could get my face ripped off either way in this market. I will either move to 75+% cash or start hedging my positions. I want to do this because regardless of the macro move in the market, October will probably be a down month, and I want to be able to grab a little alpha in Nov-Dec from the tax sellers.

What Money?

As much as I want to have vast amounts of paper currency at my disposal, money is just an indulgence to me. I called this blog 'wanna be investor' for a reason.

Money, wealth, riches, material objects etc. are much too easily lost by simple chance. I lose sight of this fact too often.