Geoff Considine

http://quantext.com
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304 Comments

    • Tue Sep 16th 16:03 PM | Rating: 0 0
      Commented on:
      The Nature of Risk
      Jmorace:

      Nothing in my analysis assumes an infinite holding period--where did you infer that?


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    • Fri Sep 12th 10:05 AM | Rating: 0 0
      Commented on:
      The Nature of Risk
      Hi all:

      To a large extent, the comments suggest that the authors have never encountered the relationship between risk, volatility, implied volatility, credit default swaps, and the academic standard for models of corporate failure (like Z scores and their later evolution). I understand that this is new stuff for many (most non institutional) investors. I am a bit surprised by the vitriole but not entirely. In many ways, the comments suggest that the authors have a knee jerk reaction that has nothing to do with the article. One guy is down on Beta---did I mention Beta? nope. Also, there is extensive data on implied volatility being a solid predictor--having real information content--this is not just driving by looking out the back window, as some have implied.

      Good luck.
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    • Wed Sep 10th 12:03 PM | Rating: 0 0
      Commented on:
      Energy Sell-Off Overdone
      Well, one reason for this decline may be that a range of institutional investors have been dumping energy commodities in fear that congress will ban their investments here. There is also probably a tactical issue here---a lot of people smelled a sell-off and wanted to be first out the door. As commodities drop, people sell off energy firms. It is always good to remember that energy firms tend to be high volatility--comes with the territory. Clearly the rate of gains in energy commodities was too high to be sustainable, but the long-term narrative for sustained high demand for energy in the developing world is hard to dicsount.
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    • Sat Sep 6th 14:05 PM | Rating: 0 0
      Commented on:
      More Thoughts on Mohamed El-Erian's 'When Markets Collide'
      jmorace:

      Thanks for the comments--and it does not hurt my feeling when thoughtful people disagree with me. Please understand: I am not saying that the time is nigh to invest heavily for those with cash--it is beyond my abilities to 'time' this market contraction. That said, this decline is not so bad for those with truly well diversified portfolios. The S&P500 is down a lot, but it has not been hard to build a diversified portfolio that is in far better shape. The decline looks bad for people whith high Beta portfolios and those who have chased the trends--but they were simply taking on extra risk because of a recent low volatility environment (a la Minsky). This has also allowed a lot of hedge funds to lever up to silly levels.

      Geoff
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    • Fri Sep 5th 13:14 PM | Rating: 0 0
      Commented on:
      More Thoughts on Mohamed El-Erian's 'When Markets Collide'
      Guys:

      Great comments all! There are a number of good points here. Let's start with the fact that when Mr. El-Erian is talking about an allocation to U.S. equities, for example, its a safe bet he does not mean the S&P500--he states very clearly that he is not a fan of market cap weighting. Portfolio theory also supports specific sector allocations that do not match market cap weights.

      Now, I like the liquidity argument--its a good one. If liquidity is extracted from the market, asset prices will fall---people are taking money out to stash it under their mattresses and the banks are making it harder for leveraged speculators to speculate. This is volatility. This makes assets cheap for investors with available cash and gives them an incentive to inject liquidity back in...there are contractions and periods of deflation and there is no reason to believe they cannot occur---but none of these ideas is inconsistent with a view that markets are, long-term weighing machines. We may see a long-term period of contraction--I for one will not predict one way or the other. If one can make this case, it leads to certain actions. QPP puts a probability on long-term poor performance of even diversified portfolios--see my article on The Lost Decade. Thats as far as QPP goes.
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    • Thu Sep 4th 13:21 PM | Rating: 0 0
      Commented on:
      Black Swans, Portfolio Theory and Market Timing
      To Sportsguy:

      Thanks for your comments. To make the additional step to dealing with an individual's time horizons (as opposed to the endowment kinds of horizons), you need to use Monte Carlo as in the following article:

      seekingalpha.com/artic...

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    • Mon Sep 1st 14:08 PM | Rating: 0 0
      Commented on:
      Thoughts on Mohamed El-Erian's 'When Markets Collide'
      Kinabalu:

      I will need to think about your proposition that economics lends itself to modeling better than investments. The great thing about investments is that, at least in portfolio theory, we are trying to model the odds rather than a point outcome...

      Geoff
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    • Mon Sep 1st 14:06 PM | Rating: 0 0
      Commented on:
      Thoughts on Mohamed El-Erian's 'When Markets Collide'
      To Kotika98:

      If I may paraphrase you here--and this is similar to a point Warren Buffett has been making for years--U.S. based firms that trade internationally do reap many of the benefits of the expansion of emerging markets, so it seems less important to invest directly via ADRs. There is something to this--especially as Mr. El-Erian acknowledges that global markets are becoming more highly correlated in time.
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    • Sun Aug 31st 18:54 PM | Rating: 0 0
      Commented on:
      Thoughts on Mohamed El-Erian's 'When Markets Collide'
      To Kinabalu:

      The Friedman quote is not so foolish as you would indicate. I find that the majority of investors seem to follow rules of thumb and conceptual models that are far from validated under this standard! I mention 'the great moderation' and the 'decoupling' of foreign equity markets from the U.S. as examples of thoroughly un-validated conceptual models--but there are many more. This should be common sense, but it is not. Chasing performance is, of course, the ultimate case of this kind of fallacy. People are, sadly, uncriticial of the models that drive their thinking--but there is a macro process to looking at models. I have spent my professional career--in finance, but also for almost a decade at NASA---building and then tearing down quantitative models. The ideas expressed by Mr. El-Erian are deep in this regard, but I understand that they may seem obvious at first glance.
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    • Sun Aug 31st 18:49 PM | Rating: 0 0
      Commented on:
      Thoughts on Mohamed El-Erian's 'When Markets Collide'
      CLH and IronCity:

      What is different about the perspective that Mr. El-Erian brings is that it emphasizes portfolio-level thinking, quantifying and managing to expected returns and risks, and using models to be able to look at the risk-return tradeoffs of positions in a consistent framework. That said, I have tried to match my discussion to the tone of the book. The book is a 'big picture' kind of treatment...

      Institutional research focuses on portfolio-level thinking, as does this book. Retail investors focus far more narrowly on the short-term and 'news' and tactics. Tactics are important, but Strategy is key as the first step.

      Look up the annual reports from Yale or Harvard and you will see what I mean. CLH says:

      "Investing is a short term activity and trying to look far out into the future is meaningless."

      This is the retail investor's view of the world and mutual fund managers cater to this sort of perspective. Endowments and other institutional investors consistently trounce retail investors and a lot of the reason is that institutional investors plan for the long-term effectively. If you read my articles, I try to bring some of this kind of portfolio thiniking to a wider audience...I cannot capture it all in one place--but that may be a good idea for an article--to try to summarize in brief. How about a title like "What Institutional Investors Do that Retail Investors Don't Do"?

      Bottom line: there are standards of practice among successful institutional investors and retail investors would benefit from paying attention. Just look at the performance of Yale and Harvard...as well as many others. Retail investors chase performance, so fund managers give them what they want...but it is not the best way to invest by any means.

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    • Fri Aug 29th 12:01 PM | Rating: 0 0
      Commented on:
      Thoughts on Mohamed El-Erian's 'When Markets Collide'
      Whidbey:

      The point is not whether mutual funds apply portfolio theory. They don't--because they are selling to an audience that wants something different: high Morningstar ratings and low tracking error. Retail investors chase performance, so mutual fund managers tend to oblige them. A lot of mutual fund managers are also closet indexers. I have documented this stuff in a range of articles. Look at the endowments at Harvard and Yale and read institutional research, and you see a very different view of the world--and that is why this book is so useful: it shows this perspective to retail investors.

      This is not a "how to book" and it does not reveal any earth shattering secret momentum trading strategies. This book provides insight into why so many institutional investors beat retail investors soundly.

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    • Fri Aug 22nd 14:45 PM | Rating: 0 0
      Commented on:
      Income Planning and Safe Withdrawal Rates
      Gina: QPP allows you to test the idea you are referring to with a single setting--and of course it works in terms of increasing the % draw and the survival rate, but the income volatility can be very high--so I also allow the user to specify a minimum required draw (i.e. what you need to keep the lights on.).

      Geoff
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    • Tue Aug 19th 12:07 PM | Rating: 0 0
      Commented on:
      Defining a Set of Core Asset Classes
      I will try to cover a range of questions here. With regard to bonds vs. bond funds, this depends very much on your personal situation. In a hypothetical world, bond funds and bonds accomplish the same thing in a portfolio.

      With regards to infractructure, if you look at my All ETF model portfolio, you will see that I have utilities, transport, and materials as specific allocations--these are all infrastructure. These come up simply because they have such nice portfolio effects via QPP. I am awaiting a copy of Mr. El-Erian's book to see how he motivates these asset classes in depth.

      With regard to the recent losses in commodities: the whole point of asset allocation is offsetting risks. Commodities have had a great run but they cannot out-perform forever. Also, risk and return go hand in hand--you cannot have the returns of commodities unless you take on the volatility. This brings us to the broader issue of whether timing makes sense, etc. I have written about this elsewhere: of course relative value is important--but history suggests that it is secondary to some other factors.

      Geoff
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    • Sat Aug 16th 18:07 PM | Rating: 0 0
      Commented on:
      Defining a Set of Core Asset Classes
      Ranger Ric:

      Thanks for your comments. The fact that small cap and large cap are highly correlted does not alter the fact that small caps, with higher risk, also yield higher average returns--this is in no way contradictory. A small cap tilt will result in higher returns--no mystery. Equal weighting a portfolio creates such a small cap tilt.

      Your point about the stability of correlations is correct, but I have found in long backtests that the stability of the correlations is sufficient via QPP to yield good portfolio outlooks--I have tests going back thirty years in three-year out-of-sample increments. Also, to be clear, QPP does not strictly preserve linear correlations.
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    • Sat Aug 16th 17:57 PM | Rating: 0 0
      Commented on:
      Defining a Set of Core Asset Classes
      Dumbo:

      The baseline standard for analysis is normally distributed returns, which then leads to a lognormal distribution of prices--and this is what I am using.

      Geoff
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