Category: Analysis

  • How Should We Define Stock Asset Classes?

    In a previous set of posts, we looked at how to think about and define asset classes – as they relate to bonds. Now let’s apply the idea of defining an asset class in terms of characteristics to stocks. From the point of view of theoretical finance, the main difference…

  • Are Bonds One Asset Class, or Multiple?

    Theory and history suggest that for bonds, changes in interest rates are the dominant risk factor. Most of the rest of the risk is explained by credit risk. History also shows that in times of greatest stress, credit risk and liquidity risk can dominate interest rate risk. These characteristics can…

  • From Tangency to Barbell Strategy: What Smart Investors Actually Do

    What if one of the most elegant ideas in investment theory turns out to be nearly impossible to apply in the real world? In previous posts, we developed a number of ideas from Modern Portfolio Theory leading to the idea of the Tangency Portfolio. As a reminder, the Tangency Portfolio…

  • The Capital Market Line—Is it the Holy Grail?

    In a previous post, we introduced the concept of the efficient frontier. The efficient frontier concept is frequently presented in a graph, such as the following. Capital Market Line Now comes the insight of a single “efficient risky portfolio.” The assumption is that an investor can choose to allocate his…

  • Does Mean-Variance Optimization Help with Risk Management?

    How many times have you heard, or said, “past performance is no guarantee of future performance” or something similar? SEC rule 482 explicitly contains the language “past performance does not guarantee future results,” and the SEC requires this language in rule 482 advertisements. While past performance may not predict future…

  • The End of the World?

    Did you know the world almost ended in June? For real… The world as we know it may have come within hours of ending on June 29, 2024 when an asteroid, discovered only about one week before, passed closer to the earth than the moon is. A few hours difference…

  • Nothing Runs Like a Deere – Should You Sell John Deere Stock?

    John Deere is in the headlines because it has announced plans to eliminate about 600 jobs from three factories in the US.[1] This news attracted our attention, because we have seen selling over the past couple of years, including people using our Stock Diversification Trust to take large gains without…

  • Can Smoking Be Good for Your Lifetime Budget?

    Many anti-smoking advocates make the blanket claim that smoking is bad for your finances.[1] But are those claims justified? This blog entry is purely an exercise in analysis. Please do not read it as advocacy. My purpose here is merely to make clear the lifetime financial implications of a pack-a-day…

  • Does This Terrify You?

    Does it terrify you that this man has the President’s ear in economic matters? Here is a video of President Biden’s Chairman of the Council of Economic Advisors trying to explain, well, you use your own judgment. I’m not sure what he’s trying to explain. Does it terrify you that…

  • Buffett is Selling Apple. Should You?

    In a report released May 4, 2024, Berkshire Hathaway revealed that it has sold about 115 million shares of Apple, for proceeds of about $20 billion. About a year ago, in June 2023, we observed that Apple shareholders had enjoyed a phenomenal run. At that time, about a year ago,…