Above you say "While too high of an allocation to a positively correlated asset can actually hurt returns, you can 1.9x your CAGR by simply finding a positive EV, anti correlated assets" and at the end you say "Many PMs are quick to dismiss an investment as being negative EV, but miss that portfolios can still benefit from these securities as long as the correlations are right."
Am I to assume that by choosing a negative EV asset, you may not double your CAGR as above, but it can be helpful to overall compounding if negatively correlated. In some ways, this is the essence of Safe Haven, which I noted you read.
I'm working on piece about this now-- the idea is that "EV" shouldn't be an arithmetic function of (pay-off) x (likelihood), but instead should be measured from the increase in expected median CAGR of an investment to a portfolio of other investments. Most portfolio theories out there acknowledge this idea that optimization is dependent on what is in the portfolio already, but I think they generally trip over the next level of complications.
And agreed-- this is very much what Safe Haven says. I have found that Spitznagel very clearly articulates complex topics I've been thinking about for a long time. Don't always agree with him, but he makes the points clear enough that you can find the areas of weakness.
I read that book in December 2021 and I cannot get the ideas out of my head! The idea that insurance has value and emergence at the portfolio level is something I am spending a lot of time on. I think you did a really clear job of laying this out here. Explaining how compounding increases from sizing - cash opt - rebalancing, which then can be narrowed or expanded by correlation is great.
Matt Hollerbach (https://breakingthemarket.com/) has done a good job of laying this out quantitatively - not sure if you've seen his work. You describe here what he has tried to do.
If you use Kelly for sizing, which I assume you do, do you use software to simulate?
PLEASE use proper grammar! The title is so painful! "You are diversifying wrong" means you have some "wrong" that you are diversifying. The title should be "You are diversifying wrongly", but since that is awkward, say "You are diversifying incorrectly". PLEASE use proper grammer!
Fantastic post. I had heard that even negative EV positions can improve CAGR if they were anti-correlated enough, but didn't properly understand how prior to reading this. Thanks!
Thanks really enjoyed this.
Above you say "While too high of an allocation to a positively correlated asset can actually hurt returns, you can 1.9x your CAGR by simply finding a positive EV, anti correlated assets" and at the end you say "Many PMs are quick to dismiss an investment as being negative EV, but miss that portfolios can still benefit from these securities as long as the correlations are right."
Am I to assume that by choosing a negative EV asset, you may not double your CAGR as above, but it can be helpful to overall compounding if negatively correlated. In some ways, this is the essence of Safe Haven, which I noted you read.
I'm working on piece about this now-- the idea is that "EV" shouldn't be an arithmetic function of (pay-off) x (likelihood), but instead should be measured from the increase in expected median CAGR of an investment to a portfolio of other investments. Most portfolio theories out there acknowledge this idea that optimization is dependent on what is in the portfolio already, but I think they generally trip over the next level of complications.
And agreed-- this is very much what Safe Haven says. I have found that Spitznagel very clearly articulates complex topics I've been thinking about for a long time. Don't always agree with him, but he makes the points clear enough that you can find the areas of weakness.
I read that book in December 2021 and I cannot get the ideas out of my head! The idea that insurance has value and emergence at the portfolio level is something I am spending a lot of time on. I think you did a really clear job of laying this out here. Explaining how compounding increases from sizing - cash opt - rebalancing, which then can be narrowed or expanded by correlation is great.
Matt Hollerbach (https://breakingthemarket.com/) has done a good job of laying this out quantitatively - not sure if you've seen his work. You describe here what he has tried to do.
If you use Kelly for sizing, which I assume you do, do you use software to simulate?
PLEASE use proper grammar! The title is so painful! "You are diversifying wrong" means you have some "wrong" that you are diversifying. The title should be "You are diversifying wrongly", but since that is awkward, say "You are diversifying incorrectly". PLEASE use proper grammer!
Fantastic post. I had heard that even negative EV positions can improve CAGR if they were anti-correlated enough, but didn't properly understand how prior to reading this. Thanks!