Whatever Works for You
Envy seems unique in its absolute inability to give us any real pleasure.
Returns vs. Risk vs. Cost is the biggest tradeoff investors face. The problem is that their stated preference is often at odds with their revealed preference. Investors might start off wanting something balanced and conservative but one look at some yahoo’s portfolio could reveal their inner proclivity to YOLO. This is the root cause of most investment failures.
You simply cannot have your cake and eat it too.
A case in point are our Allocation themes. They try to reduce the volatility of a momentum portfolio by allocating increasing proportions to bonds. It’s a simple, cost-effective solution that largely works.
The blue line is Momentum. Black, red and green lines represent Shark (40% bonds), Dolphin (50% bonds) and Whale (60% bonds).
The drawdowns are in line with what was expected of these portfolios.
While constructing these strategies is easy, following it is anything but. At the top of the market, there is always some yahoo who is 100% allocated to momentum and lapping everybody. Most investors find the clarion call to YOLO impossible to ignore. And then come the brutal drawdowns.
Is it even possible to run your own race and ignore what others are doing? Isn’t the goal to make the market work for you instead of becoming a ping-pong?
I am not sure what would make it easier. The difference in returns over a period of time is pretty large and path dependent. The future will not look like the past and the present is full of revisionist history.
I guess you end up revealing your preference, and the market ends up revealing your personality.
Markets this Week
More here: country ETFs, fixed income, currencies and commodities.
Links
Research
Is machine learning a necessity? A regression-based approach for stock return prediction (SSRN)
We propose a simple, linear-regression-based method that achieves out-of-sample performances comparable to machine learning methods with ignorable computational cost.
Market Volatility and the Trend Factor (SSRN)
We find that the trend factor performs significantly better following high market volatility periods. We hypothesize that fundamental signals are more likely to be imprecise when the stock market is more volatile, leading investors to rely more heavily on trend signals. Consequently, the trend factor could deliver higher profits. Collectively, our paper suggests that market volatility is an important time-series determinant of trend factor performance.
The Effect of New Information Technologies on Asset Pricing Anomalies (SSRN)
We test and compare the effects of introduction of two new financial information technologies, EDGAR and XBRL, on well-known asset pricing anomalies often attributed to mispricing. We find that both EDGAR and XBRL reduce mispricing for accounting-based anomalies but not for non-accounting-based anomalies. These results suggest that both easier access to and less costly processing of public information enhance market efficiency.
Sleep Deprivation and Financial Analsyts' Performance (SSRN)
This study constructs a novel measure to identify the occurrence and degree of sleep deprivation among individual financial analysts. Sleep loss is significantly associated with diminished job performance.
The Employment Effects of a Guaranteed Income (NBER)
We study the causal impacts of income on a rich array of employment outcomes, leveraging an experiment in which 1,000 low-income individuals were randomized into receiving $1,000 per month unconditionally for three years, with a control group of 2,000 participants receiving $50/month. The transfer caused total individual income to fall by about $1,500/year relative to the control group, excluding the transfers. The program resulted in a 2.0 percentage point decrease in labor market participation for participants and a 1.3-1.4 hour per week reduction in labor hours, with participants’ partners reducing their hours worked by a comparable amount. The transfer generated the largest increases in time spent on leisure. We observe no significant effects on investments in human capital.
The Mere Presence of One’s Own Smartphone Reduces Available Cognitive Capacity (uchicago)
We test the “brain drain” hypothesis that the mere presence of one’s own smartphone may occupy limited-capacity cognitive resources, thereby leaving fewer resources available for other tasks and undercutting cognitive performance. Results from two experiments indicate that even when people are successful at maintaining sustained attention—as when avoiding the temptation to check their phones—the mere presence of these devices reduces available cognitive capacity.
Investing & Economy
India
We had ourselves a budget that left no tax-payer happy. We used to have differential tax rates for different assets and holding periods. Our FM reduced these slabs to “simplify” taxation. Also, short & long term gains taxes on equities went up, along with transaction taxes for futures and options. And there were no grandfathering provisions.
What changes for investors after Budget 2024? (zerodha)
Indexation (inflation adjustment) existed for a valid purpose, letting taxpayers offset the cumulative effect of inflation on the gains made on the sale of an asset. Real estate calculations can’t ignore this difference (livemint).
For the post-budget regime's reduced LTCG tax rate of 12.5% without indexation to be more advantageous, property prices must appreciate at a minimum CAGR of 9% to 11.2% over holding periods of 5 to 24 years (livemint).
Previously, house owners could offset rental income against various expenses, thereby reducing their taxable income. Now, instead of offsetting rental income against expenses, taxpayers can only claim standard deduction of 30% and municipal taxes paid (livemint).
Budget shifts spending priorities while keeping fiscal deficit in check (reuters). India hikes taxes on equity investments (reuters).
Economy booms but India's young hanker for government jobs (reuters)
SEBI: Intra-day traders in equity cash segment increased more than 300% in FY23 Vs FY19. 7 out of 10 of intraday cash market traders incurred losses in FY23 (sebi).
RoW
US regulator privately finds weak risk-management at half of large banks (reuters).
The number of Japanese citizens fell at the fastest clip last year (bloomberg).
Super-aged Japan now has 9 million vacant homes (cnn).
Chinese nuclear reactor is completely meltdown-proof (newscientist).
China cuts several major interest rates to support fragile economy (reuters).
Apple's no longer among top 5 smartphone vendors in China as domestic brands dominate market (cnbc).
The Federal Trade Commission is launching an investigation into so-called surveillance pricing, seeking more information about how artificial intelligence is used to change pricing rapidly based on data about customer behavior and characteristics. The FTC says the practice allows companies to charge different customers, different prices (cnbc).
Tech's splurge on AI chips has companies in 'arms race' that's forcing more spending (cnbc).
Scientists have discovered “dark oxygen” being produced in the deep ocean, apparently by lumps of metal on the seafloor (bbc).
Meme of the Week
