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Shorting Stocks: When the Downsides Are Neverending

Top 5 of the Week of October 1st

In our Top 5 this week, from Of Dollars and Data, Nick Maggiulli examines the nature of reverse life insurance. The Aleph Blog writer, David Merkel, discusses shorting stocks. And The Irrelevant Investor Michael Batnick asks what gold is good for.

From Pension Partners, Charlie Bilello identifies if there’s any correlation between stock performance and manufacturing. And writing for Alpha Architect, Ryan Kirlin writes smart beta off as “dead, but not forgotten”…


Reverse Life Insurance

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  • Viatical contracts deal with the life insurance policies of the soon-to-be-deceased by assigning them to investors for a lump sum payment upfront
  • While at first glance, these transactions look and sound very morbid, this secondary market can provide a win/win for both investor and policyholder
  • Also, as well as these reverse life insurance providing liquidity for those short on time and funding sources, many individuals put the payouts back into funding research to fight the disease killing them

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Shorting Stocks: When the Downsides Are Neverending

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  • Shorting stocks is a method of speculating—shorts don’t create economic value and it’s extremely difficult to do because timing is crucial
  • They do, however, trim back the places that pretend to have value, but which don’t really
  • It is really hard to get right because “the upside is capped, where the downside is theoretically unlimited”
  • Also, being short is not the reverse of being long—instead, it means you’re the reverse of being leveraged long

Are you shorting stocks? Share your comments in the section below

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Marching to the Sound of Its Own Drum

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  • It’s been well over 2,500 days since gold hit its peak in September 2011, making gold investors very frustrated—especially since the S&P 500 isn’t far off its record high
  • Gold doesn’t necessarily go up when stocks are down; rather it’s entirely independent of that sort of correlation, which is why it can be a great portfolio addition
  • There’s no point attempting to predict where gold is going, but unlike stocks, there are no fundamentals with gold, which is why it’s a great diversifier

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On Closer Examination

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  • The ISM Manufacturing Index moved up to 61.3 at the beginning of September, which marks its second-highest peak in the last 30 years
  • Many investors think the booming manufacturing industry will do wonders for the stock market as it demonstrates a stronger economy
  • On the surface, this seems to make logical sense, but data shows that attempting to time your stock exposure in correlation with manufacturing activity is a very ineffective strategy

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But What Does It Mean?

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  • Smart beta used to refer to valuation-indifferent strategies that actively split any link between an asset’s price and its portfolio weight
  • But many modern investors believe now that “this term has been stretched to the point of meaninglessness”
  • Whatever its meaning, as well as always having been a marketing term, it’s simply algorithmic active investing

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Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form—and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.


 

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