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The Problem with Reading Too Much into Correlation

Top 5 of the Week of November 21

Kicking off the Top 5 of this week, Corey Hoffstein—CIO of Newfound Research—shares his highlights from the recent Ritholtz investing conference. Our Top 5 Blogger of 2016 A Wealth of Common Sense’s Ben Carlson looks at how private equity funds are the new hedge funds for trending investors. And No. 4 Top Blogger of 2016 The Reformed Broker Joshua Brown discusses the relationship between stocks and the dollar.

Katherine Burton from Bloomberg View uncovers the latest and greatest moneymaking machine. And Jason Zweig, author of The Intelligent Investor blog explains how the universe is simply designed against us…


4 Key Investing Lessons

 

  • Our behavior is the biggest influence on our investments; it decides the differences between our ideal theoretical portfolio and our real one
  • Decide if you’re playing to win or to lose; not knowing your own mindset when investing can impact your returns strategy
  • Here’s no such thing as passive over active; it’s the choice of how much and what you want to pay for instead
  • The way we view our portfolio performance can dramatically affect our decisions; consider every angle for a broader perspective

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Avoid Disappointing Future Results From Private Equity Funds

 

  • Today, there are nearly $3 trillion in assets under management in private equity funds—an increased growth from the $400 billion there were in 1999
  • Investors love the idea of these funds due to the promise of higher expected returns from the illiquidity and leverage they take on board with these investments
  • These type of funds are not open to all investors due to capacity constraints, and their results aren’t all they’re cracked up to be
  • With uneven cash flow and huge spread over the best and worst performers

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The Problem with Reading Too Much into Correlation

 

  • Though stock prices can be influenced by the US dollar both beneficially and adversely
  • Taking a bullish or bearish position based on analysis of these correlations would require you to “get a lot of stuff right that you probably can’t”
  • Inherently, there is no long-term danger from the US dollar on the stock market

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“The Blackest Box in All of Finance”

 

  • The Medallion fund is shrouded in secrecy, but known to be only open to the 300 employees of Renaissance, the company behind the fund
  • With recorded returns of $55 billion in under thirty years, it is 20% more profitable than it’s competition and has achieved these results in a shorter time
  • The largest draw down the fund has experienced over a five-year period was 0.5%

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The Destructive Path of Murphy’s Law

 

  • If you always factor in the financial tenets of Murphy’s Law as an investor, you can only go so wrong
  • As it applies to finance, Murphy’s Law is essentially that trends will always reverse; both good ones and bad
  • Instead of trying your hardest to find the one long-shot investment that beats the fifty-fifty odds of defying the market, focus on what you can control
  • Concentrate on keeping your portfolio diversified, avoiding high costs and taxes, and bypassing short-term trades

Have you fallen victim to Murphy’s Law with your investments? Share your experiences in the comments section below
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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.


 

Anything you would like to discuss about this week’s top 5? Do you have another favorite that isn’t mentioned here? Feel free to add it below. Let’s start a discussion in the comments section!

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Become a Better Investor Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.