An interesting investment paper

investment_ideasToday I will run the risk of re-posting somebody else’s work many months after others have had a chance to read it, on the assumption that non-professional readers do not spend their day scouring investment blogs for clever reading material.

The much greater risk, I think, is that thoughtful work goes unread by people who might enjoy and benefit from the reading.

The investment firm GMO consistently produces some of the most thoughtful investment material anywhere, and this paper from late last year delivers the goods.

Some parts I enjoyed tremendously from this paper:

  • A nice couple of anecdotes about how we see what we want to see, regardless of the plausibility of what we observe. This matters a whole lot in investing.
  • Page 9 (in particular exhibits 10 and 11) has a nifty illustration of the 1999 tech bubble, and recalls the old investment truism that “the market can be irrational longer than you can be solvent,” when you are playing with fire, aka leverage, aka borrowing money.
  • A response to the investment alchemy of ‘risk parity’ trades, when compared to a super-simple 60/40 equity/bond portfolio. The Long story, short there: Simple is just as good, but without leverage and high fees.
  • A sophisticated discussion of portfolio insurance, as it relates to using different asset-classes to achieve that insurance.
  • Overall, the perspective that purchase price always matters when discussing portfolio construction, risk reduction, and insurance.

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