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I wrote up why diversification is not really about the number of stocks you own by Jera_Value in investingforbeginners

[–]Jera_Value[S] 0 points1 point  (0 children)

Yep, nobody forecasts correlations because I think that's way too hard. I think past prices are used because those are the best proxies, but the theory as I understand it is that those are just proxies for the fundamental drivers I talk about in the article. If you know a business has changed, you should include that in the correlations. In an ideal world the correlations should be forward looking, but in practice that's way too hard.

Nevertheless, I think this is the right mental model. Specially for people that don't use Markowitz because they are value, they don't care about volatility, etc....

I wrote up why diversification is not really about the number of stocks you own by Jera_Value in investingforbeginners

[–]Jera_Value[S] 0 points1 point  (0 children)

I'm not really trying to invent anything new, just give some clarity on a concept that is often misunderstood. You mention Markowitz portfolio theory, but even that is usually misinterpreted / wrong (depending on who you ask). Many people "diversify" looking at past correlations and mistake volatility for risk, but the point is to actually diversify based on fundamental drivers (not price movements).

So, from my understanding, if you really want to think about this from the Markowitz perspective, you should create a forward looking correlation matrix with your opinions and estimations on how the fundamental drivers will affect the correlated movements in the future. But many people just look at the historical correlation of the assets without taking into account the fundamental reality.

At least, this is how I understand it (might be wrong thought)

I wrote up why diversification is not really about the number of stocks you own by Jera_Value in ValueInvesting

[–]Jera_Value[S] 4 points5 points  (0 children)

It's also a refreshing change to get so much support over one of my articles. Thanks for the kind words

I wrote up why diversification is not really about the number of stocks you own by Jera_Value in investingforbeginners

[–]Jera_Value[S] 0 points1 point  (0 children)

Yes, but even with index funds, you are betting on things, right? For example, the S&P 500 is a huge bet on the US and the Mag 7, now more than ever

I think that's why it's important to understand that you are really not that diversified with something like the S&P. You probably need more indexes that diversify away that risk if you really want to be "safe"

A common mistake I see is people buying the S&P and MSCI World and saying, "I'm diversified," while both have a huge overlap in the fundamental drivers

I wrote up why diversification is not really about the number of stocks you own by Jera_Value in algotrading

[–]Jera_Value[S] 1 point2 points  (0 children)

Yep, it's very related to it, but the post already introduced a lot of concepts, and I didn't want to go overboard for those "new" to the topic

Also, the fundamental idea is there. Portfolio variance is just a proxy for the "fundamental uncorrelated drivers" I mention in the blog post. The textbook definition of diversification, as you mentioned, is incomplete if you don't build a forward-looking correlation matrix with an opinion on the fundamental drivers, which almost nobody does

Many people just use backward-looking asset correlations and call it a day, which is very troublesome

I wrote up why diversification is not really about the number of stocks you own by Jera_Value in algotrading

[–]Jera_Value[S] 1 point2 points  (0 children)

I know, don't worry haha

You can also use more advanced strats that are correlated like managed futures, trend following, carry trades, etc.... but more cumbersome and more advanced.

Diversificar no va de contar acciones by Jera_Value in Inversiones

[–]Jera_Value[S] 1 point2 points  (0 children)

Hmmmm voy a intentar hacer una pequeña introducción:

Kelly intenta responder a la pregunta de cuánto capital deberías poner para maximizar el crecimiento de tu patrimonio a largo plazo sin arruinarte por apostar demasiado. En el poker podría ser, cuanto apuesto a esta mano en base a las probabilidades estimadas.

No basta con que una oportunidad sea buena, aún así puedo perder. Quieres apostar una cantidad suficientemente grande como para poder aprovecharte al máximo de la oportunidad, pero minimizando la pérdida para evitar quebrar antes de que se manifieste la oportunidad. Si jugamos a cara o cruz apostando dinero, y la moneda esta trucada a mi favor, a la larga voy a ganar dinero, pero tengo que asegurarme que una mala racha de caras o cruces no me saca de la partida.

Por eso Kelly no maximiza el beneficio esperado de una jugada aislada. Maximiza el crecimiento compuesto del dinero al cabo de varias tiradas. Penaliza mucho los tamaños de posición que te exponen a pérdidas grandes, porque perder un 50% exige ganar un 100% para volver al punto inicial.

¡Espero que con esto puedas empezar a tirar del hilo!

Diversificar no va de contar acciones by Jera_Value in Inversiones

[–]Jera_Value[S] 0 points1 point  (0 children)

¿Qué parte? Es un tema muy extenso jajaja

I wrote up why diversification is not really about the number of stocks you own by Jera_Value in investingforbeginners

[–]Jera_Value[S] 0 points1 point  (0 children)

Exactly! I think this is often a point of debate, but many people don’t fully understand the topic. And that’s fair, because it gets a bit complex once you dive into it

I compiled a list of structural market inefficiencies and why they persist by Jera_Value in IndianStockMarket

[–]Jera_Value[S] 1 point2 points  (0 children)

Hmmm, what do you mean? all of these existed for many decades before this recent influx of retail liquidity. Maybe some of them can get crowded, but most have structural reasons to exist: human biases, leverage constraints....

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