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ROFLMAO. Talking about reducing your own arguments to an absurdity. Minimizing (or more accurately balancing) risk and increasing profits are not mutually exclusive.

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Yes they are. See Gambling Theory by Mason Malmuth, specifically the chapter "The Silly Subject of Money Managment".


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sorry to burst your bubble here, but you are very very wrong again.

you can use intelligent leverage and true diversification to both minimize risk AND increase profits.

the traditional portfolio of stocks and bonds has a risk adjsuted return (sharpe ratio) of about 0.30-0.35

by taking away equity allocation and moving it to leveraged short term bonds as well as a small amount to commodities (CCFs so they are deleveraged to risk level of equities) in addition to leveraged IL bond allocations and REITs, you can create a portfolio with an expected and historic sharpe ratio of 0.70, which is more than twice as good as the traditional portfolio.

the reason this works is that by using leverage, you can bring other asset classes to the same risk level as equities. since on average, all asset classes can be expected to have between a 0.2 and 0.3 sharpe ratio, you can use leverage to increase the risk level and thus the returns of any asset class (or deleverage an asset class). this is true forall asset classes with the exception of commodities since that is debateable at the present time.

further, there are time periods where the expected level of risk adjusted return for an asset class may be altered due to structural or repricing issues.

anyways, absolute returns can be adjusted by leverage so you are not locked into a given level of return. all that matters is creating an optimal portfolio. once that is done, you can tune it up and down to a risk level that suits your target (you can take a .7 SR and target 4% risk, or 10% risk vs. a .3 SR that, at the same risk targets, would return less than half the excess return per unit risk).

it doesn't pay to make broad based statements about things you do not fully understand without any qualificaitons and then cite a book on gambling where investing and diversification isn't discussed in enough depth to cite that work as defense of your point.

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You said interest rates rose too fast and they are in need of a rate cut? How would that not be the relative equivalent of saying the market is deflationary and in need of an inflation boost?

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if you can't see the very big difference between the two, then you clearly don't have an understanding of monetary issues. at least one that is deep enough to have this conversation.

just to give you a hint though:

inflation rate= the rate of increase of prices

deflation rate= the rate of decrease of prices

low inflation != deflation.

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I never said indices are mispriced. I will restate what I said more clearly. Stock averages grow over time not because of "mis-pricing" but because underlying broad market growth is productivity growth. Broad indices capture that productivity growth and are therefore expected to be profitable (and have proven to be in the past).


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Future earnings are attempted to be priced into securities. If indicies rise over an extensive time they are mispriced in the past.

Not every index is destined to do well over time either.

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neither of these is totally right. broad based indices of bonds, stocks, TIPS, etc. can all be expected to outperform risk free allocations due to capitalism.

capitalism returns the taking of risk, otherwise, risk would never be taken. an investor can allocate money to the risk free rate OR to an equity index. if the equity index couldn't be expected to return more than the risk free rate, no investor would put money in companies that require more capital to grow or invest or whatever they want capital for.

this excess return above the risk free rate is called a risk premium. it is the difference between risk free rate of return and the total return on an asset class (or broad index or whatever).

you can allcoate to a diverse set of asset classes and be sure that, over time, you will be rewarded to taking risk by allocating money to those asset classes. the construction of your portfolio will determine the relative risk adjusted return, but even an undiversified portfolio will return more than cash, otherwise, nobody would invest init.

these facts have held true historically and a consultant (Rocaton) has made numerous attempts at calculating exact risk premiums over time. they have 2 charts that are very instructive. the first one shows the linear relationship between risk and returns of asset classes (except commodities). the line is basically a 45degree line up from the origin.

the second one brings all those asset classes to the same risk level as equities and then plots the risk vs. return. this time, all asset classes come in at the same level of return of equities giving a sharpe ratio of between 0.2 and 0.3 (as one would expect).

another reason this makes sense is because if one asset class could be expected to perform better over time, more money would pile into that asset class and thus reduce its future expected returns. eventually, the opposite would occur as you see that asset class returning less than previously expected due to increased allocation to it. this process of arbitraging asset classes should (and has and is expected to) keep all available asset classes in the same risk adjusted return ballpark.

there are things that can reduce that risk adjusted return though as i mentioned. one example is if all pension funds in teh world switched 5% of their allocation to commodities. that would drive down (and possibly into negative territory) the sharpe ratio of commodities and make them a poorer choice for diversification going forward. another example is in the IL bond market in the UK where pension plans are forced (by law) to match their assets and their liabilities. that has resulted in a large allcoation to UK ILs and thus pushed down the future expected return a bit relative to US TIPS.

Barron