Ethereum is the second largest cryptocurrency after Bitcoin. Ethereum has several properties which make it more “useful” than Bitcoin. It can be used for payments/transfers, same as Bitcoin; however, it can also be used to createSmart Contracts, anddecentralized applications (Dapps). The Chicago Mercantile Exchange (CME) will launch Ethereumfutureson February 8th.
Bitcoin futureswere launched in December 2017, which marked the all time high price up to that point. After the futures were launched, Bitcoin went on to fall 83%. Up to that point short sellingBitcoin was very difficult; therefore, the launch of futures made it easy for anyone that wanted to bet against the cryptocurrency to do so. The cryptocurrency markets are much more mature now, so we do not think the same thing will happen with Ethereum.
Cullen Roche has a great blog in which he takes a pragmatic view on many financial topics. In his most recent post he talks about GameStop. He talks about why the popular narratives being written about in the media are mostly wrong.
First up, short sellers, the media was blaming them for the issues in GameStop. Short sellers are vital to keep price discovery in markets working. In fact it has been short sellers who have exposed many frauds such as Enron and more recentlyWirecard.
Robinhood was the next to be blamed. Robinhood banned trading in certain stocks not to benefit hedge funds, but because of margin requirements they had to meet with the clearinghouses.
Finally, the media blamed T+2 settlement. US stock trades take 2 days to settle. There are valid reasons why trades take 2 days to settle. The issue here is not a technological issue, (blockchain will not solve T+2 like many blockchain enthusiasts claim); but rather financial markets are complex and T+2 is necessary for some settlements.
Health-care and hospital systems have started increasing allocation towards private strategies, specifically private equity, private credit, and hedge funds. There is a general feeling, not only in health-care related funds, that allocations to private strategies need to increase in order to meet return targets.
We are of the belief that all asset valuations are intricately linked. Since interest rates for US treasuries are hovering near 0%, this increases valuations for all assets. Low rates drive investors to invest in riskier assets in search of returns, which drives up valuations for these other assets. Instead of investing in riskier assets, investors should adjust their return expectations downwards going forward. When the risks of investing in private assets materialize, investors will be unprepared. We saw this in 2008 when private investment heavy endowments had to sell at fire sale prices because they needed liquidity.
Unlike many endowments, we do not believe private assets are a magical panacea that will solve all their problems. In fact, we try to steer clear of private assets.
When analyzing investments, the order of returns does not affect the ending value. Increasing by 10% and then dropping by 5% will result in a 4.5% compounded return. Dropping by 5% and then increasing by 10% will get you to that same 4.5% gain. However, this all changes if we are adding or withdrawing money from the investment. In a scenario where a person is retiring, the sequence of returns matters a lot.
In this article Ben talks about what exactly sequence of returns risk and how to avoid it. We cannot control the sequence of returns and therefore cannot completely avoid sequence of returns risk. However, we can take steps to mitigate it. One such step is diversification. Diversifying a portfolio means that the portfolio will be less volatile. A less volatile portfolio is not as affected by sequence of returns risk as a highly volatile portfolio. This is another reason why we always advocate for lower volatility portfolios. They are easier to stick with for the long term and not as prone to sequence of returns risk.
This is a bit more technical than our usual article highlights. However, it makes an interesting, and important point. The authors look at a sample of 39 developed countries from 1849 – 2019. They analyze each country’s stock market and their historical returns. They conclude that a diversified investor with a 30-year horizon has a 12% probability of losing relative to inflation. In other words, if we invest in a diversified stock portfolio, we have a 12% probability of losing money in real terms.
This conclusion is extremely important. The argument usually goes, “if you hold stocks long enough, they always recover”. However, this argument relies on US stock market data. In the US this has been true since the 1900s. However, the US is not a representative sample of world equity markets. Today, the US has the largest, most liquid financial markets in the world. Therefore, the US data suffers from survivorship bias. Since today it is the largest market, by definition it had to have the highest returns and also has the best data. Therefore, making conclusions based only on data which we have easy access to is not representative of what we might expect going forward.
A perfect example is Japan, the Japanese equity market is just recently reaching the highs from 1989, that is over 30 years with 0% returns. Stocks do have higher expected returns than bonds; however, the risk in stocks is that they’ll crash or that they will have long periods of underperformance.
