We were sitting in the Four Seasons restaurant in the iconic Seagrams Building in Manhattan. The room is cool. A pool a few feet away. Original Picasso on the all. A place for power. Deals were being made all around us.
I was a bit shocked when he told me that. I asked him what had happened.
The gentleman I was talking to was a portfolio manager for his own company. His flagship fund was a fund of funds invested in only portfolio managers that had made at least 25% per year over the previous 5 years. It was very successful.
He himself was a very good portfolio and he had included himself in the fund because he himself had qualified under the 25% rule.
But he had a look of panic around him. He was sweating. His knuckles were gripping the edge of the table. The room was cool but he was not. There was power all around us but his was slipping through his fingers.
I was worried that he would break the glass he was holding.
“What happened?”, I asked?
It turns out that he had lots of positions on and thought there was no correlation. He had a position on a big portfolio. Perhaps about 30 different positions which is a lot for his type of fund. For example, he had a position in soybean meal and the Japanese yen.
He thought he had little risk in his portfolio because he was so diversified. He could sleep at nights.
But then a big news item came out and all of his positions moved large. Like really large. Turns out that he lost about 30% in one day.
You see, things can be non-correlated in normal times but become highly correlated in panics. For example, everything was correlated during the Crash of 1987. In 2008, for the first time in history, every stock on the NYSE was lower at the end of the year than at the beginning. In other words, they were all correlated.
Two lessons to be learned.
First, when morons tell you that diversification can reduce risk, that is true during normal times but will kill you in panics.
Second, you can’t use things like robo advisors to manage your money. You need an old fashioned human being with gray hair who has been through panics to know what to do.
Want an old fashioned human being with a little gray hair to tell you what is going on in the stock market? Want someone who has “seen it all” over the last 50 years guide you through the potential for a Financial Crisis in 2020.
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Thanks!
Good macro trading,
Courtney
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