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Minyan Mailbag: Refco and Risk


Asset allocation drives returns in the long run because it has to primarily do with assessing risk.


Prof. Succo,

This Refco story is growing more and more strange. Two funds (Rogers and VR) handed them over their assets believing they were going into the regulated unit and now are missing-in-action in the unregulated: as the old saying says "there is not a 2 without a 3"... In an environment like this in more common times financial and brokerage stocks would get at least hammered: now they are preparing (and possibly leading the market) into a Santa Claus rally. As per your superb last post the traders that have cast their die not only are not pricing risk, they are denying it completely.

Minyan Valerio


It is the pricing of risk that drives markets. When P/E ratios can go from 5 to 40 the math shows that the earnings are not important (although the long term trend is) because earnings do not fluctuate nearly as much as that ratio does.

When someone gets opinionated on direction because of earnings, don't listen (it may be good for a fluctuation, but that is all). The reason asset allocation drives returns over long periods is because asset allocation has to do primarily with assessing risk.

A stock can go up $1 and those long it will make money in the short run. But the stock could have $10 of risk in it if things go wrong that no one sees. It is assessing this $10 of risk that will keep an asset allocator out of this stock (or all stocks) avoiding losses.

Our largest volatility positions are in financials not because we think they are going down, but because of the potential of them going down a great deal.

Prof. Succo

No positions in stocks mentioned.

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