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Skating Where the Puck Was: The Correlation Game in a Flat World
Skating Where the Puck Was: The Correlation Game in a Flat World is the second installment in the Investing for Adults series. This series is not for novices.
This booklet explores the notion that, as a general rule, no magic policy rich in highreturn/low-correlation alternative asset classes exists that will simultaneously preserve upside reward and protect against downside losses. And as long as I’m lowering your expectations, this booklet is most certainly not a blueprint for the “perfect portfolio.” You’re an adult, after all, so you know that the future efficient frontier lies well beyond
our ken; presumably you already know all about the mechanics, long-term benefits, as well as the uncertainties, of wide diversification and factor tilt using low-cost, efficient vehicles and the risk/reward spectrum between all-fixed-income and all-equity portfolios.
Rather, this booklet provides a way of navigating a global investment landscape that grows ever more linked by the month, and a way of thinking about diversification.
This booklet explores the notion that, as a general rule, no magic policy rich in highreturn/low-correlation alternative asset classes exists that will simultaneously preserve upside reward and protect against downside losses. And as long as I’m lowering your expectations, this booklet is most certainly not a blueprint for the “perfect portfolio.” You’re an adult, after all, so you know that the future efficient frontier lies well beyond
our ken; presumably you already know all about the mechanics, long-term benefits, as well as the uncertainties, of wide diversification and factor tilt using low-cost, efficient vehicles and the risk/reward spectrum between all-fixed-income and all-equity portfolios.
Rather, this booklet provides a way of navigating a global investment landscape that grows ever more linked by the month, and a way of thinking about diversification.
37 pages, Kindle Edition
First published December 6, 2012
30 people are currently reading
228 people want to read
About the author
William J. Bernstein
22 books472 followersWilliam J. Bernstein is an American financial theorist and neurologist. His research is in the field of modern portfolio theory and he has published books for individual investors who wish to manage their own equity portfolios. He lives in Portland, Oregon.
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Displaying 1 - 5 of 5 reviews
January 20, 2014
The second monograph in Bernstein’s series of for experienced investors takes its title from Wayne Gretzky, who took his father’s advice to "skate where the puck's going, not where it's been” to become the greatest hockey player of all time. Very few have been able to follow the same advice to investment success - Sir John Templeton and Yale’s David Swensen are two examples - and sadly most end up skating to where the puck was, accepting market risk and market performance (less fees). The dual goals of market outperformance and lower risk are available in theory but not practice.
Bernstein explains why this is naturally so. Templeton with international investing and Swensen with non-traditional asset classes were pioneers who had considerable first-mover advantages. As others copied their successes the higher returns were whittled away, and the diversification benefits were eroded as the formerly non-correlated assets became more and more correlated. Swensen, who in his pioneering years enjoyed outsized returns for Yale’s endowment, suffered just as much as the rest during the recent financial crisis as all asset classes - traditional and non-traditional alike - became highly correlated. In the words of MIT professor Andrew Lo, over time “alpha becomes beta”. Any innovation leading to outperformance (alpha) eventually becomes widely available and part of regular market performance (beta).
Bernstein includes some very interesting perspective on commodities and precious metals futures, which have been used as both inflation and deflation hedges. Investors may want to rethink both their strategies and their convictions. With respect to investors’ ability to take risk at all, he notes that it “may be a matter of character rather than training,” and that those who can’t stick with the market-based portion of their investments in downturns are part of the natural pendulum of asset prices, as they swing from unknown to popular to undesirable. Though he doesn’t spend much time on it, his points will have readers reflecting on the merits of value and contrarian investing.
Still, the conventional wisdom about diversification is much better than the alternative (i.e. not diversifying), but it is unlikely to insulate portfolios from downturns (short-term risk, in Bernstein’s words) in the way investors hope (see Swensen above). In a prelude to his third monograph, Deep Risk, Bernstein cautions investors to resign themselves "to the fact that diversifying among risky assets provides scant shelter from bad days or bad years, but that it does help protect against bad decades and generations, which can be far more destructive to wealth.
Bernstein explains why this is naturally so. Templeton with international investing and Swensen with non-traditional asset classes were pioneers who had considerable first-mover advantages. As others copied their successes the higher returns were whittled away, and the diversification benefits were eroded as the formerly non-correlated assets became more and more correlated. Swensen, who in his pioneering years enjoyed outsized returns for Yale’s endowment, suffered just as much as the rest during the recent financial crisis as all asset classes - traditional and non-traditional alike - became highly correlated. In the words of MIT professor Andrew Lo, over time “alpha becomes beta”. Any innovation leading to outperformance (alpha) eventually becomes widely available and part of regular market performance (beta).
Bernstein includes some very interesting perspective on commodities and precious metals futures, which have been used as both inflation and deflation hedges. Investors may want to rethink both their strategies and their convictions. With respect to investors’ ability to take risk at all, he notes that it “may be a matter of character rather than training,” and that those who can’t stick with the market-based portion of their investments in downturns are part of the natural pendulum of asset prices, as they swing from unknown to popular to undesirable. Though he doesn’t spend much time on it, his points will have readers reflecting on the merits of value and contrarian investing.
Still, the conventional wisdom about diversification is much better than the alternative (i.e. not diversifying), but it is unlikely to insulate portfolios from downturns (short-term risk, in Bernstein’s words) in the way investors hope (see Swensen above). In a prelude to his third monograph, Deep Risk, Bernstein cautions investors to resign themselves "to the fact that diversifying among risky assets provides scant shelter from bad days or bad years, but that it does help protect against bad decades and generations, which can be far more destructive to wealth.
December 29, 2015
I'll save you ten bucks...asset classes don't interact the way they used to. You must look in unconventional places for non correlated returns. You're welcome.
May 28, 2024
More wisdom is packed into this short book than one could pick up from watching every episode of Jim Cramer’s Mad Money or other finical entertainment shows. As the name of the series implies the indented audience are mature investors, people that are familiar with modern portfolio theory and the like, as such no easy solutions are given but there are suggestions given.
January 11, 2018
a brilliant 30 page essay on the underestimated and frequently overlooked topic of correlation. doesn't give many answers, but does provide a lot of food for thought on important defensive strategies
March 28, 2015
Good guide to thinking about how to find non-correlating assets.
Displaying 1 - 5 of 5 reviews