Halloween in the Ruff household was a huge success. Both girls had a great time. They got so much candy that neither one of them has noticed any missing. In the end, I think they actually had more fun handing candy out to other kids.

Also, THE BRAVES WON THE WORLD SERIES! First time since 1995 which is amazing considering how many runs they had at it. On Tuesday night, my wife got home from a meeting and sat on the couch next to me. Looking at the TV she said, “It would be great if he just hits a bomb and totally quiets the whole crowd.” The next pitch, Jorge Soler launched a 450ft home run over the left field wall to score 3. I turned to her, apologized, and then informed her that she wasn’t allowed to move from that spot until the end of the game. It worked.

Hedging Versus Diversification (attached) A Better Option than 60/40?


When I ask advisors and clients what they would like to see from an investment strategy they often mention downside protection. Even in a diversified portfolio, during times of extreme distress (like March 2020) correlations converge towards 1. With bonds yielding next to nothing, perhaps there is a better way to construct an allocation.

The linked study compares a traditional 60/40 stock/bond mix rebalanced quarterly, versus a the S&P 500 with a 15 delta 1 year protective put, also rebalanced quarterly.

Said differently, does 60/40 beat 97.5% equities with 2.5% on a protective put?

“With real returns on U.S. treasury bonds still solidly negative, investors continue to rely on historically unstable correlations between equity and bonds to protect their portfolios from equity market volatility. With interest rates still near historical all-time lows, investors are relying on a continued decline in rates to maintain the benefits of traditional portfolio diversification.” This is what I’ve talked about with the 1-legged fixed income stool. The Income and Negative Correlation legs are gone. Only the principal protection leg remains.

I was very surprised by the findings of this study. The 97.5% w/protection performed much better than I expected. Going forward, with flat or rising rates, it’s likely that this relationship holds.

A few issues we need to research further – the study assumes “perfect” option pricing and execution. Anyone who trades options knows this does not exist. What does this strategy look like if execution is just OK? As the author concedes, the outcome for the S&P protection strategy is very path dependent.

From an allocation standpoint, a client’ statement would look much more convoluted and volatile than a normal 60/40 portfolio. What kind of impact would this have on client psyche? Additionally, if a client needed to access capital during a time of market dislocation, the bonds in the 60/40 portfolio would provide a much more reliable source of liquidity.

The Dunning-Kruger Effect

“Everyone is a genius in a bull market.”

Dunning and Kroger studied overconfidence and found that the worst performers consistently overestimated their abilities.

  • As humans, we’re notoriously incapable of evaluating our own competency levels.
  • Some investors fall victim to the Dunning-Kroger Effect, wrongly attributing their performance to innate talent as an investor.
  • “everyone is a genius in a bull market!”

The solution posed is to be brutally honest about the boundaries of your competency. Be comfortable saying “I don’t know” and embrace the areas where you need to grow.

“The world would be a much better, more efficient place if everyone were more willing to admit the gaps in their knowledge.”

As Charlie Munger said, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.

Happy 7th Birthday

American TV host surprised to learn Ireland has the euro not the pound

Joe Kernen is why I avoid CNBC.

7 years ago today this thundering idiot hi-jacked what could have been a decent interview ask some hardball questions. The shameless ignorance is astonishing.


Man spent $150 eating every meal at Six Flags since 2014 to pay off student debt

I’m a little surprised Thomas Lyons hasn’t tried this.

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