Stock & Bond Correlations

This correlation won’t last. The action in the past 2 months is triggering a real fear though. Investors have come up with creative ways to generate returns without bonds. Some replace treasuries with ‘bond-like’ dividend stocks. There is no perfect way to solve this problem. Keep in mind, the portfolio with 60% in stocks 40% in bonds wasn’t the perfect solution either even when yields were higher.

Venture Capital Like Returns

The latest trend among retail investors is to try to find stocks that can generate 10x returns. The theory is that these returns are so large that they can make up for losses. There will be losses if you are searching for big wins. It’s a dangerous game because this new mantra throws out some of the basic tenants of value investing. The biggest tenant is taking profits when stocks become expensive. This new investment concept tells investors they shouldn’t sell after their stocks become ‘expensive.’ It ignores the concept that companies don’t all become the next big winner.

There is huge survivorship bias in just studying the biggest winners. No one applauds the investor who takes a 30% profit at nearly the correct time. Old-style investors believe they need a margin of safety. They actually sell stocks even when there might be more room for them to rise. Many value investors believe they shouldn’t sell at the exact top. They prefer to sell early because it shows they were prudent. In the long run, prudence wins. It’s easier to stay prudent than it is to predict the few stocks that will become the next big winners.

At the same time, it’s also wise to incorporate some of the lessons these new ‘hold forever’ investors teach. You can learn from everyone, especially investors who have done very well. The best takeaway from the new mantra is to avoid selling a great stock because of negative headlines. Don’t be so easily swayed by noise.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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