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Matt Hollerbach Profile picture
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31 Dec 21, 7 tweets, 2 min read
Who was the first to advocate using the geometric return in investing? Both Mark Spitznagel and I agree it was Daniel Bernoulli.

Most investors would benefit from understanding the true message from his brilliant 300 year old paper on measuring risk.

breakingthemarket.com/the-earliest-a…
The thread from last December where I first approached the topic.

A few sections from Spitznagel's book:

Risk aversion is not necessary with Bernoulli's framework
Academics missed the point
mapping to the geometric average
The big idea, hidden by a slick function.
Bernoulli was first, and his findings change everything.

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Matt Hollerbach Profile picture
18 Oct 21
Showing why vol targeting produces a higher compound growth rate portfolio, through coin flips.

Odd rounds, heads: +10%, tails -10%

Even rounds, heads: +20%, tails -20%

Both games average 0% gain each flip. The even rounds have 2X the volatility of the odd rounds though.
This game is supposed to mimic how markets have variable stable volatility. There are periods of high vol and period so of low vol.

Total volatility for this game is sqrt(10%*10% + 20%*20%)/2 = 15.8%

Vol drag is 15.8%^2 /2 = 1.25%
Now let's vol target the game. On odd rounds bet 140% the base bet, and on even rounds bet 70% of the base bet. The outcome of each flip becomes:

Odd rounds, heads: +14%, tails -14%
Even rounds, heads: +14%, tails -14%

Each round is now identical, with same vol and return.
Read 7 tweets
Matt Hollerbach Profile picture
26 Aug 21
This is a deep point.

If you only sampled data at one month you shouldn’t “expect” to find the true arithmetic return. That was the point of this post.

breakingthemarket.com/the-arithmetic…
When you sample from a distribution which was created through compounding, you need a very large amount of samples to expect to “find” the arithmetic return with the sample because compounding skews the data.
So if the daily process is the foundational part of the game, and you know it’s distribution, and lets just say that the distribution there is normal, you can expect to “find” the properties of that distribution without any expected bias. Errors will be small and on both sides.
Read 9 tweets
Matt Hollerbach Profile picture
13 Aug 21
I’m often asked my views on long vol and tail risk hedging and if I’ve looked in it.

I haven’t really said much on the topic before, but I have explored it quite a bit.

Here’s what I’ve found in my journey into the long vol universe
On paper, long vol is a great asset to rebalance and run a Shannon’s Demon type approach. Its negatively correlated with many things, often times very negatively correlated. It’s the perfect type of asset to rebalance with other assets to increase the long term(geometric) return.
Pure theoretical long vol is awesome. I started out working with integrating “long VIX” with geometric balancing (my trading strategy).

The number were so scary good (visions of RenTech) I almost resigned from my engineering job the next day.
Read 29 tweets
Matt Hollerbach Profile picture
11 Aug 21
An investing story about the rest of this year:

Covid finally starts to diminish in the rest of the world.

I think most American’s think that because we have lots of vaccinated people and our lives mostly normally now, the rest of the world is similar, but they aren’t,
Their vaccine levels are far below America’s and they have still been dealing with outbreaks and lockdowns as the USA has trended towards normal.

But that will change. They will get vaccinated, and go back to somewhat normal life as well. Here’s what’s going happen when they do.
Capital and wealth that flowed into the USA as we opened up our economy more fully before the rest of the world will flow back out to the global countries that are getting back to normal.

This wealth outflow will cause the USA stock markets to go down.
Read 7 tweets
Matt Hollerbach Profile picture
7 Aug 21
How do you determine a car's speed?

Well one way is to measure the flow of gas going into the engine, do some math with that and the size of the engine, further calculate it with the dimensions of the crank shaft, input the current gearing ratio...
of the car, apply the weight of the car and the diameter of the wheels, and then add in the slope of the road and wind speed.

With all that you could calculate how a cars speed and you would have a good understanding of why its at that level.

Or...
You could just measure the wheel RPM, and use it's diameter to figure out the car's speed.

Which one would you go with?

Now I read these current papers which attempt to use order flows to explain market behavior, and I wonder...
Read 6 tweets
Matt Hollerbach Profile picture
16 Jun 21
Is Geometric Balancing actually a value strategy?

Here’s the logic
When prices pop up, all other things being equal, Geo-balancing says the asset is now overvalued in the portfolio and sells it.

When prices fall it says the asset is now undervalued in the portfolio and buys it.
The decision to buy or sell is entirely based around the value that asset provides to the portfolio at its current price.

There are two key difference here to traditional value investing
1-The math to determine “value” is based around Claude Shannon’s “demon” and the Kelly criteria.

breakingthemarket.com/the-great-age-…
Read 7 tweets

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