The hottest Risk management Substack posts right now

And their main takeaways
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Top Finance Topics

Equity Risk Premiums: An Update

Musings on Markets • 0 implied HN points • 22 Oct 09
💰 Finance Investing Market Analysis Risk management Economic Trends Stock Valuation
  1. Equity risk premiums are important in understanding stock market debates. They help determine if stocks are overpriced or underpriced.
  2. After a major financial crisis, the implied equity risk premium rose significantly, leading to questions about whether this change is permanent or temporary.
  3. Current market conditions are uncertain, and opinions vary on whether stocks will continue to rise or face a correction based on the equity risk premium.

Crisis Lessons: Presentation...

Musings on Markets • 0 implied HN points • 10 Oct 09
💰 Finance Market Analysis Risk management Behavioral Finance Investment strategy Economic Trends
  1. Personal lessons from a crisis may vary for each individual and shouldn't be forced on others.
  2. Relying too much on historical data can be risky; understanding that things may not always revert to previous averages is important.
  3. A better grasp of risk and its unpredictability helps improve decision-making in finance and investing.

A Risk Argument: Democracies versus Dictatorships

Musings on Markets • 0 implied HN points • 19 Sep 09
🇺🇸 U.S. Politics Democracy Dictatorship Risk management Globalization Economic Policies Democracy Dictatorship Governance International relations
  1. Democracies have more day-to-day uncertainty because policies can change frequently, making it hard for businesses to predict outcomes. In contrast, dictatorships can promise stability but may change radically without warning later on.
  2. Continuous risks in democracies can be managed with tools like options and futures, while the sudden changes in dictatorships can be harder to protect against. This is why managing constant risks can be easier for businesses.
  3. Experience in uncertain democratic environments can help businesses adapt better to changes, giving them an edge in the unpredictable global economy compared to those in more stable, but risky, dictatorship settings.

One year later: The lessons from the crisis

Musings on Markets • 0 implied HN points • 13 Sep 09
💰 Finance Market Analysis Corporate Finance Risk management Investment Banking Economic Policy Market Trends Investment Banking Risk management Financial Crises Corporate Finance
  1. Lehman's failure might have been necessary for Wall Street to recover. Allowing it to collapse helped the government take bigger steps to save other companies like AIG.
  2. Wall Street hasn't really changed after the crisis. They've gone back to risky practices and high bonuses, as if nothing happened.
  3. There’s a pattern of forgetting past mistakes on Wall Street. People there focus more on making deals than learning from what went wrong before.

Commodity companies and commodity dependent markets

Musings on Markets • 0 implied HN points • 30 Aug 09
💼 Business Commodities Valuation Investing Market Analysis Risk management Valuation Commodities Investing Finance Market Analysis
  1. The value of commodity companies directly depends on the prices of the commodities they deal with. When commodity prices rise or fall, the value of related companies changes too.
  2. There are two main ways to predict future commodity prices: looking at historical price cycles or analyzing supply and demand factors. A mix of both methods can lead to better forecasts.
  3. When valuing commodity companies, it's important to remain neutral about commodity price predictions. This way, investors can make their own judgments about the quality of the company's value and the market conditions.
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Valuing declining and distressed companies

Musings on Markets • 0 implied HN points • 30 Jun 09
💼 Business Corporate Finance Valuation Methods Investment Strategies Market Analysis Risk management Investing Valuation Market Analysis Corporate Finance Risk Assessment
  1. Declining companies often show stagnant or even falling revenues over time. This can signal a deeper issue, especially if it's happening across their whole industry.
  2. These firms frequently deal with shrinking profits due to losing pricing power and competition. As a result, they might start selling off assets to stay afloat.
  3. Declining companies might pay out large dividends or buy back stock, but this can be risky. If they have a lot of debt, it could make their financial situation even worse.

Valuing Young Companies

Musings on Markets • 0 implied HN points • 19 Jun 09
💼 Business Startups Valuation Investment Entrepreneurship Private Equity Startups Valuation Investment Risk management Equity
  1. Young companies often have limited data because they are just starting out. This makes it hard to accurately value them.
  2. These companies usually don't bring in much money yet, which can lead to big losses as they try to get established.
  3. Investors need to be careful with their money because many young companies fail. Only a small percentage survive long-term.

Macro and Market Timers

Musings on Markets • 0 implied HN points • 12 Jun 09
💰 Finance Investing Market Analysis Risk management Economic Trends Investing Market Analysis Economic Trends Risk management
  1. It's hard to prove that market timers are good at what they do since they make very few calls. So, it's easy for them to just get lucky sometimes.
  2. Market timers often don't give clear advice. It’s easier to check if a stock picker is right because they make specific stock recommendations.
  3. Even if a market timer is right eventually, they can lead investors to lose money before that. It's better to focus on picking good stocks for long-term success.

Culprit found for market crisis!!!!

Musings on Markets • 0 implied HN points • 07 Jun 09
💰 Finance Market Theory Financial Crisis Investing Strategies Risk management Economic Policy Market Theory Financial Crisis Regulation Investor behavior
  1. The efficient market hypothesis claims that markets are generally accurate in pricing assets, meaning it’s tough for investors to consistently beat the market. Some people believe this idea is not entirely true.
  2. There are criticisms of the notion that financial leaders fully trusted the efficient market hypothesis. Many academics recognized market inefficiencies long before the crisis and warned about issues like asset bubbles.
  3. The idea that the financial crisis is largely due to the efficient market theory overlooks other factors. Issues like poor regulations, the creation of complex financial products, and incentive structures also played significant roles.

Why I cannot stand George Soros!

Musings on Markets • 0 implied HN points • 05 Mar 09
💰 Finance Investing Speculation Regulation Markets Economics Investing Speculation Market Analysis Risk management Economic Theory
  1. George Soros is viewed as a lucky speculator rather than a great investor, as he made big profits from a couple of fortunate bets.
  2. The author believes Soros should not offer moral lessons, especially since his success comes from speculation rather than hard work.
  3. Many successful investors are often just lucky, and we shouldn't assume they know more than we do about investing.

Fama-French and the Proxy Wars

Musings on Markets • 0 implied HN points • 21 Feb 09
💰 Finance Investing Risk management Market Analysis Financial Models Investing Market Trends Corporate Finance
  1. Fama and French found that traditional models like CAPM don't explain stock returns well, especially over long periods. They looked for other factors that might explain differences in returns better.
  2. They discovered that smaller companies and those with low price-to-book ratios tended to have higher returns. They saw these factors as signs of risk rather than market inefficiencies.
  3. In deciding between using CAPM or their proxy models, it often depends on your goal. For evaluating past performance, proxy models work well, but for future return predictions, sticking with CAPM is usually better.

Can betas be negative? (and other well used interview questions)

Musings on Markets • 0 implied HN points • 17 Feb 09
💰 Finance Investing Market Analysis Risk management Financial Instruments Investing Risk management Market Analysis Investment strategy Financial Instruments
  1. Yes, betas can be negative. This means that adding a negative beta investment to a portfolio makes the overall risk lower.
  2. A negative beta investment acts like insurance against risks that could harm other investments, like gold during inflation.
  3. Expected returns on negative beta investments are usually less than the risk-free rate, reflecting the idea that you're paying for insurance with lower returns.

The problem with regression betas

Musings on Markets • 0 implied HN points • 11 Feb 09
💰 Finance Investing Economics Risk management Market Analysis Statistical Methods Investments Risk management Market Analysis Economics Quantitative finance
  1. Regression betas can be unreliable because they come with a standard error, meaning the estimated beta can vary widely.
  2. Using different time frames or market indices can give you different beta values for the same company, and there's no one 'correct' beta.
  3. Regression betas are based on past data, so they may not accurately reflect a company's future risk as its business model or debt levels change.

Low riskfree rates...

Musings on Markets • 0 implied HN points • 02 Feb 09
💰 Finance Investing Valuation Market Trends Economic Indicators Risk management Investment Valuation Economics Market Trends Risk management
  1. Riskfree rates in the US and Europe are very low right now, which makes valuing companies tricky. Using these low rates can lead to inflated company valuations.
  2. While riskfree rates are low, risk premiums and default spreads are high. This means we need to adjust other factors in our valuation to get accurate results.
  3. It's important to be consistent with all the numbers used in valuation. If you use today's low riskfree rates, you should also update growth and inflation rates to match the current economic situation.

Data update for January 2009

Musings on Markets • 0 implied HN points • 20 Jan 09
💰 Finance Market Trends Risk Assessment Valuation Metrics Investment Strategies Corporate Finance Investing Market Analysis Risk management Corporate Finance Emerging Markets
  1. Equity risk premiums and default spreads dramatically increased in 2008, making companies worth about 40% less today than the year before, even if their earnings and ratings stay the same.
  2. During a crisis, emerging markets suffer the most, and risk premiums for these markets have also risen significantly, affected by higher premiums in developed markets.
  3. Although market multiples look cheap right now, the accounting numbers are outdated, meaning the full impact of the crisis isn’t reflected yet, and an update is expected in May 2009.

Corporate Finance - post crisis

Musings on Markets • 0 implied HN points • 19 Jan 09
💰 Finance Corporate Finance Investment Analysis Risk Assessment Debt Management Dividend Policy Corporate Finance Investment Analysis Risk management Capital Structure Dividend Policy
  1. Investment analysis will shift to more probabilistic methods rather than just relying on expected values. This means looking at a range of possible outcomes instead of one average guess.
  2. We can expect higher risk premiums for both stocks and bonds in the near future. This change is due to increasing uncertainty, especially in both developed and emerging markets.
  3. Companies will focus on having more cash and be cautious about paying dividends. They might prefer flexible options like stock buybacks instead of committing to regular dividends.

Accounting Fraud

Musings on Markets • 0 implied HN points • 07 Jan 09
💼 Business Corporate Governance Investor Relations Regulatory Compliance Corporate Governance Accounting Fraud Investment Risk management
  1. Self-interest is often more powerful than accountability in companies. When people face conflicts, they usually prioritize their own benefits.
  2. Good corporate governance is important to prevent fraud. Having a board that asks smart questions can help keep management honest.
  3. New accounting rules won't stop fraud. Companies often find ways to cheat around regulations, so being skeptical can save investors from losses.

The Crisis of 2008: Lessons learned, unlearned and reinforced

Musings on Markets • 0 implied HN points • 31 Dec 08
💰 Finance Market Analysis Investment Strategies Risk management Economic Trends Behavioral Finance
  1. Interest rates can be negative, which is surprising. It shows how unexpected financial situations can be.
  2. Investing in established companies isn't always safe, and relying on certain rules can lead to mistakes. The financial landscape can change quickly.
  3. Cash can be an important safety net, and understanding risk is more complex than just looking at numbers. Real-world connections matter too.

Hard wired to deceive?

Musings on Markets • 0 implied HN points • 23 Dec 08
💰 Finance Investing Fraud Psychology Behavioral Finance Ethics Investment Fraud Behavioral Economics Psychology Risk management
  1. Larger brains in primates, including humans, are linked to higher chances of deceit. So, you might be more at risk of being misled by smart investors.
  2. We tend to lie often and it's a normal habit. This means that investment pitches can be filled with half-truths.
  3. People feel guilty about lying but that doesn't stop them from doing it again. Getting away with a lie encourages more lying.

Corporate Hedging: Answers to questions

Musings on Markets • 0 implied HN points • 30 Nov 08
💰 Finance Risk management Investments Market Analysis Corporate strategy Trading
  1. Hedging makes sense when companies protect against risks that directly affect their core business, like Southwest Airlines hedging against oil prices.
  2. Hedging after a price increase can be dangerous. Airlines that didn't hedge before prices spiked often suffer losses trying to time the market.
  3. Companies should make hedging decisions based on their unique situations and avoid risky speculative bets that can confuse investors.

Corporate Hedging: The Down Side

Musings on Markets • 0 implied HN points • 27 Nov 08
💰 Finance Risk management Corporate Finance Investment Strategies Market Analysis Derivatives Risk management Investment strategy Derivatives Corporate Finance Market Analysis
  1. Not all risks should be hedged. Some risks can be passed on to investors who may want that exposure, like how oil companies shouldn't hedge oil prices.
  2. Companies should hedge against important risks that can greatly affect their operations, like insurance for physical damage or stabilizing fuel costs for airlines.
  3. Firms can also benefit from seeking out risks where they have an advantage. This can lead to success if they understand and exploit those risks well.

Some thoughts on Las Vegas!

Musings on Markets • 0 implied HN points • 12 Nov 08
💰 Finance Investments Risk management Market Analysis Behavioral Finance
  1. Casinos are a clear example of probability at work, where the odds are stacked in favor of the house. This means over time, the casino will profit from players.
  2. Gambling in a casino isn’t really a rational investment since players often face negative expected returns. It tends to attract those looking for entertainment, not wise financial choices.
  3. Even the most secure systems can have weaknesses, as shown by card counting in poker. However, generally speaking, the longer you play, the more likely you are to lose.

What is the message the market is sending?

Musings on Markets • 0 implied HN points • 25 Oct 08
💰 Finance Market Trends Economic Indicators Investment Strategies Risk management Global Economics
  1. The market is currently focused on the economy rather than banking issues. Investors are worried about a possible recession next year.
  2. Historically, the market isn't always a reliable predictor of economic slowdowns. A big drop in the market can suggest a slowdown, but not every decline leads to a recession.
  3. Some positive factors are still present, like falling oil prices and low global interest rates, which could help the economy recover in the future.

The New World Order: How this crisis affects valuation

Musings on Markets • 0 implied HN points • 21 Oct 08
💰 Finance Investment Valuation Economics Risk management Market Analysis
  1. The risk of investing in stocks and corporate bonds has increased, affecting how we value them. There's a chance this is a temporary spike, but we might see higher risk levels for a couple of years.
  2. Global economies will slow down, impacting the growth and earnings of companies next year.
  3. Small companies may struggle or fail in this crisis, while larger companies with strong finances and advantages will likely come out ahead and be valued higher.

Black, blue and white swans: Comments on Taleb

Musings on Markets • 0 implied HN points • 13 Oct 08
💰 Finance Risk management Investment strategy Market Theory Behavioral Finance Economic Models
  1. It's important to realize that real-life data often doesn’t follow normal patterns and can have unexpected jumps and surprises.
  2. While it's essential to be aware of unpredictable events (black swans), we shouldn't stop planning or forecasting our future.
  3. We should use our best judgment to value assets, keeping in mind that shocks can occur, and we need to account for these risks.

Diversification: Why is it not working?

Musings on Markets • 0 implied HN points • 08 Oct 08
💰 Finance Investing Markets Risk management Portfolio Management Behavioral Finance
  1. Diversification is important for investors, but its benefits have decreased recently. Investors now see more risks across different markets than before.
  2. The connection between different stock markets has increased, meaning that a crisis in one area can affect many others. This makes diversification less effective.
  3. Real estate risks have become more linked to the stock market because of how properties are now invested in. So spreading money across asset classes offers less protection than it used to.

Is it time to make the move?

Musings on Markets • 0 implied HN points • 07 Oct 08
💰 Finance Market Trends Investment Strategies Economic Growth Stock Analysis Risk management
  1. The market drop was influenced more by worries about the economy rather than just fear, showing a different sense of urgency than previous weeks.
  2. The equity risk premium in US stocks is higher than usual, suggesting either a big change in the markets or that stocks are undervalued.
  3. When looking for investments, focus on stable companies with essential products, strong earnings, low debt, and reasonable prices.

Mark to Market or Not to Mark to Market?

Musings on Markets • 0 implied HN points • 01 Oct 08
💰 Finance Accounting Investment Risk management Valuation Regulation
  1. Marking to market helps investors see the current value of assets, but it can be hard for accountants to keep up with everything they need to estimate.
  2. Fair value can mean different things depending on how you look at it, making it tricky to have a clear agreement on what it actually is.
  3. The rules for marking assets vary by type, leading to inconsistencies where some assets are more strictly valued than others, like securities versus loans.

II. Why did it happen?

Musings on Markets • 0 implied HN points • 28 Sep 08
💰 Finance Market Trends Risk management Regulatory issues
  1. People often become overly optimistic when times are good, which can lead to financial bubbles. There's a pattern throughout history of underestimating risk when things are going well.
  2. The problem with risk in financial markets is that those who take the risks often don't bear the consequences. This creates a disconnect that needs to be addressed.
  3. To improve the system, we should change how financial rewards are structured. Bonuses should be based on long-term performance, not just short bursts of profit.

The end of investment banking?

Musings on Markets • 0 implied HN points • 22 Sep 08
💰 Finance Banking Investments Regulations Market Trends Risk management
  1. Goldman Sachs and Morgan Stanley are changing how they operate by becoming bank holding companies. This means they will now accept deposits and can access more long-term capital.
  2. The old way of investment banking had problems, especially with risky trading and high bonuses for profits but little penalty for losses. This led to serious financial issues for many firms.
  3. With new regulations as bank holding companies, these firms will have to hold more equity and may see lower profit margins. It's a shift to a more cautious investment strategy.

Are you a contrarian?

Musings on Markets • 0 implied HN points • 22 Sep 08
💰 Finance Investing Market Analysis Behavioral Finance Risk management
  1. Being a contrarian investor means going against what everyone else is doing, especially in tough times. It’s easier to say you’re a contrarian than to actually act like one when the market is falling.
  2. Deciding to invest when the market is down takes a cool head and confidence. Most people usually panic or hesitate instead of taking action.
  3. You can't force yourself to be a certain type of investor if it doesn’t suit your personality. Some people are not built to stay calm and think long term during market chaos.

What is the risk free rate?

Musings on Markets • 0 implied HN points • 20 Sep 08
💰 Finance Investing Economics Markets Risk management Financial Analysis
  1. The risk free rate is important for calculating risk premiums in finance. It acts like a foundation for understanding the potential returns on investments.
  2. Traditionally, the U.S. Treasury rates were seen as risk free because they were assumed to be free from default. This means that investors thought the U.S. government would always pay back its debts.
  3. Recently, there have been signs that this assumption may need to change. A rise in the cost of insuring against U.S. Treasury defaults suggests that investors are now more concerned about the risk of default.

Selling Short: The debate

Musings on Markets • 0 implied HN points • 19 Sep 08
💰 Finance Investing Market Analysis Regulation Stock Trading Risk management
  1. Short selling helps reflect all kinds of news in the market, both good and bad, so it should be allowed.
  2. Banning short selling can push the practice underground, making it harder to track and potentially worsening the situation for companies.
  3. Investors, whether they are short sellers or long buyers, should be held accountable for manipulating stock prices.

A primer on insurance

Entraigues • 0 implied HN points • 28 Jan 21
💰 Finance Insurance Risk management Investments Economics Market Analysis
  1. Insurance helps protect you from big financial losses by pooling risks with others. If something goes wrong, like a house fire, the costs are shared so it doesn't fall on just one person.
  2. When you buy insurance, you're trading a small, certain cost (the premium) for coverage against a potentially huge loss. This is a smart move if losing that big amount would be too hard to handle.
  3. Insurance companies need to manage risks well. They have to collect enough money from premiums to cover claims and expenses, but they also invest this money to help grow their profits over time.

A guide to AI model collapse

Handy AI • 0 implied HN points • 23 Oct 24
🕹 Technology AI Data Innovation Machine Learning Risk management
  1. Model collapse happens when AI systems are trained too much on data created by other AIs, leading to poor quality and less reliable results. It's like a game of telephone where messages get muddled with each round.
  2. This model collapse can cause serious issues, like businesses making bad decisions based on inaccurate information and AI tools spreading misinformation. Imagine a world where forecasts and customer help get much worse.
  3. To prevent model collapse, researchers suggest careful curation of data, using better methods to train models, and keeping humans involved in checking data quality. It's important to ensure AIs are learning from the best inputs.

Quantum Threat Modelling

QV’s Substack • 0 implied HN points • 04 Jun 24
🕹 Technology Cybersecurity Quantum Computing Software Development Risk management Innovation
  1. Quantum technology has many parts that are classical and can be vulnerable to traditional cyber attacks. This means threats can come from many angles that don't specifically target the quantum aspects.
  2. There are unique threats related to quantum systems that are not yet fully explored, and many existing vulnerabilities are not linked to specific vendors. This makes it hard to gauge how secure quantum technologies truly are.
  3. Understanding the context in which quantum systems operate is really important. Different setups, like using space-based technology versus fiber optics, come with very different security challenges.

Poker, appendage sensory & game theories

The Strategy Toolkit • 0 implied HN points • 21 Oct 24
💼 Business Strategy Finance Risk management Decision-making
  1. Understanding poker can help improve decision-making in life. Like in poker, you can use probabilities to assess risks and make smarter choices.
  2. Learning key poker concepts like pot odds and bluffing can enhance your strategy skills. These ideas apply not just to cards but to many situations we face.
  3. Successful people think strategically and take calculated risks. Adopting a mindset similar to a poker player can help you navigate challenges better.

Hedging hedge funds have higher (h)returns

Klement on Investing • 0 implied HN points • 12 Nov 24
💰 Finance Investing Hedge Funds Risk management Market Analysis Performance Metrics
  1. Hedge funds can actually reduce their risks internally, which helps them perform better. They don't just rely on external factors.
  2. Most hedge funds have realized risks that are lower than expected, known as a negative risk gap. This can boost their overall returns.
  3. Funds that manage their risks well tend to have higher performance, while those that take on more risks often do worse.

Quant Letter: November 2024, Week-3

The Parlour • 0 implied HN points • 20 Nov 24
💰 Finance Risk management Quantitative finance Market Analysis Financial Models Investment Strategies
  1. Vulnerability Conditional Risk Measures help assess risk during financial crises. They focus on understanding tail risks in the market.
  2. Research on heavy-tailed risks can show how certain extreme events might develop. It looks into the behavior of sums of risk factors.
  3. New studies in finance are slowly changing how we understand and measure risk. Keeping up with these developments can improve investment strategies.