The Return of Risk Management
For many, October was a month to forget. The harsh sell-off in both stocks and bonds certainly tested investors’ resolve and for the second time this year, saw a fundamental breakdown in stock-to-bond correlations. Historically, when stocks went down, bond prices went up – providing a meaningful buffer during periods of distress. With interest rates on the rise, the durability of that relationship is now being tested.
The return of volatility is welcome in our view – it is difficult to find compelling opportunities when the market does nothing but march upward. The recent sell-off also highlights the importance of having uncorrelated strategies as a core part of any asset mix. Market sell-offs are not an unusual occurrence. Protecting the downside is what allows you to participate in the upside while everyone else is nursing their wounds.
Benedict Evans, a venture capitalist at the renowned firm Andreessen Horowitz, recently uploaded his annual address on the market. For those interested in what the future holds, we think it is a highly worthwhile watch:
“We began with models that presumed low internet penetration, low speeds, little consumer readiness and little capital. Now all of those are inverted. So, we used to do apartment listings and now Opendoor will buy your home; we used to do restaurant reviews and now you can get a hot meal delivered to your door. Tech is building different kinds of businesses, and so will take different shares of that opportunity, but more importantly change what those industries look like. Tesla isn’t interesting because of what it does to gasoline, but because of what it does to the car. Netflix changes TV, but so does Twitch.”
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For the better part of the last several decades, promising companies turned to the public markets to finance their expansion. As a result, many retail investors were able to share in their growth. If you think back to March 1986, Microsoft raised $61 million in an IPO that average investors were able to participate in – since that time, Microsoft has gone on to grow its value by more than 791x.
There is nuance here though, as IPOs are often poor investments. In any case, as private markets have grown from $1 trillion in 2000 to $5 trillion today, the incentive to go public’ has certainly declined. With that, so has the average Joe–s ability to participate in the growth of some of America’s most promising young companies.
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Companies like Uber Eats, Instacart, and Hello Fresh have fundamentally altered how we think about take out and meal prep. Uber Eats has leveraged their analytics platform to fundamentally alter the business of many restaurants.
“The restaurant exists only in the Uber Eats delivery app. Brooklyn Burger Factory is located in the kitchen of Gerizim Cafe & Ice Cream, a small establishment on Ralph Avenue. There used to be only a couple of unspectacular burgers on the menu at Gerizim Cafe, and only about one a day sold, according to co-owner Joel Farmer.”
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This is a brief piece on the problem of defensive decision making. It’s easy to see why people opt for the default choice in many cases. Decisions that are different can be hard to defend, and if it works out, you may risk a lot for little gain. In fact, if you do something that’s different and fail, you may find yourself unemployed.
The problem is that without risk there is no improvement – who wants to end up stuck in the status quo?
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