Personally, my focus over the summer’s been on correlation. Some investors are great at stock-picking, risk management & portfolio construction, while others are abysmal..! But, all too often, there’s precious little difference in respective performance. Because we’re all terribly correlated with the market, and with the economy – yep, we’re all making pretty much the same big bet! A preference for discounted assets, special situations & stocks with specific catalysts is my attempt to escape this correlation risk. Medium-longer term, I think this approach offers a genuine ‘edge‘ via lower beta stocks. Trouble is, shorter term, market correlation (especially in market setbacks) can simply trounce all other factors…

 Think of, say, a company with excellent results, or an oil major in a rising oil price environment. Now, picture the market dumping 25% – how well do you think those stocks are going to perform, regardless of their strong fundamentals..?! Unfortunately, if you’re a stock picker, it’s v difficult to avoid this short term market correlation. Unless you want to retreat into market-timing, trading and the weird & wacky world of specialist ETFs… For the rest of us, though, there’s some hope…

The logical & ultimate extension of my approach is to seek out investment ideas that are uncorrelated, or negatively uncorrelated, with the economy. Once you can shake off short term market correlation, this focus can offer a genuinely lower correlation/risk portfolio. There’s also the potential to earn better/decent long term returns even in an awful market/economic environment.

Ideally, I prefer uncorrelated to negatively correlated investments. The reason? Well, uncorrelated offers the possibility of sustained positive returns, while negatively correlated offers inverse returns instead. [People forget this. They add negatively correlated investments, and then grow increasingly frustrated with their losses - which are presumably offset by higher than normal returns elsewhere in their portfolio. This frustration (& over-confidence) ultimately boils over, and they dump these investments at probably the v worst moment...]. On the other hand, returns on many uncorrelated investments (e.g. Risk Arb.) are often competed away for this very reason – so annualized returns may still look attractive, but absolute returns can be positively anorexic (esp. from a private investor perspective).

From least to most attractive, I think there are three / four investment categories to be looking for:

i) Negatively Correlated Sector Stocks:  These stocks actually aren’t…

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