Do Stocks Outperform Treasury Bills

This is a good research paper on stock picking.

In summary, most active managers fail to beat the benchmark because the skew of returns is positive - a small number of stocks are responsible for a good part of the gains. Therefore the very definition of stock picking (selecting a few stocks) is statistically bound to produce many who fail to pick these ten-bagger stocks and thus underperform the benchmark.

Unless you have superior information (know in advance what these stocks are), you are likely better off sticking to an index - by buying a big bunch of stocks via an index, you will at least capture a few of these outperforming stocks.

Link to paper

Bessembinder, Hendrik, Do Stocks Outperform Treasury Bills? (July 17, 2017). Available at SSRN:

Why VIX is so low

As VIX continues to reach lower there's talk that it is too low and that markets are too complacent. I do, however, find possible reasons for why VIX can remain systematically low.

The main reason is that market participants are in aggregate more willing to buy into dips and less likely to engage in panic selling as compared to before. The result is greater price stability (less fluctuations).

This buy-the-dips behaviour is reinforced by more recent history when acting on fear has proven to be the unwise choice, costing early abandons many a missed rally.

At a deeper level, price stability can be attributed to better financial education, and investing habits that move away from speculation and towards long term investing. This can be direct, when investors change their mentality and expectations upon being more informed about investing, or indirect, when investors park their funds with asset management firms who espouse these investment styles. There is a general trend towards more passive style funds and a tapering of return expectations. 

The decrease of speculative and/or leveraged longs also help in this stability. Typically this group is the first to exit and can amplify sell-offs. 



The Valuation of Bitcoin

Fast rising markets are quick to catch the attention of financial news. Here I present my views on Bitcoin and how to possibly invest in or speculate in it.

In summary, I think bitcoin has no fundamental value and therefore no true pricing because bitcoin is an exchange of value (currency) and in itself is almost useless (not an asset or commodity). As a currency, the value is dependent on the demand for the assets it can buy, but there is a negligible amount of assets that only bitcoin can buy. The price of bitcoin can take any number - in fact, as a means of exchange, a smaller number is more convenient. My opinion is that people in general are pricing it as though it has value and that the value is increasing.

To profit from bitcoin, you have to estimate how people will 'price' bitcoin, which is incredibly complex because it's an endeavour in human psychology within the context of finance.

However, by looking at past prices, you can position yourself favourably (if the past is representative of the future). Buy in drawdown periods, not when the market is making new highs or is frothy. Expect to lose up to 80% of your investment, so allocate your funds accordingly. Hold the investment for a long enough time, say one year, and then maybe hopefully you will see some returns. How much the returns are is beyond the scope of modelling.

Full article below.

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How to long the VIX

Any intermediate investor would have had the thought of buying the VIX, either to speculate that a panic is about to occur, or as a hedge against their long equity portfolio.

Unfortunately there is no direct way of buying the VIX as it is reported.

This is because the VIX is an index - essentially a compilation of prices of a hypothetical portfolio of options on the S&P 500. To perfectly replicate this portfolio is simply not feasible (though you can try - here are the components).

Here are a few ways to go long on the VIX or to express a buy on volatility:

1. Buy VIX Futures

The most direct instrument tied to the VIX is the VIX Futures. Take time to understand how these futures work, as they are not as simple as buying a stock (more details on VIX Futures in this post) - they usually decay in value and all have an expiry date (think buying milk).

+ Most direct exposure to the VIX
- Most of the time in Contango and so will lose value over time
- Depending on the time to expiry, the change in VIX may not result in a proportionate change in the futures price - in fact, it always gains less than the change in underlying VIX

2. Buy VIX ETFs

Buying the ETF is usually easier (more intuitive) than trading futures as it behaves more like a stock, except for the persistent downtrend. The reason for that is that these ETFs necessarily have to hold VIX futures, and thus suffer the same decay in value as mentioned above, just in different mixtures and rates, depending on the ETF methodology.

+ More intuitive
+ No need to roll over futures as they expire
+ Will track the daily percentage move of the VIX pretty well
- Will lose value over time

If you want to be adventurous you can even sell Inverse VIX ETFs as opposed to buying Long VIX ETFs (if available for sale though usually scarce).

3. Buy Options on VIX / Vol ETFs

There are options on VIX futures and on some VIX ETFs, allowing you to express your view in a more complex way by introducing a new dimension - volatility on volatility - as though one wasn't enough for you.

Options on VIX futures - quite similar to buying the VIX futures. Payoff is calculated based on a settlement price on option expiry day (ticker is VRO). You will not lose on Contango but you will lose premium, which will amount to about the same. Moves in the VIX will usually not translate proportionately to option values, similar to futures it will translate to a smaller change in value of the options.

Options on VIX ETFs - you need to predict the value of the ETF to estimate your payoff. This involves evaluating the ETF trajectory (it normally loses value) as well as the option premium before deciding if it's worthwhile.

+More bespoke payoff conditions
- Requires understanding of both VIX and options

4. Buy Volatility themed funds

These funds do not intend to have a 1x long exposure on VIX, so it certainly won't move in proportion to it, but it aims to have some volatility as part of the portfolio such that it adds value when VIX spikes, or at least cushions the fall in other long equity positions the fund is holding.

Many of them adjust their holdings according to a level or ratio, using VIX or vol ETfs as gauges.


5. Buy Options on the S&P 500

Another way to buy volatility is to have a delta-neutral, vega-positive position like a Straddle or Strangle. The position does not have to remain delta-neutral, since you are expecting volatility to rise and this happens when the index moves more than expected. This is a double boon as you gain from the increase in volatility (your options are worth more), as well as any profits from the index movement beyond your breakeven points. Your losses are fixed (max loss = option premium), but your profits will not be easy to estimate.

You can also buy naked Puts. A rise in VIX usually corresponds to a decline in S&P value (the decline is usually the cause of the rise in VIX). Buying Puts give you the double advantage of profiting from a decline in the S&P and profiting from increased volatility (the Puts will increase in extrinsic value when the decline happens).

+ Benefit from both index movement and increase in volatility
+ Known loss amount at outset
- Is not a direct investment in the VIX - the P/L on your options will be in the same direction as the VIX but will be difficult to estimate as a proportion of VIX