Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

What Are Tail Risk Funds?

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Tail risk funds represent a small niche of the hedge fund industry, and there are a few different types. They essentially serve as insurance for your portfolio. They lose money most of the time, but when there is a tail risk event, they rise quite a bit when the rest of the market crashes down hard and fast.

Tail risk funds hedge against tail risk, which is a type of portfolio risk that appears when there is a significant chance that any particular investment or fund will move more than three standard deviations from the mean. Tail risk events have a small probability of occurring, but they do occur from time to time, which is why many investors choose to use tail risk funds.

Traditional strategies for portfolio management usually follow a pretty normal distribution. There’s nothing out of the ordinary with them. However, tail risk funds are able to normalize the returns of an entire portfolio by making up for steep declines when there is a sudden correction with no warning or time to prepare for it. Such a steep, sudden correction occurred in March 2020, and many tail risk funds made headlines with astonishing returns during the selloff.

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Joe Average

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The market just won’t shake itself loose, will it. For weeks now, it feels like we’ve been trapped. Unless you own one of the handful of mega-cap NASDAQ stocks that makes a lifetime high every single day, I suspect you have the same frustration that so many others do.

The source of this frustration can, I believe, be better understood with the equity index charts shown below. We begin with the Dow Jones Composite, which shares the same two fundamental features found on so many other big indexes and ETFs: (1) an important price gap, below which prices have traded for weeks (2) a broken trendline anchored to the March 23rd bottom.

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How Much Will Tesla Inflate?

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Tesla stock soared past $1,500 a share today, and talk about whether it’s in a bubble has been reignited. Several analysts have weighed in on the EV maker today, and even some bears are starting to say that the shares could keep rising.

However, one author suggests that Tesla stock is indeed in a bubble — and that it’s bound to pop at some point.

In an opinion piece for MarketWatch, Mark Hulbert said Tesla stock is inflating like a bubble, and those who buy now should prepare for a crash. He noted that he made the same forecast in early February, and the shares plunged 60% in the six weeks following that prediction — alongside the rest of the market.

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Titanic Bar

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Rough, rough, rough day on the tech front today. No, I’m not just talking about stocks. I’m talking about the site. We’re hard at work optimizing the servers to deal with all the new features and growing traffic, and I’ve hired some extra help. Suffice it to say, I need the beverage below worse than you, but I’ll refrain and keep focusing! Have a good weekend, and I’ll be back later. The site could be spotty for a while, but at least the market’s closed!

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Speculative Earnings

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In a clever and useful analysis, Ronen Israel, Kristoffer Laursen, and Scott Richardson of AQR use the residual income approach to break down how the value of a company’s stock depends on three components: its book value, the value of its predictable earnings, and the value of its speculative earnings.  The first component, the book value, can be read off the balance sheet. The second component, the value of predictable earnings, is based on the assumption that the company meets analyst forecasts for the current year and the following year. 

In all future years beyond year two, the earnings are assumed to be equal to year two earnings.  The final component, the speculative value, equals everything else.  The speculative value is calculated by starting with the stock price and subtracting the book value and the value of predictable earnings.  The speculative value incorporates all the growth in earnings that the market expects beyond the first two years.  To summarize,

Stock price = Book value + Predictable earnings value + Speculative value.

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