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Does Buffet Understand Risk? Your Weekend Reading


Following are some of the most interesting trading and investing stories that I have come across on the web this week:

The No Short Premium

A recent academic paper from Danling and Li looks into the effect of short selling constraints in the Hong Kong stock market. Not all stocks can be sold short due to exchange rules and regulations and this has a notable effect on returns.

The authors found that the un-shortable stocks produce significantly higher returns than shortable stocks. Between 1997-2014, the authors found “no-short stocks on average earn a higher monthly return of 2%, or a higher abnormal monthly return of 1.32%, than shortable stocks.”

Visual Analysis Of RSI

An interesting article from Beyond Backtesting presents a new take on the RSI 2 indicator when used with the E-mini S&P 500. The authors find that the security shows a high level of mean reversion over 1-5 days with RSI levels under 20 the most optimal. Thy also find that “extremely overbought conditions exhibit a strong reversionary nature”.

Does Warren Buffett Not Understand Risk-Adjusted Returns?

good article from Bloomberg writer Jared Dillian who takes a fun poke at Warren Buffett’s long-held negative view of the hedge fund industry. Hedge funds generally get a bad rap when compared to index funds but many have produced better Sharpe ratios than the index.

How To Take Advantage Of Political Shocks

This piece from Joachim Klement takes a good look at the effects of political events (and geopolitical events) on markets. He is able to classify the events into two types. One type leads to a short-term effect and quick recovery while the other is more long-lasting. A worthwhile read given the upcoming elections in Europe later this month.

How The Flash Crash Trader Lost $50 Million

This story came out a few weeks ago but it’s a great read if you missed it. The ‘Hound of Hounslow’ Nav Sarao made a killing in futures before apparently losing nearly all of it in bad investments. He was arrested on claims of spoofing and partly blamed for the 2010 flash crash.

Australia Goes 25 Years Without Recession

Australia’s economy contracted in the third quarter but a surprise 1.1% rise has pulled the annual figure back to a 2.4% growth rate. Australia has not had a recession since June 1991 and is now just one quarter short of the modern-era record held by the Netherlands, between 1982 and 2008.

Book Of The Week: Narrative And Numbers

I just downloaded Aswath Damodaran’s new book Narrative and Numbers: The Value of Stories in Business. This book is about the importance of stories in investing valuations. It promises to explain how a company without any revenue can command a multibillion dollar valuation. And how seemingly good companies fail to inspire stock market returns. Can’t wait to get stuck into this one.

Let me know of any good stories you have found in the comments.

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