Who is the real culprit behind the crash? What is institutional investors' risk parity strategy?
Hello, this is Shimon Yama.
The other day, New York State in the United States issued an "emergency declaration,"
around that same time
a friend of mine who was on a short business trip to New York
heard local stories firsthand.
People shouting “Corona!” at Asians,
and sometimes I see articles like that, but what is it really like?
My acquaintance did not experience those taunts in New York.
Although they were worried that they might be faced with an unfriendly look at the hotel front desk,
they did not actually experience any hostile looks.
Even on the subway, most people were
engrossed in their smartphones and did not pay attention to others at all
nor feel any particularly hostile gazes.
Of course, it cannot be said that there is no discrimination
against Asians,
but the people who actually express it
are likely only a very small minority.
“Do not assume that all media reports are true.”
That’s the point.
Recently, when I see Westerners visiting Japan I notice that
even those who do not usually wear masks
tend to have a larger proportion wearing masks than before.
There are times when it seems like
a full-on gas mask—
and at times I see people wearing full protective masks,
since an “emergency declaration” was issued,
I wondered whether there would be many people wearing masks in NY as well.
When I asked, my friend said that
during their stay,
there were almost no people wearing masks.
Maybe they are not selling them,
but regardless, very few people wore masks.
“Wearing a mask to prevent viruses from entering the body?”
is questioned,
but still, coughing and sneezing
that spread viruses is considered to have some effectiveness.
When I heard, “Is New York okay without people wearing masks?”
I was worried.
American healthcare is notoriously expensive.
Unlike in Japan
where there is a National Health Insurance,
people often don’t go to the hospital even when unwell
and try to treat themselves somehow.Many people do this.
Would this situation contribute to the spread of COVID-19?
I wonder what the outcome would be for the world’s economy,
the United States, the center of the world economy.
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
Who caused the crash?
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
I will talk about stock trading.
Recently, many people have felt a suffocating pain or tension
from the stock market downturn.
They may have thought, “Surely the bottom has been reached,”
but then there was another drop.
A situation where selling begets more selling continues,
and many may be exhausted with stock trading,
but
even if we lament what happened,
the situation won’t change.
These kinds of crashes occur regularly.
Unless you can overcome this,
you cannot keep making profits in stock trading.
But, why did a crash occur in the stock market?
Obviously, “someone sold.” Who was it?
I don’t know exactly who is selling,
but there are hints.
Have you heard of the strategy called
“Risk Parity”?
Since the Lehman Brothers collapse,
this strategy has drawn attention and is said to have become a trigger
for recent crashes.
So, what is the “Risk Parity” strategy?
Let me explain.
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
Limits of Diversified Investing
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
First,
the historical background of how the Risk Parity strategy was born.
'Do not put eggs in one basket'
There is a famous market saying.
“Invest in multiple assets and diversify risk.”
That is the teaching,
which seems rational at first glance,
but after the Lehman Shock,
market participants began to realize
that this idea does not always hold up.
Even with diversification across stocks and bonds,
if both stocks and bonds crash,
the point of diversification becomes meaningless,
and during the 2008 Lehman crisis,
stocks and bonds both fell at once,
leading to the realization that
“the traditional idea of diversification is not enough.”
Amidst this, the Risk Parity strategy emerged.
In English, it is written as “Risk Parity.”
However, since Parity means balance,
a literal translation is “risk balance” strategy.
This strategy was popularized by Bridgewater Associates,
founded by Ray Dalio,
the founder, who spread it widely.
So, what exactly is the strategy?
Diversifying into stocks and bonds is the same as traditional diversification.
However, unlike in the past where you would allocate 60% to stocks
and 40% to bonds, you do not determine asset allocation
simply by fixed percentages.
As the name suggests,
you balance the risk share of each asset.
If stock risk rises, you reduce the stock weight,
that’s right.
The metric used to measure risk is
various in finance, but
in the Risk Parity strategy the one used is
“volatility.”
In other words, the magnitude of price fluctuations.
For example, as stock price volatility increases,
it is considered higher risk, so you would sell stocks
and reduce that share.That’s the idea.
And recently,
as stock volatility surged,
the share of stocks dropped,
leading to significant selling of stocks.
Since the Lehman crisis, the Risk Parity strategy has spread mainly among institutional investors,
and because enormous sums were moved according to
the Risk Parity concept,
that capital could have been pulled from the stock market all at once,
potentially causing further drops.
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
First, stop diversification.
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
Finally, about “risk”
I will share my thoughts.
Some individual traders may think, after hearing about the
Risk Parity strategy,“I’ll try to use this as a guide,”
but for individuals, it is too high a hurdle, so
I do not recommend it.
This is fundamental, though, if you truly want to avoid risk,
you should reconsider investing by diversifying into stocks and bonds,
the basic strategy.
As I always say,
in my case, I trade a single security,
hold both buy and sell to hedge risk,
but
no matter how the stock price moves,
this method can prevent a situation where all positions would be lost with 100% certainty.
Now that the future is unclear,
as a minimum condition you must not lose your capital,
and trade carefully.
So please enjoy the rest of today
and thank you for watching until the end.
Keizo Shimoyama
