WSJ Article Generates Lively Debate on Risk

By on March 19, 2012

The Wall Street Journal recently featured an article entitled, “Stocks are Riskier Than You Think,” by Zvi Bodie and Rachelle Taqqu.  The article started out promisingly enough but wandered into the muddy waters promoting active management (hedge funds) and purchasing options to hedge risk.  Many astute readers of the WSJ pounced on the questionable conclusions of the authors. There were nearly 100 comments following the article.

Most of the readers came to the defense of stocks and rightly so.  It appears the authors of the “Stocks are Riskier…” article were confused by the volatility of stocks and not giving enough credence to equities’ historical tendency to rise above the rate of inflation and provide protection of purchasing power.

One commenter brought up Warren Buffett’s recent letter to investors which she claimed, “brought tears to her eyes.” Buffett made the important point,

“The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period.”

Buffett’s 2011 letter to investors is available at this link.

Many readers also pointed out that bonds have had one hell of a run since 1981 and to suggest they be used to mitigate risk could be irresponsible and result in disaster.  But wait, one person commented that if the U. S. experiences a similar post-1990 style deflation as Japan did, bonds will continue to produce generous returns. This reader also wrote he was widely diversified and the best bargain he could find in the current environment was rental real estate. He was also wisely more concerned about his health risks than monetary risks.

Many readers commented on the hazards of option hedging strategies.  The authors of the article promoted a strategy in which the downside was limited to 15%, while the upside was pegged at a mere 6%.  This generated a cacophony of boos regarding the high costs of options, with the only real beneficiary being the financial industrial complex.

Several readers came to the defense of the authors pointing out that our stock market recovery has been largely engineered, or manipulated, by the powers that be through an irresponsible accumulation of debt (by the administration) and money printing orgy (by the Fed).  The suggestion that TIPS and I Bonds be core holdings may provide ballast to a portfolio given the probable aftermath of reckless policies.

Source: Wall Street Journal

2 Comments

  1. Hugh Jorgin

    March 20, 2012 at 11:54 am

    J’aime le fromage vilain!

  2. Wall Street Sucks

    March 21, 2012 at 6:52 pm

    Risk is always present no matter the investment. Cash is a wasting asset, and although the volatility is typically low, makes its holders steadily poorer. That is of course, unless you have a deflationary depression; the odds of which are miniscule.

    Wall Street is very adept at stoking investor activity through it’s manipulation of risk expectations. The blood sucking croupiers in the middle profit despite the risks involved.

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