/risk-mitigation

Roughwork ideas and models

Risk Mitigation

High level notes and models for investing and wealth preservation.

The cure mustn't be worse than the disease.

Rolling Roughwork

Key Metrics

  • CAGR/Median/Kelly Percentiles
  • Log return on Total Wealth
    • You can generalise to % of total wealth
    • Beware, nominal values matter because of affordability thresholds/step-functions baked into reality

Models & Visuals

All from Safe Haven Investing so far.

Visuals

  • Bootstrap Paths Model
  • X and Os Model (Sum of parts)
  • Cost-Effect Safe Haven Frontier

Models

  • P34 Petersburg Wagger - Shows how a bet can be good or bad depending on how much wealth you have.

Industy Models:

  • Portfolio Theroy Sharpe Ratio Efficient Frontier
    • Show weaknesses such as leverage fragility
    • See LML ErgodicityEconomics doc 2017

Core Concepts

  • Compound Average Grouth Rate (CAGR / Geometric Mean)
    • Think of risk as things which reduce CAGR.
  • Kelly Criterion (Sizing your position)
    • Try to raise the lower percentile paths
  • Median performance is more typical than mean performance

Other

  • Understanding leverage
    • Magnifies risk
    • Magnifies model error/uncertainty about risk
    • Pseudo-leverage such as 3X S&P500 ETFs, limits downside?
    • Closely related to sizing your position
  • Handling inflation in return models
  • Max log drawdown
  • Falsification. Falsify hypotheses don't naively try to confirm them.
  • Mechanical and Statistical Relationships. Don't confuse them. Mechanical is better but rarer.

External Resources: