Quote for the Week
Risk and time are opposite sides of the same coin.
This conclusion suggests that duration — the concept of risk that the fixed-income people use — has relevance for all kinds of risks, not just for bonds and mortgages. Duration is a weighted average of cash flows over the life of an investment, with the present values of those cash flows as the weights. Duration does not always fit the bill precisely, because it does not reflect the uncertainty of those cash flows, but it does capture the sense of what we are after.
Indeed, in a fundamental sense, duration conveys more information about riskiness than volatility can convey. As fixed-income investors learned long ago, duration explains volatility — long-term bonds are more volatile than Treasury bills, and stocks are more volatile than long-term bonds. Thus, as I argued at the outset, volatility is a useful concept but an incomplete one. We are closer to the essence of risk when we look at it through the prism of duration. — Peter Bernstein (source)
From the Archives
Last Call
- Songs of Experience: Reminiscences of a Strategist – L. Sonders
- Seeing the Future and Bond Yields – Behavioral Investment
- Interest Rates and Stock Prices: An Old Debate Resurfaces! – Musings on Markets
- Who Pays You for Your Process? – Net Worthwhile
- The Danger of the Last 20% – Purpose Code
- VC Isn’t VC Anymore – A. Dash
- A Historical Analysis of the Federal Income Tax – Kansas City Fed
- Your Perception of Time Is, In Fact, Warped – Noema
- Only 4 Days Each Year are Actually 24 Hours Long – Big Think
- Rogue AI Agents Hate CAPTCHAs, Just Like You – TechCrunch