The Most Forgotten Asset of All

For recipients, a Nobel Prize means unlimited kudos. A chance to etch their name into history. A way to put themselves ahead of their peers.

For the six different types of awards on offer, most go to someone (or a group) few outside their field will ever know.

Unless your name is Barack Obama or Bob Dylan, that is.

Obama won the Nobel Peace Prize in 2009 — not even a year into his presidency. At the time, it was a controversial pick. Reportedly, even Obama and his advisers were uneasy about its timing.

With the Nobel Prize, though, controversy is never far away.

Plenty also questioned the Nobel Literature Prize going to Bob Dylan back in 2016 — the first songwriter to receive it. Except his loyal fans, of course.

Like Obama before him, Dylan too was unsure about what to make of it all. He didn’t personally accept the award until it coincided with his touring schedule.

And even then, he only just snuck inside the six-month cut off period. Failure to accept the award by then meant he could have missed the prize money that accompanies the award.

The prize money then was eight million Swedish kroner. That worked out to be less than US$1 million at the time.

No doubt, that amount of money is always handy. But I’d guess that Mr Dylan was, and is, doing just fine.

Apart from these two famous recipients, another 902 individuals and 24 organisations have won the coveted awards. Some, more than once.

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A new take on risk

Another recipient few might know is Harry Markowitz. Well, outside the financial markets, that is.

Markowitz won the economic section of the 1990 Nobel Prize for his work on portfolio theory. The prize was a long time coming, given he wrote the first iteration of his theory all the way back in 1952.

Up until then, analysts valued companies based on their future cash flow. The bigger and stronger the anticipated cash flow, the more value (and the higher the present value) the company would have.

Based on that criteria, investors would seek to buy a collection of stocks with the highest present value. Irrespective of which sector they belonged to.

However, this method forgot about something important…risk. In particular, how the stocks performed as a group.

If all the selected stocks were in one sector, an investor could take a big hit if that sector took a bath.

To better assess risk, Markowitz studied how the stocks moved in relation to each other. In other words, their correlation.

For example, bank stocks might have a high degree of correlation to each other. So too, mining stocks. But what about a bank stock compared to a mining stock?

They were less likely to be highly correlated. And it was this correlation (or lack thereof) that could help reduce risk.

The less correlation between stocks, the less chance that one falling stock would flow onto other stocks in the portfolio. The aim was (and remains): to lower the expected risk, for a given amount of return.

Risk is always there

Trying to diversify risk away is a common plank for fund managers. However, just as stock prices change, so too do correlations.

Stocks and sectors that might have had a high correlation in the past, might do less so in the future.

The other thing is, you can’t eliminate risk altogether. A bear market, or a dramatic shock, can see any asset class fall.

There is one asset class, however, that investors forget about in a bull market. And by its very nature, has very little correlation to other asset classes at all.

This asset class is cash.

As we know, holding too much cash long term can kill performance. But in a low interest rate, low inflation environment, holding cash is less of an impediment. It can also help take volatility out of a portfolio.

And because cash is liquid, it enables you to swoop, should a distressed asset come your way. Whether that be shares, property or any other asset class.

Markowitz’s theory is now almost 70 years old. Nonetheless, its importance has not waned.

There is little doubt that — unlike some of the other recipients — his Nobel Prize stands as one of the less controversial picks.

All the best,

Matt Hibbard,
Editor, Options Trader

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Matt Hibbard is Money Morning’s income specialist. With nearly three decades in the markets, Matt has traded just about every asset class there is. The one thing that has stuck with him over this time is a very simple premise. That is, it’s the cash a company generates that ultimately determines its value. Sure, some stocks might fly away to multi-digit gains. But unless these companies can convert the ‘story’ into real money, the market will eventually find them out. And when that happens, the share price quickly falls back to Earth. Matt is also the editor of Options Trader, where he shows subscribers how to use basic options strategies to generate income. This is income they can generate on top of regular dividend payments. Matt doesn’t play the prediction game, where the aim is to be proven ‘right’. Instead, his goal is to generate as much income as he can for his subscribers, irrespective of whether the market is going up or down.


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