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ยป Modern Investment Thinking and Modern Portfolio Non-Management
Date published: 15/09/2011
Modern Investment Thinking and Modern Portfolio Non-Management
Part II: The Full Circle of Investment Thought
See also Part I: Technical Analysis --- Blinded By The Math
Very few politicians act as if they know anything about business, capitalism, markets, etc. Very few theoreticians (particularly research economists) seem to know anything about actually running anything for real: business, government, investment portfolio, whatever.
And this brings us to Modern Portfolio Theory (MPT) --- the fancy new scourge of the financial markets.
Modern Portfolio Non-Management (MPNM) --- Houston, We Have A Problem
Even the "dinosaurous preposterous" Buym' 'n Holdm' passive strategy of the 1900's had a better chance of success (with some minor disciplinary and managerial tinkering) than the MPNM cop-out of the new millennium.
Here we are asked to accept non-management as a solution to a problem that exists only in the minds of product creators and financial institutions weary of regulators and lawsuits. It's appropriate because it's cheap and inexorably controlled by the immortal teeter-totter principle --- very scientific indeed.
The unquestioning professional acceptance of Modern Portfolio Management just cries out for conspiracy theory analysis. Investors (and not just small investors) can go from Great Granddad's first contribution to a UGMA account to their retirement program without ever owning a common stock or any form of individual income security.
Clearly, we've moved way too far away from the classic principles of investing. But how can we criticize a government that shows no respect for a capitalistic system that has produced the highest standard of living on the planet, when we, as investors, shun the basic building blocks of capitalism ourselves?
Modern investment thought clouds the distinction between the purpose of stocks and bonds as investment media just as cleverly as it tries to erase the critical difference between an investment and a speculation. It supports the calendar performance evaluation idiocy, and panders to both a misguided tax code and a regulatory environment that paints all financial professionals as charlatans and thieves.
But the mortal wound to most investment programs is a heightened misunderstanding of both the purpose and the operation of Asset Allocation.
The simple process of taking a person's risk tolerance input and creating a goal directed division between equity and income securities has been replaced by too many cross-purposed modifications than can be presented here.
But the very idea that the object percentages are to be either: (a) re-balanced annually based upon changes in market value, (b) changed randomly based on the managers' assessment of the future, or (c) ignored entirely --- well, it just boggles the experienced investment managerial mind.
The purpose of an Asset Allocation formula is to direct the long-term investment plan --- the equity to income ratio is maintained decision by decision, trade by trade, throughout time. Using the Working Capital Model, there is no need for rebalancing ever, and Tactical AA (the "let's guess the future of one sector or emerging market" approach) is pure speculation.
Market Cycle Investment Management is a 35 year old body of investment management thought that employs: cost based asset allocation and diversification; cyclical performance evaluation using meaningful benchmarks; standardized quality assessment, income production requirements, and manageable buy and sell disciplines.
It's Asset Allocation principle's distinguish only between equity-purpose and income-purpose investments. It has succeeded for decades by embracing the market cycle, preparing for it, and by growing the income that will be needed at a distinctly discernable time in the future. No special mathematical skills or fancy footwork required.
Conclusion: The Full Circle of Investment Thought
From the unmanaged Buy and Hold strategy of generations past, it's interesting to observe the full circle we've traveled to the unmanaged multi-product portfolio of the 21st century. Somewhere in the process, both technical and fundamental analytical techniques have been steamrolled under the pavement of the new highway to --- just what, actually.
We have gone from a process that valued ownership of financial assets and a discipline that encouraged personal responsibility for creating financial security to a product shopping mall environment of products based on probabilities and computer model projections of possible realities.
But in spite of the tremendous shift in financial focus (be it based on a fear of regulators or the greed of institutional fat cats), somehow, someway, the basic rules of the investment game have remained the same. A consistent approach to the mystery (technical, fundamental, or numerical voodoo) is a requirement.
And, as it always has been, if you can't see and/or understand what's inside, you're probably better off looking elsewhere.
For more information, or to discuss your specific situation, please contact me directly.
Steve Selengut
Kiawah Golf Investment Seminars
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy".
Now that you have read this, what do you think? Do you have other ideas? Please share you views with other members (eg by blog or on the discussion forum) and/or request professional member(s) to contact you directly.
