Look at this picture. Let me ask you a couple questions.
First question... Which of the two in the photo “believes” he is in control?
Answer = They both do. The Rider believes because of his superior intellect, ability to reason, able to lead and direct, that he is in control. The Elephant likes to eat and doesn’t like being hassled, so he pretty much follows the commands of the Rider.
Second question... Who’s “really” in control?
Answer = The Elephant. No oat bag, reed grass, hand-held electric wand or switch can hold the 12,000 pound pachyderm from doing whatever HE really wants to do.
Now let’s assign each to some Wall Street characters: a Money Manager and The Market. The Rider is a Money Manager and the Elephant is the Market. I’m sure you can see where I’m heading, but bear with me.
A vast majority of money management uses Modern Portfolio Theory (MPT), which basically assembles a portfolio such that the expected return is maximized for a given risk level. So, if you reach for a higher return, you should expect to experience higher risk. The downs are deeper.
Not sure why we keep calling it ‘Modern’, it was designed by Harry Markowitz in the 1950’s. In fact, he won a Noble prize in Economics for it. I recognize that the New York Stock Exchange was founded in 1817 and we have some measurable history between then and WWII, but Bell Labs didn’t produce the UNIX computer (the building block for todays present-day machines) until 1969. I’m thinking ‘modern’ as in since the 1990’s.
The challenge to MPT is that you get nice and comfortable, tucked into your cocoon of diversified holdings and just kind of float along. Not just you, the investor, but the advisors as well. Then a 2008 comes along and EVERYTHING goes down. It doesn’t matter how many asset classes you’re spread over, if they all go down, you lose money.
Another odd dynamic to MPT is that because everyone uses it, when something goes wrong, the blame finger is pointed at the ‘market’. It can’t be the models fault, of course not. It’s that silly market, not following the rules.
You may think I’m kidding, but I’m not. I’ve sat in rooms and been on selection committees when a manager was asked to explain a variance in their fund from the market, and the answer was “the market was wrong.” The first couple of times I heard that, I asked them to repeat, because surely I didn’t catch it correctly. After a while, you just close your notebook or hit ‘X’ on the spreadsheet and look for a quick way to wrap the meeting up… and not step in any elephant droppings on the way out…
This really highlights how different Tactical money management is from the norm. To that point, I want to build on my blog/video from last week, and once again use my video writing tool. It’s important that you watch the first one, so here it is: http://blog.robbrinkmanacademy.com/3-major-differences-between-todays-market-and-2008
In this video I talk about Forward Looking Due Diligence, how it’s capturing respect in the Tactical arena and how the liquidity event that caused the S&P 500 to drop over 11% in late January through early February warrants attention:
