Skip to main content

An Efficient Edge

Over the years the differing opinions of stock portfolio management and predictive models overflowed to the world of academia owing its credibility to the massive endowments that were faced with the same issues as the average investor, namely, how to make money. But as the markets have recently shown their first price rebellion in four years memories are stimulated about the days when gross uncertainty made capital preservation a winning strategy. Today, I believe we are seeing a similar correction in today’s volatile markets. 

For many years individuals from prestigious academic institutions and other backgrounds have tried their collective hands at the management of assets. Most did so to no avail, as the markets proved too random to consistently outperform. So what did these individuals do? They gave up. Or rather they keenly decided that if all the available education and pedigree didn’t prepare them for success in asset management then what hope was there for the average investor. Hence the introduction of indexed mutual funds.

What this created was an investing environment that could be tracked on a basis that forgoes fundamental analysis and instead relies on the premise that all information that is available to influence market behavior (i.e. volatility) is available to everybody, making its efficiently distributed. This meant that if the stock market index went up a portfolio could be hedged with a bond index that could be counted on going down. Sounds simple enough, and the fancy name given to this characterization was The Efficient Frontier.

Flash forward and today those index funds are the mainstay of the ETF business. That means in short all of the characteristics of a mutual fund with the tradability of an individual stock. The product has been a gift to the speculating community, looking at a horizon no longer than an 8 hour trading day. But it hasn’t been that easy in the years since the aforementioned frontier strategies stumbled in the financial crisis and a new set of short term models based on thousands of pieces of data compiled over fundamental, technical and now behavioral analysis projecting more activity in the markets, including a near quadrupling of option volume since the introduction of ETF’s, and a clearing system, given the fancy name High Frequency Trading, can capitalize even without a spec of leverage.  And it can all happen in seconds, as we’ve all felt in the last few weeks.

In short, the chronic hyperbole, the computers, the chaotic global economies, all at the beckon of technology has served to move us further and further away from the discipline that indexing was meant to create for us. However, in its place it has heightened the need for true active asset management as the efficient means to offset the surrounding axis of volatility. It also doesn’t hurt to have a real person to talk to.

Popular posts from this blog

I B!#*$ For A Living

Not really, but I’d like to. The problem is I don’t search, or that is to say I don’t search for this blog. I do search, regularly so, with the same vigor that I flip though a newspaper. I have my pet subjects, finance, art, and sports, politics (not necessarily in that order) I never look at real estate and I rarely look at style articles. One of the reasons I don’t search for this blog is because there is a fine relationship between the price (the value of an asset) and time (the freshness of the analysis) that serve to form my views. That’s the only way I can assure that my posts are mine, grammatical blemishes and all. It also affords me the privilege of some license whereby I’m open to write about almost anything that strikes me as useful in the aim to inform. That’s one of the main reasons I choose to inhabit the space, which brings light to financial news, because it’s so reliant on nearly every other market, across all cultural and political spectrums and best of all it always…

Please Don't Believe Everything You Read

“I have news for you” said Andre
And as I peered through his bad hair weave, and “coke bottle”” glasses I realized he was right.

Nowhere in our collective memories do we ever fully understand the workings of our mind. Driven not by the collective accumulation of information but rather defined by the processes eternally influenced by the random cocktail of chemicals in our heads and poisoned by the principles we carry around in our back pockets with all smug confidence.