I thought you might be interested in some ideas about the investment climate around the time of this”great recession”. You might find them disturbing, or enlightening, based on where you believe we are today.
It would be a”piece of cake” to demonstrate that the”irrational exuberance” of the”.com bubble”, ten years or so later, was due to blind faith worship of technical evaluation, as the”no worth at all industry” flourished while rewarding, higher quality, dividend payers significantly underperformed NASDAQ’s more speculative issues.
More lately, blame for”The Great Recession” could well have been laid at the feet of big government, misguided authorities, and Modern Portfolio Theory zealots rather than heaped upon Wall Street banking associations, complicit as they were in forming the tragedy. There was plenty of guilt to maneuver around.
Sterk, in my opinion, supports the assertion that Modern Portfolio Theory (MPT) and its computer production”The Efficient Capital Market Hypothesis” were straight, without doubt, the origin of the current global financial crisis.
By eliminating the”prudence” in the Prudent Man Rule, the national government had permitted hypothesis and theory to substitute gains and periodic recurring interest payments. Effectively, probabilities, standard deviations, and correlation coefficients replaced basic value analytics, real gain numbers, and income generation capacities, as determinants of investment acceptability in trusteed portfolios.
No class or type of investment is inherently imprudent.
At exactly the exact same time, Congress was: encouraging lenders to make mortgages available to absolutely everyone; permitting national mortgage providers to bundle products for Wall Street; preventing the SEC from regulating a burgeoning derivatives sector; and making all regulators remain clear of any involvement with an increasing interest in”credit default swap” gambling.
My evaluation is that we stay in an”artificial portfolio” bubble as this is being written.
Not even Dodd Frank comprised a solution to the issues that fostered the downturn / correction (at least not efficiently ). Both pension and defined contribution plan (401k) trustees continue to be expected to concentrate on portfolio market value increase rather than growing the earnings that plan participants will need in retirement… conservative, income based, portfolios will be fined mercilessly by feckless regulators for”poor performance”.
The very popular”retirement income fund” in the world (Vanguard’s VTINX) generates less than 2% in spending cash, check it out… while countless different securities, safely yielding much more, are unacceptable to the authorities.
With no meaningful correction for more than ten decades, it appears likely that countless investors are going to become victims of a”How Can This Be Happening, Again” debacle.
Blinded From The Math
MPT does not just ignore all basic analytics while enjoying Frankenstein with the technical selection, additionally, it pays no attention to the fact of market, rate of interest, and economic cycles. It’s generated an investment environment that has taken diversification to new heights of lunacy by adding every possible speculation from the formulation, while disregarding fundamental quality and income creation.
The only significant”risk”, it postulates, is”market risk”… in fact only the always clear and present threat of securities and markets. The MPT mixologists’ mix:
Combine all industry price numbers of securities irrespective of quality positions, income, as well as sustainability amounts
determine these amounts varied against one another during various past market scenarios… no matter cyclical cause
quantify the dispersion of the outcomes as they relate to the typical and newest iterations of the real numbers (what!)
Quantify the probability of every possible outcome, assign a”standard deviation” market value change risk measurement to every possible outcome, and conclude by correlating the various risk assessments.
MPT portfolio construction ensures that everything possessed is negative directionally correlated to almost everything else, without ever owning a single stock or bond, or contemplating the amount of income created by the portfolio. Thus creating, eh, making, a passively managed… well, I have not really decided what such a portfolio is.
The”oxymoronic” passive management (allow the formulas and standard deviations steer your retirement jumped ship) of”Modern Portfolio Theory” may initially have a sexy ring to it… until you try to find out exactly what it does to the information it fuels itself .
Are not we bringing too much science into a relatively simple method of measuring dollars for ownership interests in business enterprises… an age old means for carrying quantified financial risk in the quest for improved personal wealth.
MPT has spewed forth thousands of derivative products that have shifted the equity playing area…
Should an uptick at a”triple-short-the-S & P 500″ ETF be regarded as a positive or a negative?
Should individual issue numbers be corrected for the amount of derivative entities which hold them, long or short?
Does share price have anything whatsoever to do with basic price or is it the effects of derivative parlor game action?
S & S p/e ratios are approximately 50% higher than they were five decades ago; a sampling of high-dividend-paying ETFs sports an ordinary p/e more than double that of the S & P.. . And not one of your advisers (myself excluded) appears concerned with the anemic level of earnings being generated by your retirement-bound portfolios.
Modern Portfolio Theory would have us believe that the future is, indeed, predictable in a reasonable level of error. Theorists, research economists, other professors, and Wall Street marketing departments have always gone — and they have always been wrong.
Any claim to precision; any attempt to time the market; any expectation of being in the right place at the ideal time, the majority of the time, is simply not a fact of investing. And there is the rub for the two kinds of analysis, and for”the emperor’s new clothes” hazard assessment methods and”active asset allocation” procedures so well known in MPT.
As long as we live in a world where there are tsunamis and Madoffs; terrorists and politicians; large corporate egos and a lot more dangerous major government; and imperfect intellect (both artificial and human ) that there will be no expectation of certainty.
Get over it, reality is really cool as soon as you’ve learned to take care of it.
All of the areas, concepts, and procedures explained there work together to produce (in my experience) a safer, more income effective, investment experience. No implementation should be undertaken without a complete understanding of all facets of the procedure.