1. Wednesday, November 12th, 2014
    cracking the narrative

    Asset managers need to create a narrative about what they do and how they do it.  Lacking a story, it’s all about the numbers.

    You might say, “Well, that’s the way it should be.  This is a performance game.”  Except that’s unrealistic.  Everyone has periods of underperformance and clients who lack understanding of an asset manager’s approach are more likely to bolt at the wrong time.  That’s typically bad for the clients and obviously bad for the manager.

    To be clear, creating a narrative that is dishonest and manipulative is not a tenable long-term strategy (in addition to being just plain unethical).  On the contrary, trust is built through transparency, awareness, and education about the real way an asset manager navigates the markets.

    The narrative should be effective and truthful.  If you don’t have a powerful story to tell, you’re going to have a hard time of it and will be fighting a one-dimensional battle for assets ... continues

  2. Monday, November 3rd, 2014
    the risk machine

    While juicy returns will always cause the salivary glands of investors to water, these days the investment industry seems to talk more about risk than return.  No doubt the financial crisis played a role in bringing risk to the fore, but its journey to prominence has been decades in the making.

    Thirty years ago, scatter plots of asset class forecasts (as well as those fancifully precise efficient frontiers) were charted with a Y-axis labeled “return” and an X-axis labeled “standard deviation.”  Over time, “volatility” replaced “standard deviation,” but in many of today’s versions, the X-axis is marked with a different, loaded, word:  “risk.”

    That equivalency — risk equaling volatility — has become the foundation on which much of the modern investment industry rests.  There are some heretics, of course, who dispute the simplification that has occurred.

    For example, Howard Marks kicked off a spirited ... continues

  3. Wednesday, October 15th, 2014

    The context for investment decision making is constantly evolving, but the evidence of history is hard to escape.  It exerts a pull on us even when we acknowledge that it might not be representative of the future.

    As I have written before, modern finance is a young discipline and the investment ecosystem of today doesn’t look anything like that of 1983, when I entered the business.  That’s not very long ago and, oh, by the way, interest rates have been dropping the whole time.  Not exactly representative of the range of possibilities.

    In any case, I spend a lot of time thinking about how organizations and individual decision makers develop the assumptions on which they invest.  The historical record creates a powerful conceptual frame.  For asset owners and their advisors, there are broad assumptions that form the grid on which actions are mapped — returns, volatilities, and correlations especially.

    But what if the patterns of the past don’t really fit ... continues

  4. Tuesday, October 7th, 2014
    training by osmosis

    As a group, investment professionals are famously independent and resistant to most organizational initiatives almost as a matter of principle.  Not coincidentally, investment firms often flounder because of cultural issues that other kinds of organizations try hard to address (sometimes too hard, of course, and not always successfully either).

    The frontier spirit at many investment shops is understandable to a certain degree — getting the work done without talking about it incessantly has an appeal to most who find their way into the industry.  But an organization isn’t self-organizing; sooner or later some structure is required and some energy needs to be expended to make it work.

    Given the bias against any heavy-handedness among the troops, the leader of an investment firm needs to pick his or her spots as to where and how to add that structure.  In my experience, training is one area that could use attention in many organizations.

    I don’t mean ... continues

  5. Tuesday, September 23rd, 2014
    decaying beliefs

    In 2012, Samuel Arbesman wrote The Half-life of Facts: Why Everything We Know Has an Expiration Date.  I must confess that I have not read the book.  My awareness of it comes from a review by Shane Parrish on his excellent blog, Farnam Street.Farnam Street | Jason Zweig called it “a compelling blog about decision making.”  Agreed.

    We know of the half-life of radioactive materials.  But there’s also a disintegration of accepted knowledge across disciplines; it’s just not very predictable.  In certain fields (math is mentioned by Arbesman), the body of knowledge changes pretty slowly.  In others, much more quickly.

    He wrote that “the social sciences have a much faster rate of decay than the physical sciences.”  And, despite the attempts to turn finance into physics, you can’t get more social than the markets.

    What is the half-life of an investment theme?  Of an investment theory?  Of an investment belief?  Their lengths are dependent ... continues