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  1. Monday, December 8th, 2014
    dumb groups

    The rise of behavioral finance has led to a widespread awareness of the human inclination to veer away from logical decision making,The Psy-Fi Blog | Here’s one compilation of those failings, “The Big List of Behavioral Biases. although most of us seem to get caught in the same traps over and over again anyway, even though we are aware of our tendencies.  I know I do.

    On the other hand, the popular notion is that there is a “wisdom of crowds” (even though that’s likely to be true only under certain circumstances).  There are, of course, many times when the crowd goes astray, sometimes helped along these days by our electronic tools and their reinforcing algorithms.  (No market commentary intended, although some readers might take it that way.)

    In between the individual and the crowd are small groups of people trying to make decisions together.  We live in a world of organizations.  Since this forum is devoted to those who roam the investment ... continues

  2. Monday, December 1st, 2014
    points of failure

    A week ago, the lead segment on 60 Minutes highlighted the decrepit state of infrastructure in the United States.60 Minutes | The video and transcript of the piece are available here, along with extra material.  In case you thought that the collapse of the I-35W bridge in Minneapolis would have caused some action, think again.  Since that tragedy in 2007, inaction has been the order of the day.

    That despite business and labor being on the same side of an issue for once — and almost everyone talking about the need to do something to address the infrastructure weaknesses before another calamity occurs.  A secondary theme of the 60 Minutes piece was the depressing effect the lack of investment is likely to have on the economy going forward.

    Our elected officials seem to have a risk management philosophy that involves risks not being dealt with until the moment at which they can’t be ignored any longer.  (In that, the politicians are similar to investment managers who have ... continues

  3. 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

  4. 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

  5. Wednesday, October 15th, 2014
    amplifiers

    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