Portfolio Management Must Change
I am out of town this weekend for our annual Spring Break family reunion and skiing extravaganza. These events are becoming much more fun as all of the kids are getting older and more independent. There is lots of eating, drinking, laughing and great conversation to be had. Most importantly, however, is simply the time to reconnect with family.
Therefore, this week’s missive is by Bill Hester from Hussman Funds which touches on something that is very important to me. The world of investing as we have known it – is over. The historical principles of valuation metrics, allocation, portfolio weighting and risk management are no longer valid in many ways.
The rise of electronic trading, algorithms, dark pools, exchange traded funds (ETFs), and high frequency trading has irrevocably changed the landscape of investing. When combined with continued central bank interventions, which artificially inflate asset prices and suppresses yields skewing historical valuation metrics, the advantage has clearly been shifted away from individuals to those that control the money and information flows.
However, it is the illusion of success that keeps individuals in the game. When markets rise and their portfolios increase in value – they become overly confident believing their current success is based on their skill. However, this illusion is quickly dashed when the next cyclical bear market occurs.
For investors, the rules of the game have clearly changed. Unfortunately, not for the better. No longer due the rules of fundamental investing apply. Today, it is simply the understanding of price momentum, trends and money flows.
The “rise of the machines” have not only changed the way we MUST think about investing – but also about the expectations of returns from allocation models. Bill does a great job of explaining this.