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The
myths of Modern Portfolio Theory,
the Olestra™ of investing,
and all of its illegitimate relatives have resulted in the creation of a new and
popular set of mindless, imagineered investment disciplines that are nothing
more than just other ways to record and illustrate investment history without
valid analytical, interpretive, deductive, predictive, or directional investment
value: Modern
Portfolio Theory | Brinson's
Asset Allocation | Beta
| Monte
Carlo Analysis | Efficient
Frontier Analysis MPT
Risk Management | Dull
Sharpe Ratio | Pie
Charts | Technical
Analysis | Investment
Planning Software The
premise of Modern Portfolio Theory depends heavily on one's blind, unconditional
acceptance of a grossly invalid assumption; if it happened yesterday or if it
happened sometime in the past, then it will — probably, more likely than
not — happen today or it will — probably, more likely than not —
happen sometime in the future much in the same way that it did in the past. The
errors in the reasoning and the math of Modern Portfolio Theory are the failure
to distinguish between 'connected and causal' variable relationships and 'contrived
and coincidental' variable relationships; the connected variables, for example,
that must be in place to cause rain or the connected variables that must be in
place to cause investment prices to rise such as fundamentals and earnings growth
verses coincidental and contrived variable relationships; a change in the price
of an investment and the change in the price of a related market index over a
selected analysis range; Beta: Think
about it: 'Past
investment performance is not an indicator of future investment results' is a
required, responsible, and absolutely true investing footnote, an
investing fact that anyone who has spent more than a nanosecond in the financial
markets would or should know, and an investing law designed to protect the investing
naive, innocent, and unsuspecting. Then
why would one blindly place his/her trust in the present and his/her hope for
the future in a mythical investing science — Modern Portfolio Theory and
all of its illegitimate relatives
such as Monte Carlo Analysis, Efficient Frontier Analysis, Beta, Brinson's
Asset Allocation, Pie Charts, and a distant relative, Technical Analysis (worth
a glance) —
that relies solely on past performance investment data to feed hypothetical and
contrived investing algorithms in a misguided effort to predict future investment
results? All
are just other ways to record and to illustrate investment history without valid
analytical, interpretive, deductive, predictive, or directional investment value.
If
this nonsense were valid, there would be no need for investing analytics, forecasting,
or guidance of any kind — research, analysis, opinion, advisors — and
one would simply select investments based on past performance without regard to
suitability, quality, structure, or risk. Explained
another way, a thermometer measures temperatures in degrees as the weather changes.
A thermometer is a recording device not a forecasting one and, therefore,
it cannot be used to predict future temperature levels. Standard
Deviation, Efficient Frontier, Beta, VaR, and Sharpe Ratio are much
like a thermometer; merely means to measure past (contrived) relative investment
performances between investment variables and neither the cause of nor the predictor
of either. Furthermore,
if a thermometer also happened to store prior temperature readings on a daily
basis, you certainly would not retrieve that information and use it to predict
tomorrow's or next week's temperature readings. As
one would have to analyze the weather-changing causal variables that affect weather,
such as humidity and barometric pressure, to predict future temperature levels. The
same holds true for historical Standard Deviation,
Efficient Frontier, Beta, VaR, and Sharpe Ratio readings
as a basis for predicting the investing future. Future
investment values and associated investment/investing risks can only be meaningfully
understood and predicted based on one’s correct understanding and interpretation
of the fundamental performance changing, causal investment performance variables
that actually affect an equity’s behavior. Keep
in mind, there
is no theory — modern or otherwise — that can be ordained, no computer
that can be programmed, no software that can be designed, no investing tool that
can be 'imagineered,'
no technical analysis voodoo methodology that can be contrived, and no equation
that can be divined to quantify, evaluate, and predict the primary forces that
drive the sublime chaos of the financial markets and investment prices; human
consensus, mood, and behavior; intelligent and not, knowledgeable and not, reasoned
and not, rational and not, and logical and not. |
Each
day in the stock market is a new day and independent of the prior days' stock
prices in much the same way selected lottery numbers are independent of the past. It
cannot be said that because a lottery number has been drawn in the past, regardless
of the number of times it has been drawn , that previously drawn lottery numbers
have a greater probability of being drawn in the future; the same is true for
stock prices. Clearly
there can be a carryover affect of prior pricing variables that can affect current
price along with other, new pricing variables that did not affect prior prices.
To that extent stock market prices are not completely independent of past prices;
however, it cannot, therefore, be concluded that today's price is because of yesterday's
price. Think
about this:
 Step
1: Reflects the closing price of a stock on its first day of trading based
on stock market pricing variables: - Earnings,
markets, momentum, fundamentals, institutions, individual investors, news, analysts,
technical analysis, currency, governments, the list goes on and on, all have unknown
impact on each days' prices.
- The
consensus totality of all of these variables, unknowable in advance, will determine
the day's price.
Step
2: Illustrates two days' closing prices with day two's closing price being
determined by stock market price variables and not because of the position of
the first day's price data dot. Step
3: There is no basis whatsoever to suggest that the price of a stock will
close @ A, B, or C on day three based on the position of the prior two days' closing
prices; the fatally flawed leap of faith assumption that technical analysis would
have you accept. 
Furthermore,
technical analysis mistakenly makes much of the reflective not predicative relationship
between a stock's daily price and any one of a number of moving averages, 20 Day
Moving Average illustrated below, for example. Daily
Prices and a 20 Day Moving Average are nothing more than mathematically connected
with the 20 Day Moving Average simply being generated by, being a function of,
being a derivative of Daily Prices. Both
are simply ways to record trends; but, neither of them predict trends. To
suggest that a day's stock price will behave in a particular way because of
its relationship to a moving average is absurd. The
appeal of Modern Portfolio Theory, et al is that no investment skill or judgment
is required; just update, search, retrieve, sort, pick, print, and present information
that suggests that past performance, contrary to fact and law, is, in deed, an
indicator of future investment results.
"Our
updated Efficient
Frontier Analysis historical investment performance data and our new and improved
pie charts and graphs indicate that we might do better
if you were to move your current investments that I recomended to you based on
Efficient Frontier
Analysis historical investment performance data at that time and that
did well
in the distant past prior to your investing in them, but have not done well since
you have owned them, into investments that are currently on the Efficient Frontier,
that have done the best in the most recent past, and that have low Betas; therefore,
low investment risk." "The
best news is that because the Betas of your new investments have been around 1.5
and because I think that (based on the past performance of the S&P 500) the
S&P 500 is going to go to 2,100 and your new investments, if I am correct
about the future of the market (based on the past performance of the market),
will go up, on average, about 70%." |
Investment
history and investment hindsight, other than reference points for considering
investment selection, are neither investment insight nor investment foresight.
Investment
history will show that these investment advising hoaxes did for investing
what peanut butter and jelly sandwiches did for medicine. |