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. |
MPT
Investment Planning Software and Reports Most
investment planning and proposal software programs are mindless, default designed
rather than user defined, and are never anything more than databases of investment
history programmed to be retrieved and presented with elaborate, just pick,
print, and present, laddered windows infested with graphs, historical investment
performance history data dumps, and pie charts... while,
for example, chasing efficient frontiers and waiting for fresh historical investment
data to be added to the software to generate new efficient frontiers to justify
investment change so that all clients are investing in the most recent investments
that have done well in the most recent past... ...to
create the illusion of investment analysis, interpretations, projections, and
performance probabilities and to suggest investment history will somehow just
repeat itself, when, in fact, what is presented is simply what has happened in
the investment past as predetermined by the limitations, the exceptions, and the
assumptions of the investment planning software programmers.
Investment Planning Reports Investment
planning reports most often end where investing really begins:
-
They
typically suggest, subliminally though not legally, that there is, in fact, a
connection between past investment performance and future investment results.
-
They
are often but a distraction from the indispensable, substantive portfolio management
issues and investment selection realities. -
They
offer considerable information about form and frame but little about design and
structure to give the investor an investment direction and really nothing about
the motor that will drive the investor to his or her investing destination.
-
They
usually downplay or even ignore the more important investment issues of establishing
an investment philosophy, defining the correct investment selection process, and
adopting proven portfolio management disciplines. -
They
are usually of little material or directional value because they are often just
an "instant replay" of an investor’s financial past, merely parroting back initial
questionnaire input showing the individual what he or she already knows about
himself/herself. -
They are composed of historical data and hypothetical
assumptions, presented in the eye-catching wizardry of colorful pie charts, graphs,
and an array of schedules are but sleight-of-hand used to generate a very
generic, over-assumed, and under-planed investment plan.
The
investment plan’s (un)specific course of action is to be found in the ever-present
admonition: "Past performance is no guarantee of future results" — just after
the recommendations were selected and made based on past investment performance!
Furthermore,
at the bottom of some obscure page, there is the often added subtle, oh so subtle,
warning that (because the investment planning report is so generic and because
the firm does not want to assume the responsibility for making specific recommendations),
"Product recommendations are not specified," and/or "For specific investment advice
please consult your financial advisor." Though
past performance can be a small part of the investment selection and investing
performance puzzle, an investment portfolio is not necessarily better constructed
or better protected because the beta is low, the alpha high, or because an investment
portfolio is on the efficient frontier: - There
are no fundamental causal relationships between these terms and a safe and sound
investment portfolio; only reflective ones.
- These
terms are not a measure of the true metal of an investment portfolio.
- These
concepts are merely mathematical indicators of the relative, historical performance
tendencies of an individual investment or investment portfolio as the markets
change.
- They are the
'glitter;' however, they do little to enlighten:
How
are the fruits and vegetables today, Joe? In
all the years I have had this fruit stand I have never seen the distribution of
returns for vegetables look so bad. You
will be glad to hear that as of today, oranges are on the efficient frontier,
but with betas a little higher than I like to see for this time of year. If
I were you, I would stick with bananas. They have beautiful, beautiful alphas
with a probability of very little expected risk based on the standard deviation
for bananas.
Joe, what about the future for fruits and vegetables? I
don't have any idea! 
Closing question,
"Then, why do you need the report?" Investors
want specific investment advice in the first place! Generic
is found and is of value only at the drugstore. Current
and projected budget, cash flow analyses, and personal balance sheets, due diligence,
investment merit, investment suitability, and thoughtfully
defined, relentlessly applied, and rigidly enforced investment selection and management
disciplines, rules, and procedures and portfolio design, management, and performance
disciplines, rules, and procedures, and the
prospects for the investing future should be the primary investment planning considerations. Plan
for today. Take
care of today. Depend
on today’s values and the dimension of time. The
future works out because we take care of the present with a vision of the future
and not because the past is used to predict the future. |