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. |
Pie
Charts The
investment industry has created a new investment language over the last too many
years; pie chart.
Investment
firms and their advisors find that this investment graffiti makes it easy to generate
investment planning reports, to make recommendations, and to justify change based
on colors. Converting
data to pie charts lends itself to the generation of a wide range of splendid
graphic and data representations that obscure the issues, oversimplify investment
planning, and subliminally suggest that past investment performance will be, in
fact, future investment results. Pie
Charts and their relatives deaden the brain, suffocate rather than illuminate,
obscure rather than clarify, trivialize the task at hand, and leave out the details.
-
Shakespeare
did not write, "How do I love thee, let me show you this pie chart."
-
Michelangelo,
at the Sistine Chapel, did not think, "I will paint them a pie chart."
-
Steven
Hawking did not say, "The pie chart you see on the screen explains the issues
of quantum physics and black holes." What
would happen if pie chart were translated and became the universal language of
industry and the arts?
-
Your
Accountant: "I prepared your tax return for you in a detailed pie chart format
to give to the IRS." -
Your Attorney: "You will save some money if I do a multicolored pie chart
corporate restructuring for you." -
Your Doctor: "Here are your pie chart physical results. The pie chart indicates
that we should remove all of the yellow and add a little more red when we go into
surgery and open you up in a few minutes. By the way, you are in luck because
the sliver of black in the pie chart seems to indicate that anesthesia will not
be necessary while you are being operated on." -
Your Architect: "I show my designs in primitive pie chart rather than in
the usual, more traditional blueprint format to create a more natural impression
and to give you a better picture of what your new home may look like. Red represents
brick and green is for the lawn. The gray indicates that we will be using a lot
of nails. Oh yes, I almost forgot, the pie chart seems to indicate that the structure
should hold." Why
would anyone use something rather ambiguous, like colors, to explain something
that is quite clear, like numbers? The
reasons are to hide the numbers (not good), because the numbers are not understood
(worse), because the numbers are not known (worse yet), or to keep the recipient
from being too informed becasue the investment advisor is not well informed (the
very worst).
Pie Chart
Investment Planning If
you were building a home for your future, what would you think of an architect
who, while competing for your business, gave you your floor plan in pie chart
rather than as a blueprint?  
If you
were going to make decisions about your investment future, which illustration
below would be a better starting point? This? 
Or
This? 
Examples were randomly selected,
not related, and Gross Commissions were omitted.
For
me and from my experiences, I enjoyed devouring pie chart (not) competition on
a daily basis. The
Solution If
you are presently addicted to the primitive language of pie chart or if you are
suffering from pie chart withdrawals, we can help.
If you are in denial of your affliction and continue to be satisfied with
things as they are, obscure and superficial, may the force be with you.
How
do I know about all of this? I was once suffered from this terrible, disabling
malady. |