By Miles Clyne
As much as I like to rail on about what we do at the Tycuda Group, it is probably equally important to share what we don’t do. Here is a list of some of the activities we try to avoid:
• We don’t think you should sell your winners after a certain level of gains. We only sell when the growth potential starts to weaken.
• We don’t think you should “average down” on (a.k.a buy more of) positions that are at a severe loss. Be in the habit of cutting your losses sooner. Only buy them back when they have the best potential for gains. By saying we don’t believe in the above, it pretty much says we don’t believe in holding a static asset allocation. Consequently, we don’t believe in Modern Portfolio Theory.
• We don’t believe most “Risk Profiling” questionnaires get it right. This is simply because at various times in market cycles either stocks or bonds could be the most risky asset class. There will also be times when even GICs can be the most risky. If you are risk-averse, your asset allocation weightings should change as various assets take on too much risk.
• Consequently, the same logic applies to the concept of aging. We do not agree that the older you get, the more you should limit your exposure to certain asset classes. At all ages you should avoid the asset classes where market conditions are generating excessive risk.
• In most cases, we don’t think diversification is applied intelligently to portfolios. Diversification too often becomes dilution, which can do more harm than good.
• We don’t think you should rebalance your portfolio as frequently as most firms suggest. Our research identifies that in most cases rebalancing too frequently is a contributor to lower long-term returns.
• We don’t think you should fear investing. We think you should be educated in better practices that can deliver far better results than average.
• We don’t think RISK is a 4 letter word. We think it is an 11 letter word: OPPORTUNITY. Risk needs to be assessed and determined if it is an opportunity. Indiscriminate risk-taking is foolish. We don’t think you should take our word. We think you should make us prove our beliefs to you. Data does not lie.
Going against the grain can be good or bad. Most investment firms choose not to for good reason. Back in the 1950s a guy named Harry Markowitz came up with Modern Portfolio Theory (MPT). Back then the financial industry was pretty simple. Very few managed products like mutual funds existed. Most people bought stocks and bonds. By the 1970’s, MPT became mainstream and Harry was given the Nobel Prize in economics for his work. The financial industry seized upon MFT as fact, as opposed to theory and it became “prudent”. Anyone not using MPT was considered unprofessional and uneducated. Now, after almost 70 years, it is still promoted as a prudent practice, regardless of its known flaws. The M for modern is still used. I am pretty sure someone made an intentional error in the 70s - I think that the M stands for Marketing.
I’m reminded of Baron Lister, who was held in contempt by his fellow surgeons when he first suggested that hand washing prior to surgery should be standard practice in the operating room. Seems ridiculous to think anyone would argue this, but in the 1880s, it went totally against the beliefs of the day. The Baron was responsible for saving countless lives because he refused to accept the standards of the day.
Because something is the norm doesn’t mean it is right or wrong. But when we ignore evidence, we have to ask ourselves whose interest is being served? MPT has provided the global financial industry a very simple process for managing trillions of dollars of assets and a justification for higher fees. Would it be in their best interest to retool and apply a process that required much more labor and thought?
There are great strategies and disciplines all around us that go against the grain. Our job as investors and advisors is to find them - then build great portfolios, regardless of whether they challenge the status quo.