The Tao of Portfolio Management
July 21, 2013·0 comments
Portfolio managers and stock pickers use the same vocabulary but see entirely different things when they look at a portfolio. A top-down manager sees a constructed object with aggregate characteristics to manage. A bottom-up investor sees a collection of individual bets. Yet both are evaluated and pressured to operate as though they're building the same thing.
- Stock pickers are drowning in aggregate metrics. Volatility measures, factor exposures, correlation data, performance benchmarks. Everyone assumes managing these signals is essential to controlling risk properly.
- But fundamental investors shouldn't logically care about these metrics at all. A portfolio to a stock picker is a container for individual positions, not the thing being managed. The usefulness comes from the space inside, not the vessel itself.
- When bottom-up investors start adjusting individual holdings to manage portfolio-level characteristics, they've made a logical error. They're treating aggregate properties as if they necessarily apply to each individual member, mistaking a system-level pattern for a component-level attribute.
- This behavior happens constantly because it becomes the rational choice despite being wrong. Institutional investors ask the same questions about all portfolios. Conforming to these expectations becomes necessary, even for managers who privately believe the approach is inconsistent with their strategy.
- Every portfolio risk management tool available treats the portfolio as the object being directly managed. None are designed for an investor who sees the portfolio merely as a container. What happens when the framework itself is built for the opposite worldview?
Subscribe Today to Read More
Unlock instant access to this and hundreds of other evergreen essays that explore the world of narrative through hard science and human wisdom.
- Make more informed decisions as an investor and citizen.
- See through the nudges of Big Politics and Big Media.
- Become a better consumer of news.
- Maintain your autonomy of mind in a swarm of narratives.
- Join a community of more than 100,000 truth-seekers.
Looking for Deeper Insights?
Unlock exclusive market intelligence, trade ideas, and member-only events tailored for investment professionals and active investors with Perscient Pro.
VISIT PRO
DISCLOSURES
This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
Comments
Start the discussion at the Epsilon Theory Forum...