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Do you know those days where you forget a small thing and it causes a disruption to your whole day in unforeseen ways. Or something happens, totally out of your control, and disrupts your detailed plan of action. Wow, what irritation this can bring to us. You and I will try to avoid these blood pressure raising events by planning even more.You see, we all plan a lot in our lives, based on theories, experience and assumptions, but reality has its own laws. A plan is a good start, but it’s just that…
Have you heard of the Efficient Market Theory (EMT) and its close relative the Modern Portfolio Theory (MPT)? Yes, the one that is being touted by new online, software-based, financial advisors. EM theory says you can’t beat the market because it’s always perfectly priced. The MP theory is about how mathematical models show that investors should diversify because it reduces risk. These theories are very elegant and have a great following due to their convincing simplicity. However, these theories come with a great many assumptions and we know reality has its own laws. Twitter shares dropped 17% yesterday. Was it perfectly priced yesterday or today? Did you define your “risk” well enough so the MP model skipped Twitter in your portfolio? Remember that small item causing a disruptive chain reaction in your plan. A plan is a good start but it’s just that…
Do you know “Further Lane” in the Hamptons, New York? That is where the most expensive house in the U.S. is located ($147mln). The house was bought by an activist hedge fund manager. Do you think he has been investing according to the EMT and is applying MPT? Yeah… well…. he is a hedge fund manager, you say. But wait… guess who he bought the house from? A very successful value investor who has not used any leverage, values capital preservation and only does fundamental research. I ask again, do you think the value guy has been investing according to the EMT and applying MPT? Uuuuhm, NO! We at i-Cthru love elegant theories but follow proven success. And as for you, yes, in theory you could own this house too. So, in reality, you should start investing now. Follow success not theory.