Today’s note, “ You Had One Job”, takes a new look at portfolio construction and alternative investment strategies.
Good dog trainers will tell you: every dog needs a job. It's true for the pack, and it's true for the portfolio. Every investment should accomplish a specific job in a portfolio, such that diversification emerges from the combination. But in the same way that it's a common mistake to get a dog for the life you wish you led rather than the life you actually lead, so is it a common mistake to make an investment for the portfolio you wish you had rather than the portfolio you actually have. This is particularly true with alternative investments, which is why they don't FEEL satisfying to most investors, even if the performance is okay.
A better way to think about portfolio construction? Step One: write down the macro scenarios your portfolio needs to confront successfully. Step Two: figure out the jobs your investments need to accomplish by immersing yourself in the stories of investors who confronted these scenarios in the past. Step Three: evaluate your managers for clarity in knowing their job and for a demonstrable process in achieving it.
The protection of the pack has been the human animal’s source of strength, in both fact and spirit, for a couple of hundred thousand years now. I think we’re going to need it over the next few years, too.
Some good news regarding Salient and Epsilon Theory …
As some of you may have noticed, last month we made an announcement regarding some executive changes in the Asset Management group at Salient. My friend and partner Rusty Guinn will be managing the division as Executive Vice President, and I’ll be his right hand as Chief Investment Strategist.
I’ll be discussing current market conditions on the Tactical Tuesday call, presented with our friends at Broadmark, next Tuesday, Nov. 8 (Election Day!) at 2p ET / 11a PT. The participant toll-free number for that call is (800) 905-9496. Please note that access to the call is limited to financial advisors and investment professionals. Click here to add the call to your calendar.
Also, Podcast #12 – “Karnak” – is up on the Salient website, as well as on iTunes, GooglePlay, and Stitcher. I used to be a patriotic guy and a value investor. And then 2008 happened, ripping away the pleasant fiction of what I used to believe and revealing the naked sinews of true power in this country. In so many respects, I’m having unpleasant flashbacks here in 2016, as the similarly pleasant fictions regarding media and politics are being stripped away.
All the best,
Ben
W. Ben Hunt, Ph.D.
Chief Investment Strategist
SALIENT
Houston, San Francisco, New York
T: +1 713-548-2627
E: bhunt@salientpartners.com
I’m researching the Narrative Machine in real-time and sharing my work on the Epsilon Theory website.
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2016_11_04 You Had One Job.pdf
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