The class of those who have the ability to think their own thoughts is separated by an unbridgeable gulf from the class of those who cannot—-Ludwig von Mises
Orthodox thinking will keep you out of trouble. In the investment industry, if you build a client’s portfolio in rigid conformance with Modern Portfolio Theory, your firm will back you and it is unlikely that you will ever be successfully sued, regardless of how horribly things turn out for the client. And make no mistake—building portfolios based on mean variance optimization doesn’t have a very good track record.
Unorthodox thinking, as uncomfortable as it may be for some, is also the only way the human race advances. After all, nearly every current orthodoxy was once out of the mainstream. It’s good to have new ideas bubbling up, prepared to take the place of our current king of the hill if they can demonstrate their worth in practice. (Theory that doesn’t work in practice isn’t much of a theory.)
I’m encouraged to see factor-based investing and broad diversification advancing at the expense of Modern Portfolio Theory. Relative strength tests well as a return factor, as do value and low volatility.
HT to Michael Covel
