Christopher Cole of Artemis Capital Management has an excellent new piece of \research out there and I just wanted to highlight some parts out of it today. He specifically targets traditional empirical views on things and mentions how the efficient frontier is no longer a valuable tool, and how fear and safety are both weak to live by in perspective:
“In a world where
global central banks manipulate the cost of risk the mechanics of price
discovery have disengaged from reality resulting in paradoxical expressions of
value that should not exist according to efficient market theory. Fear and
safety are now interchangeable in a speculative and high stakes game of
perception. The efficient frontier is now contorted to such a degree that
traditional empirical views are no longer relevant”.
He emphasizes that volatility-of-volatility as an important dimension in investing going forward:
“In this brave new world volatility is an important dimension
of risk because it can measure investor trust in the market depiction of the
future economy. The problem is that the abstraction of the market has become an
economic reality unto itself”.
He makes a case for ditching the traditional business school route; in the new world, we must be able to philosophize ideas that question traditional thinking:
“You didn't get your MBA to be an amateur philosopher - your
job is to make cold-hard decisions about real money - not read Plato. You are
out of luck. For the next decade this market is going to reward philosophers
over students of business. Why? Because the modern investor must hold several
contradictory ideas in his or her head at the same time and none of them really
make any sense according to business school case studies”.
On black swans:
“What are the “unknown unknowns”? Ask a psychic… I have no
idea (that is the point) but if someone put a gun to my head and forced me to
guess I would answer vol-of-vol itself. The more traders use ‘uncertainty’ as a
market timing indicator the more unstable and cross-correlated markets will
become. If you extend that concept to high frequency market microstructure and
take it to the logical extreme you may see the problem”.
He also mentions why he finds it a challenge to market his ideas because they are unorthodox, when in fact, those are the ideas that need particular attention:
“During my presentation they asked what “box does your core
strategy fit into?” I told them it didn't cleanly fit into any of the hedge
fund strategy “boxes” they routinely index. My response was not well received
and I was told verbatim that I had a “marketing problem” if my fund couldn't “fit into a box”. I understood right then and there why they had
diversification issues. I look at things very differently…. that marketing
problem is a competitive edge”.
Read the full piece here:
Artemis
