Upsetting the status quo is the first step to valuable thought

Today we found a negative review of Juggling Dynamite by a new self-styled, “do-it-yourself” financial blogger. The blogger does not name himself, so I will have to call him DIY.
Of course, I don't expect that everyone will love my message.
Juggling Dynamite is a book that upsets the status quo of long-only proponents. Ideas that upset the status quo incite passionate responses. Most readers that have written to me use strong language such as “I loved your book.” A few, like DIY, dislike the message, and also respond rather passionately.
Actually it seems that there are two main groups that dislike the book’s message. The first are the do-it-yourself, self-proclaimed “experts” who are not actually money managers. This group usually cites training in other general areas to claim authority on money management. Since they do not have a management discipline themselves, they decide that passive-only is the best strategy. As I explain in Juggling Dynamite, passive strategies have worked fine in secular bull markets, and they have worked horribly during secular bear markets, with losses or no real gains even over 10- and 20-year periods. Long-only proponents naturally hope we are always in secular bull markets. History, unfortunately, does not support this hope.
To be clear, I am far from the only one expressing these concerns. Peter L. Bernstein, and other long-tenured independents, has been preaching “my sermon,” as Bernstein calls it, for the past several years. Just last week in his keynote at the CFA Forecast dinner, he alluded to the risk that we may be facing a 1970s-like cycle again.
There is a certain wisdom and risk aversion that comes from being a professional money manager. (Bernstein was one from 1951 to 1973.) As a discretionary fiduciary doing the job for a living, we managers are actually accountable and potentially liable for losses that our clients experience. I have always said that real-life responsibility for others is what separates the parents from the teenagers.
The other group that sometimes takes offense to the book are people who are long-only managers at mutual funds and other buy-and-hold firms. Since this group spend all their time selling people on buy and hold, my book tends to annoy and provoke more discussion and doubt than they care to entertain. My book explains all of these dynamics in detail for anyone who cares to learn more.
As for the criticism that Juggling Dynamite fails to include our performance numbers, I have heard this complaint from a few people now. I did not include our firm’s return numbers for a couple of reasons: One is because we are not running mutual funds, so we must model composites and every account is segregated with a different mix of fixed income and equities. The other reason is that I did not write the book as a sales pitch for our firm's approach (not everyone can be our client) nor a do-it-yourself book. The book makes the case for objective, tactical risk management, and I say that there are several valuations methods one can use to accomplish this. I also say that very few individuals will have the expertise and self-discipline to do it for his or herself. But, as I have said before, just because something requires great discipline and constant effort, it does not mean it should be avoided by those who have the foresight, system, and commitment for doing it. Admittedly excellent risk-adjusted managers are rare and valuable, but fortunately this doesn’t mean they don’t exist. I name several in the book, and I link to several more from my blog favourites.
The central point of Juggling Dynamite is to push back on the self-serving rhetoric of long-only investment sales, and to alert investors to the reality that we may well be in a different market cycle over the next several years than the one experienced over the '80s and '90s.
I am very grateful to DIY for linking us to the excellent paper by M. Faber, “A Quantitative Approach to Tactical Asset Allocation.” Although the method is simpler than the one we use, it does make the case for our approach exceedingly well. My partner and technical analyst Cory Venable published a similar paper explaining some of the basis for our methodology in the Journal of Technical Analysis, out of NY, NY in January 2005.

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One Response to Upsetting the status quo is the first step to valuable thought

  1. Anonymous says:

    The physics of the current economic and market reality are clear. Few people seem to understand that the only way we got through the last cycle in the shape we have has been due to a very long period of very low interest rates and an asset price bubble built on debt and financial innovation.
    If we look at the historical relationship between interest rates, inflation and money supply, we find that the current market crisis started at a point which has probably never before precipitated a crisis. Skipping the necessary detail and analysis, the world's financial system is very unstable and the two most likely potential outcomes are a period of high inflation and lower economic growth (stagflation) or an outright depression.
    The US economy has been dependent on an asset price bubble built on debt and by implication and association so has the rest of the world.
    The global financial system can no longer cope with the current level of debt. Take away the supply of debt and you take away the support for assets and expenditure. Take away consumer expenditure and you take away ……and so on and so on……………
    We have vast structural imbalances, the collapse of these imbalances will be ramified by the natural forces of the economic multiplier. Those who disagree ignore the impact of low interest rates, hedge funds and financial engineering on extending the structural imbalances to the point where a small subsector (sub prime) of small GDP component (4 to 6% of US GDP over the last few years) can impact the entire world's financial system.
    It has nothing to do with scaremongering or losing your cool, it is pure physics.
    Andrew Teasdale
    The TAMRIS Consultancy

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