The Law of Causality is the Law of Identity in action. If an investor’s primary investment objective is to live the one life they have with confidence, investment success or failure must be measured by looking into the future, not back into the past.
The corollary to this is the traditional industry refrain, “past performance does not guarantee future results.” Quite true, and another essential step up the conceptual ladder is - respect the uncertainty of the future. However, this tends to be ignored by traditional industry “best practices” because it would likely render economic and market forecasters irrelevant.
The objective alternative to subjective forecasts is quantitative analysis. At Affluent Capital, our advisors combine the timing of an investor’s cash flow objectives with 1000 lifetimes of random simulations. Each potential outcome, for any investment strategy, is calculated using the most reliable, historical capital market assumptions available.
For GM Billy Beane of the Oakland Athletics baseball club, this meant replacing members of his scouting department with SABRmetrics. It measures the actual game performance of individual players, compiles the data, and organizes it into a useful structure. In epistemology (theory of knowledge) this is called logic – evidence, causality, and context.
Known famously as Moneyball, the 2002 Oakland A’s revolutionized baseball after winning the AL West with the lowest payroll in baseball. At the time, his methods were reviled by his scouting department and mocked by baseball industry experts. Yet Moneyball won, and for the same reason that a former Army Chief of Staff once said to his Generals, “if you don’t like change, you’re going to like irrelevance a lot less.”
Traditional baseball metrics like Batting Average and RBI’s were replaced with On Base Percentage, and supported by the subsets - strikeouts, home runs, and walks. Like a batter cannot control the position of the fielders, or their choices and skills, an investment manager cannot control the price discovery inherent to liquid capital markets.
Paradoxically, if financial industry “scouts” could predict markets and discover mispriced securities, and do it consistently, their outperformance would not mean more dollars of future wealth! Think of that - the timing of cash flow and sequence of returns can have a greater impact on success or failure than the sacred industry “best practices” of asset allocation, security selection, and market timing.
Another traditional bromide is “days out of the market,” and its used to keep clients invested and “stay the course” lest they miss the top ten days of market performance. Does anyone ask, what happens if you miss the bottom ten days of a market free-fall? We do, yet neither idea is relevant to measuring success.
Through the advisors at Affluent Capital, our exposure to risk assets is predicated on objectively measured confidence. The new performance benchmark is meeting and exceeding our client’s defined goals for dollars of future wealth. That is the performance standard, not historical industry benchmarks.
Because our primary purpose is for our clients to live the one life they have with confidence, this defines fiduciary responsibility better than any government regulation.
CONTACT USto set up a complimentary consultation to discuss any questions you may have. We’ll help you get your finances in order so you can focus on your life.
Live the one life you have with confidence.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.