[Research has been coming out that seriously challenges conventional investment wisdom and endeavors to systematically bash down many of the portfolio management pillars that investors have steadfastly been reliant on. One example is the latest Canterbury Market States Study that provides statistically relevant evidence that markets are not random nor do they behave in a normally distributed pattern. Implications are far reaching and putting into question many strategic portfolio management methodologies, risk/reward metrics and also whether portfolio management decisions should be based on subjective views of the investor’s risk tolerance and personal financial objectives.
It is important to keep up with these types of disruptive research efforts because it is only in these challenges of old ways of thinking and long held assumptions that true investment management innovation can happen.
To further explore this new ongoing research effort, the Institute for Innovation Development recently talked with Institute member Tom Hardin, managing director and chief investment officer of Canterbury Investment Management – an investment advisory firm specializing in providing financial advisors, institutional investors, and retirement professionals with an adaptive ETF portfolio management solution built on defined rules and evidence-based results. Focused on their proprietary Portfolio Thermostat Strategy and the Portfolio Thermostat Fund (CAPTX), Hardin warns advisors and other money managers about the risks in not challenging “conventional wisdom” and recommends how they can position themselves to take advantage of a new era of investment thinking and opportunity for investors.]
Hortz: Please give us some background on your research efforts. What were your motivations and thinking behind how you decided on this research path that you have been taking?
Hardin: My motivation to rethink portfolio management strategy and to pursue an alternative path is two-fold. One motivator comes from decades of personal observations that made it crystal clear that traditional portfolio management, quite simply, does not work during volatile bear markets.
The second is a much higher motivator that stems from my deep discussions with affluent clients and financial advisors. Many surveys have confirmed that both, advisors and their clients, lack the confidence that their existing portfolio can handle the next market downturn. As a portfolio and risk manager, I decided that there had to be a better way to manage the risk of inevitable volatile bear markets, while providing advisors and investors peace of mind.
About 15 years ago, our team here at Canterbury began a quest to research and challenge the validity of all previous investment theories and the assumptions that were used to form traditional portfolio management practices. We took every known assumption that has been around prior to the turn of the century and questioned them all. Guess what? We found that the vast majority of the old assumptions that have become “conventional wisdom,” were flat wrong.
Hortz: As a researcher, how do you go about disproving old and developing new investment assumptions and portfolio management practices?
Hardin: As far as disproving old assumptions and practices, we begin by asking a logical question… Is doing what I am doing now getting me the result that I want? If I am not getting the result I want, then ask... is there something wrong with the process being used, or the assumptions that the process was built on? We found that more often than not, the failed management process was based on flawed assumptions.
One of the best ways to disprove old assumptions, or to develop new ones, is to think opposite… For example, take the keystone assumption that traditional portfolio management was based on, the risk/reward relationship. The assumption is that if one is willing to accept more risk and stay invested for a long enough time, then he or she should be rewarded with higher returns. What if I said the opposite? Taking more risk, over time, would be more likely to produce poor results, instead of higher returns.