Modern Portfolio Theory or Finance for the clueless

Modern portfolio theory is claimed by its adherents to be one of the cornerstone of modern finance. This combined with other academic finance jargon such as Beta, Efficient frontier, CAPM, etc are taught as medicine to fools who go to attend MBA classes or choose to take academic finance classes. In case you jump to conclusions at this point, thinking that I am a whimsical egomaniac, let it be known that I was once one of these fools.

To give credit to the theory one might say it is for people who are complete idiots when it comes to business, trading and investing. Because for these people if they create a diversified portfolio - fundamentally that is what MPT boils down to - they should be fine. Engineers can go back to fixing bugs and doctors can go back to fixing patients and all will be fine. By minimizing their risk through diversification or taking an average amount of risk, they will do better than even bigger idiots - folks who think that putting their fiat currency wage earnings under their mattress or in a savings account would save them from the vagaries of inflation.

What is so great about coming up with a huge theory that your grandma already knew by heart - don't put all your eggs in one basket.  But telling people false theories such as EMH etc what these people have done is to lull the masses into a false sense of complacency. Don't even try to understand financial markets. Don't understand trading, don't understand the psychology of investing or markets. None of this matters - just put all your money in a broad market index of stocks and bonds and go home. Its utterly useless to understand psychology of the markets - behaviour of crowds, hurding, pump and dump schemes etc.

To be continued.

Crypto Poem

Aha Bitcoin, Litecoin and Ethereum
Make my head spin with delirium

So many ICOs and so much greed
Remind investors of Tulip breed

When the clouds clear and the future unveiled
Some will survive and some will get buried

Who cares!  enjoy the fun while it lasts
In the end Bitcoin will stand like a signal-mast

Bitcoin for a crazy world!

Lately I have seen a lot of negative news about Bitcoin in financial media. As we all know the financial media is mostly written by MBA types or the types that go for journalism degree. These folks are mostly about superficial things. In the case of MBA types, it suffices to say that they do not appreciate anything but money. In other words, an MBA type has no aesthetic sense for anything - in technology, or in art, etc. All they care about is money and how to use others who are less cunning than them for their own purpose.

For financial journalistic types, it is safer to say that one should not expect this type of folks to write about something completely revolutionary. They would write safe (as understood by their bosses) articles for their conservative readers. Also do not expect this type to be too deep in scientific subjects. The fact they went to journalism degree, after all, is mostly because they were not too good in hard sciences, math or computer science.

There is so much FUD spread by these people on financial media that it is unfathomable. Bitcoin went from 1000 to 17000 in a matter of 11 months, completely ignoring these folks. Still they would not take heed and do their due diligence. Before writing about bitcoin, they should read about cryptography, databases, digital currencies and try to envision a future without banking intermediaries.

My theory is that Bitcoin is an asset class for a crazy world. A world where  arrogance, overconfidence and hubris of the world leaders -- running financial economies with infinitely printable fiat money -- have no bound. It is good to have a few bitcoins in your portfolio for the day when something blows up in the financial world somewhere. Given the way the money is being debased by the central banks, the possibility of a blow-up in the financial world is not too far fetched.

Beware of free

As rational human beings we love free things. But on further reflection it is seen that - many things come to us as free, but end up costing us a lot. An example is reading free news on news media. We are addicted to news these days. It is everywhere - TV, Internet, Newspapers and so on.

Day in day out loners read these news items and respond to them emotionally or in an exaggerated manner. Many of them end up acting on these items and then on average they lose money on the basis of this information.

The reason this happens is that most of us have a 'faulty' biased brain filled with bunch of information and heuristic rules. When we see a news item like -- XXX commodity down 50% from its all time peak, we think based on a rule that was taught in a class, may be by a manipulative asshole instructor, that when you have a 50% sale you should take it usually. This rule might be applicable for broad stock market index like S&P 500 where the risk of a sector permanently going down has been diminished, but it cannot be applied to a specific stock or a sector. Why? Because it could well be that this stock or sector is in a secular decline because of fundamental shift in technological usage or because of a change in consumer tastes. Would you have thought of investing in a typewriter ETF when they were down 50% from their peak? It may very well be that a particular sector/market is on a permanent decline because of the newer technology replacing it.

Many people got burnt looking for a 'sale' in the sector investing. They bought OIL ETFs in 2015 when news media was filled with news of oil prices getting whacked.

There are many such examples of news media and wall street mouthpieces selling 'excitement' to the public. Once when I was booking a room outside a hotel lobby, the place was filled with people going to watch a football game in a nearby stadium. I remember commenting to the attendant that the crowds going to the stadium look really happy. He said, "They look much more happier going then when coming back from the event."

I guess once the excitement of the expectation passes away we become more sober in our assessment of the reality.