In the process of learning screenplay writing, I came upon this old Jewish proverb:  “We see the world not as it is, but as we are.” In effect, one’s particular viewpoint becomes a prism through which we judge everything ... the opposite of an open mind. Unfortunately, we often make this worse by surrounding ourselves with people holding a similar viewpoint.   In doing this we are often unknowingly seeking validation.   It’s what behavioral economists refer to as affirmation bias.   But a preset viewpoint closes off other possibilities … including what might be unrecognized truth.  It may have been affirmation bias that led Jack Kennedy into Viet Nam or George Bush into Iraq. 

      In the investment business, consultants pool portfolio managers with the same investment style into what’s known as a style-box ... a structured form of institutional affirmation bias.  This creates a seeming reduction of risk … and an aura of sophistication.  Entire mutual fund organizations have been built on this marketing premise. The client is then advised to place a percentage of assets in each of the various created categories.  This diversification theory was developed in the 1950’s under the pseudo science of Modern Portfolio Theory.  Does it work?  It certainly didn’t work in the recent debt crisis.  Regardless of investment style, all stocks went down. 

      Well, what about the upside?  Ironically, when the market is going up, these various investment styles tend to cancel each other out.  Example:  When growth is in favor, value investing is definitely out of favor; when small cap investing is in favor, large cap tends to be out of favor.  Which begs the question:  When a portfolio manager’s performance is superior … is it him?  Or is his style just currently in favor?  There often is no clear answer.   

     So why is this shibboleth-style diversification- given credence at all?  I believe it is because it gives an investment advisor a shaman-like mystique with his client.  The advisor alone may know what styles are currently doing well; so it is in the advisor’s interest, perhaps even unwittingly, to perpetuate this canard.   Secondly, it is intellectually and emotionally appealing to a client … even though, in my opinion, it has no value in reality.  

      As the year 2010 closes there will, undoubtedly, be stories in the press about “The Lost Decade.” Equities have allegedly gone nowhere from 2000-2010.  But in this same time frame many opportunistic managers (like Contravisory) have been able to make money for investors.  How you may ask?  It is because they choose to see the investment world with an open mind … and not through any preconceived investment style.  In effect, they are style agnostic.   Such agnosticism in the stock market works best when others remain committed to an ideological viewpoint.  Given the consistency of human behavior, the best may yet be ahead of us. 

FRANCIS PATRICK BOLAND