Is the model wrong, or is reality wrong?
From Carl Richards, as seen on garp.com
“Maybe, just maybe something is wrong with the model. Maybe there is nothing standard at all about risk. Maybe there is nothing normal about returns. Maybe risk is not like a little dial we can control on clients’ portfolios like we tune in a radio…Or maybe, just maybe, reality is wrong.”
This is a snippet from Mr. Richards’ short piece talking about what he’s learned since Lehman collapsed. (That last line is sarcasm, if you didn’t catch that.)
I wonder how many asset managers really think of modern portfolio theory as immutable. Most have to know it’s flawed. I suspect many adhere to it (and other imperfect models) because they have no choice. They have assets to invest and MPT is a convenient guidepost, however imperfect it may be.
As violent as the September thru February period was, at this point, many have moved past it. It was a big downturn, sure, but when the system was rescued, so were the troublesome theories and operating methods that led to the crisis in the first place. The Great Depression was so long and so deep, that folks couldn’t help but take certain lessons to heart … for instance, that debt is dangerous.
For much of Wall St., it’s back to business as usual.