Courage Over Convention

Summary:

In this episode of Courage Over Convention, Woody Wiegmann talks about the social influence con behind investment management. He argues that many financial advisors still rely on the same old passive investment strategies that may seem unique but are strikingly similar to what everyone else has. He emphasizes that the key to successful investing lies in embracing diversification and seeking strategies that serve your best interests.

Transcript:

Welcome to another episode of Courage Over Convention, a podcast aimed at challenging the cons behind conventional wisdom. Before we dive in, I want to emphasize that this podcast is not investment advice. We encourage you to do your own research and consult with a financial professional before making any investment decisions.

Today's episode is aimed at helping you avoid the social influence con behind investment management. The narrative is from a recent blog post of mine titled "𝗪𝗵𝗲𝗻 𝗦𝗶𝗺𝗽𝗹𝗶𝗰𝗶𝘁𝘆 𝗟𝗲𝗮𝘃𝗲𝘀 𝗮 𝗠𝗮𝗿𝗸: 𝗛𝗼𝘄 𝗖𝗼𝘂𝗻𝘁𝗲𝗿𝗳𝗲𝗶𝘁 𝗢𝗰𝗰𝗮𝗺'𝘀 𝗥𝗮𝘇𝗼𝗿𝘀 𝗖𝘂𝘁 𝗗𝗲𝗲𝗽."

Despite the dramatic losses in bonds (record-setting losses last year), it's baffling that the memetic power of oversimplified investment strategies remains unshaken.

And yet many financial advisors are still capitalizing on the same old meme: the best approach is a passive, buy-and-forget mentality.

With their eyes on the prize of client retention, they're still serving up the same one-size-fits-all portfolio that, at first glance, seems unique but is strikingly similar to what everyone else has.

Maybe they added a 2% position in commodities. What a fiduciary! Thanks!

They're still playing it safe, catering to the echo chamber, and steering clear of the added effort required to maintain a "different" portfolio. In other words, they're playing the social influence game at your expense.

The classic X% stock, X% bond (perhaps with a sprinkle of REITs or gold) portfolio may seem like the epitome of simplicity, but it's far from it.

Contrary to what the proponents of this approach might want you to believe, a truly "simple" allocation would hold every asset in the investable universe.

And here's where things get interesting: when we embrace the idea of diversification as our guiding principle, we discover strategies that may appear "complicated" but hold the key to reducing risk and enhancing returns.

Take, for example, systematic managed futures or CTA strategies. These investments involve a diverse range of markets and bet types (meaning they will take long or short positions depending on a given market's trend).

This adds an additional layer of diversification beyond market diversification.

Adding these elements to your portfolio can limit the severity of drawdowns and enhance long-term investment returns.

The bottom line? Don't be fooled by the counterfeit Occam razor the financial world sells you. True simplicity lies in embracing diversification and seeking strategies that serve your best interests.

Keywords: Courage Over Convention, investment management, diversification, financial advisors, passive investment, social influence, one-size-fits-all portfolio, risk reduction, enhancing returns, systematic

Summary:

Transcript:

The rationale behind my assertion here is embodied in the paper’s most salient quote. The authors write: "The significance of foundation models can be summarized by two words: emergence and homogenization. Emergence means that the behavior of a system is implicitly induced rather than explicitly constructed; it is both the source of scientific excitement and anxiety about unanticipated consequences. Homogenization indicates the consolidation of methodologies for building machine learning systems across a wide range of applications; it provides strong leverage towards many tasks but also creates single points of failure."

So many applications now rely on ChatGPT. It is an enormous monopsonistic force. It has become, as Musk tweeted on Feb 17th, "a closed source, maximum-profit company effectively controlled by Microsoft."

This lack of diversity and redundancy in the AI ecosystem has already revealed the potentially dire consequences if the foundation model fails or is compromised.

While the CRFM and Stanford article discusses various aspects and implications of foundation models, it raises several problems, but does not go so far as to hint at a viable answer. This is, of course, to be expected in an academic paper. But still. C'mon. The answer is clear: open-source competition.

Firms like Stability AI are essential if we are to allow the private sector to drive growth in a market that is genuinely vital to national security, and the health, happiness, and prosperity of the citizenry. 1.73 billion dollars was allocated toward non-defense-related AI R&D from the U.S. Federal Budget last year, according to a recent release from Stanford. Meanwhile, Microsoft's revenue was a touch over 203 billion on the year. Clearly, collaboration and intervention via incentives, immediate intervention, is our only hope.

Keywords: