The previous research puzzle stressed the importance of hearing (and truly considering) alternative points of view before making an investment decision.the research puzzle | The title was “point counterpoint.”  This one proceeds on to examine how investment organizations (and buyers of investment services) can benefit from having an independent review of their processes.

Reviews by outsiders come into play in a variety of ways.  Sometimes their use is enforced, as when independent monitors or consultants are required as a part of a regulatory action,the research puzzle | The Global Research Analyst Settlement had both; here’s a PDF of my series on it. but those are unusual cases.  Certain kinds of external reviews (such as third-party valuations, assessments of trading costs, and specialized performance attribution services) are common in the business, but those of investment process are relatively rare.

Organizations that are subject to due diligence reviews as a ... continues

In celebration of the new year, I’m looking at some big ideas.  The first was “the haircut,”the research puzzle | For new readers, these arrows in postings are used to provide additional information about linked material. which focused on the damaging but standard practice of using expected returns as the foundation for much investment planning.

The implementation of that idea would involve significant financial sacrifice, as institutions and individuals would be required to make hard choices to meet the new, more conservative plans.  It’s the right thing to do, but it would be painful.  Conversely, there are many improvements to investment decision making that don’t involve that kind of trauma.  All that’s needed is the will to do things better.

That’s the case with the need to hear both sides of a story before making an informed decision.  “Well, well,” you might say, “We always do that.”  I beg to ... continues

At the start of a new year, there is a tendency to think grand thoughts.  So, the first few postings of 2012 will focus on some big ideas about investment decision making.

They are all simple.  Not simple to implement, but simple in concept.  Yet they are practical, not theoretical.

The first I’ll call “the haircut.”  I speak not of a haircut on the stated value of a security for margin purposes, capital requirements, or the like, but rather of a haircut of expectations that should be a part of investment planning (and almost never is).

While it’s a bit of a fool’s game to predict asset class returns, it is necessary to have some baseline values as a framework for planning — and in some situations (as with pension plans) there is a requirement to put a stake in the ground with a specific expected return.  It’s most common to look to historical returns (like “the famous nine percent”the research puzzle | This piece is from that famous fall of 2008. ... continues

Does a strategy “work”?  Is a manager “good”?

Those questions propel the great wheels of analytical machinery that spit out recommendations on what to buy and what to avoid in the world of investments.  It can seem as if those who work on that machinery are like Charlie Chaplin in Modern Times, tightening the bolts on the gears one moment and being swallowed by the machine the next.Doctor Macro | Here’s a classic movie still of the scene. The answers get spit out until the world changes, the line is retooled, and things start all over again.

Some of us are ill-suited for an industrial approach to analytical work, which is why I’ve been writing pieces on “investment states and styles,”the research puzzle | Here’s the whole series. looking for ways to add value by redefining the process and/or the categories.  While I’ll do similar postings going forward, this one marks the end of that particular series.

A few years ago, I ... continues

The general theme of this slowly-evolving series of postings on investment stylesthe research puzzle | This PDF updates with links and descriptions as each posting is completed. is that an important part of the process of due diligence is finding different angles from which to view a strategy or an asset manager.

Anyone can look at past performance.  The more quantitative among us can also debate the evidence displayed by a variety of statistical measures, thinking that we’ll find a key to unlock the code as to which managers are good and which are not.  All of that has worth in the analytical process, but it’s also all backward-looking, and is almost always given too much weight by decision makers.  It is in the interplay between the quantitative measures (easy to get and generally cheap) and the qualitative aspects of due diligence (unfortunately, time-consuming and expensive) that the real insights are found.

As previous postings have indicated, often you are trying ... continues