The Irreplaceable Spark Conference - Part IV
Dimensions of Return
The first three installments in this series about ARCUK’s Irreplaceable Spark Conference are subtitled Values and Confidence, Discovering Independent Minds, and Radicals for Capitalism. That is because defined values and independent minds are the root cause of a capitalist society.
Of course, that society will never include everyone - and it doesn’t need to be a majority, but a plurality people living with rational ideas and habits would dominate the culture. In other words, defined values, and independent thought that are only dependent on the fundamentals of nature.
And in the natural universe, nothing is more fundamental than the Higgs boson – aka, the God particle. Accordingly, that is where Darius Gagne, CFA, CFP and chief investment officer for Quantum Financial Advisors (with a doctorate in physics) began his presentation subtitled “The Passionate Pursuit of Values.”
To me, the opening slide titled “Standard Model of Elementary Particles” was an interesting way to introduce the chart titled the “6-Factor Model of Stock and Bond Premiums” that was created by Dimensional Fund Advisors (DFA). And to better appreciate DFA’s ground-breaking achievements, here is an excerpt from Chapter 2 of The Moneyball Method,
The first S&P 500 index fund was created in 1973 by Rex Sinquefield at American National Bank of Chicago. Eight years later, Sinquefield co-founded Dimensional Fund Advisors (DFA) with David Booth, a former research assistant to Nobel laureate economist Gene Fama. Together, they transformed the investment management world with their price-driven, small company, value stock, quantitative research proposition.
Setting aside the efficacy of the DFA “premiums,” Gagne does not pay attention to macroeconomic forecasts, Fed policy prescriptions, or price targets. That is good, but what does this have to do with the Irreplaceable Spark Conference? Everything, as my previous three essays attest:
Part III: “Reject the Statist ideas of unjust prices and inefficient markets that infect economic analysis and market predictions.”
Part II: “A great place for anyone to start on their journey toward independence are the fundamental laws of economics and personal finance.”
Part I: “To waste energy trying to predict the uncertain future of capital markets takes time away from that which truly matters - taking ownership of your own future.”
True to the conference theme, Gagne made the applied Objectivism case with his “Mapping Capital Markets to Individual Financial Priorities” chart. The logic is to match your short term and essential goals with shorter term and lower risk securities and your long term and aspirational goals with longer term and higher risk securities. The effect is to create “buckets” of assets dedicated to certain spending goals, which is a popular concept because it makes sense – to a degree.
For implementation, high quality bond ladders were recommended for the essentials and diversified stock portfolios for long term desires. On the equity side, the Quantum portfolios were intentionally biased toward the DFA premium categories (size, price, profitability) and a “return” number was assigned to each equity asset class (large cap value, large cap growth, small cap value, small cap growth). Bear in mind, that may add potential assumption errors.
In addition, that “return” rarely (if ever) occurs. And to map long-term assets to long-term goals may ignore the fundamental dimension of return: the market itself. As Gagne confirmed, no analyst, strategist, or policy maker can predict or control the performance of capital markets. However, we can control market risk exposure and underperformance risk.
The premise is to avoid unnecessary risk and lifestyle sacrifice - and doing it purposefully is the essence of applied Objectivism – and The Moneyball Method:
In physics, Nikola Tesla believed the secrets of the universe lie in vibration, frequency and energy. For objective investors, Harry Markowitz discovered standard deviation, correlation and median return as the components of capital market efficiency.
Essentially, objective investors calculate their risk and spending capacity using the most reliable capital market assumptions possible. But to properly map the well-defined attributes of each asset class to individual financial priorities, you need well-defined cash flow objectives and a well-oiled Monte Carlo engine (not the car).
For those, we rely on the Center for Research in Securities Prices, an affiliate of the University of Chicago - and your essential data. What is missing from all this is the irreplaceable spark for becoming radicals for capitalism; the prime mover for strategy decisions: the objective performance benchmark.
The next article in this series will be the last and highlight another memorable speaker from the first Irreplaceable Spark Conference hosted by Ayn Rand Centre UK. Stay tuned!