The Myth of the Silver Bullet

There is no silver bullet. In life really.

But for some reason, people want to believe that there is a silver bullet when it comes to navigating one of the most complex things there is — the world of investing.

Throughout history there have been many attempts at creating this “silver bullet” and in each case they have been revealed for their shortcomings.

From the hype of the stock market in the twenties, to the housing market in the 2000's, people have many times had overly simplistic and over-confident assumptions about the markets, and in retrospect they have turned out to be wrong.

Unfortunately — and fortunately (!) — the world is ever-changing. The future is always different than the past, new risks emerge.

Things change.

That’s why overly simplistic investment approaches turn out to be “too-good-to-be-true.” Because they are.

Today, there is a new breed of this “silver-bullet” theory.

It comes in different forms: some call it “passive management”, some call it “risk parity”, and others just point vaguely to white-papers about what academic research shows.

Today’s article by Noah Pinion in the Atlantic elaborates:

Passive management means piggybacking on the wisdom of the market instead of paying one pro big bucks to try to out-guess the other pros. Exchange Traded Funds, offered by companies such as BlackRock and Vanguard, are one of the main passive investment vehicles that have emerged in recent years. Meanwhile, some big pension funds are turning to passive management. This could be the dawn of a new, laid-back financial age.

Such thinking is dangerous.

Similar to the way people pointed to the fact that the housing market never declined nationwide at the same time, these strategies have many assumptions in them, the primary similarity of which is that they believe that historical correlations will remain true in the future.

If there is anything we know about investing, it is that historical correlations are not a good predictor of future performance — and these assumptions fail when we need them most.

Unfortunately, this lack of a silver bullet presents investors with a difficult picture: simple approaches are almost certainly wrong, but more complex approaches are difficult and take a lot of time.

This exactly why we are building Artivest.

We believe that the world of alternative investing offers the kind of creative and adaptive approaches that investors need in order to navigate the changing dynamics of an uncertain future.

Active management like the kind featured at Artivest is no panacea.

However, the creativity that these strategies offer reflect the dynamic and changing nature of the global financial markets. They also acknowledge the danger of any one-sized-fits-all silver-bullet strategy.

We look forward to launching soon to share more.