I am addicted to watching the Food Network and at all times of the day it is quite likely that my television will be turned onto this channel. One of my favorite shows is Chopped. The concept is simple.
Four trained chefs or cooks compete to turn a “basket” of chosen food into a delicious Chopped meal. The basket is usually filled with five or six items that are not easy to work with, hence the challenge. From odd ingredients, inadequate preparation and poor timing skills, so many things can, and usually do, go wrong.
It’s a bit like investing.
In the world of investing, there are two broad approaches, with the first being a traditionally active one, where managers attempt to find success with misplaced securities or market timing (when to enter or exit the market to seek a profit).
This first approach is similar to the Chopped challenge, which requires inventing a new and distinctive dish within a set time frame while using specific items. The chef that has the ability to be creative and conceptualize a dish usually has the advantage.
As with the investment world, the traditionally active manager locks in on individual ideas, which results in little flexibility and creates time constraints. The manager believes that there is information that is not reflected in the prices, giving him a unique ability to be successful. If this information proves not to be true, there may not be the ability to change the plan.
The second approach to investing is when the investment manager seeks to track the market as closely as possible and is known as index investing. The goal here is not to be creative or stand out, but to track the index and ride the market. The goal is to follow an established process as dictated by an outside party.
But the drawback of this latter approach is the absence of flexibility. As in Chopped, the contestants can’t substitute one ingredient – or stock – for another. The choices have been made for them and the results must be achieved in the designated timeframe.
But what if we had a system that combined the creativity of the first approach with the simplicity of the second?
In this third approach, the contestants do not face unnecessary constraints either in terms of time or ingredients. Instead, they assemble a broad selection of dishes from multiple ingredients appropriate for the season and at times of their choosing. This way they can focus on what they can control and eliminate those items that might restrict the success of their dish.
In the world of investing, we believe this third way is the optimal approach. The first approach of picking stocks and timing the market, like making an ingenious and delicious meal in an efficient and consistent manner, is a tough task – even for the masters. Cooking meals off a provided menu, like the index managers, can be inflexible and costly.
The third way of investing lies in diversifying your portfolio and defining your needs. Like building a perfect meal with your specific tastes.
We can research the dimensions of expected returns, design highly diverse portfolios that pursue market premiums and build flexibility into the system so that we efficiently and consistently serve up investment solutions for a wide range of needs.
Like a successful Chopped contestant…delicious!
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