When it comes to defending portfolios, institutional investors should make like a cockroach and run in the opposite direction, says Bob Maynard, member of The 300 Club and chief investment officer at the $14.7 billion Public Employee Retirement System of Idaho, Boise.
Mr. Maynard has released a paper in his capacity as a member of the club — a group of investors that aims to raise awareness of market thinking and behaviors — titled “Managing Risk in a Complex World.”
The cockroach, he writes, lives in a “highly complex environment with one of the best long-term success rates of any creature.” Yet its only defense is to “run in the opposite direction from a puff of air.”
The equivalent, he wrote, is for investors to have a “very simple structure founded upon public market diversification with one basic defense mechnaism: see a volatile movement, react in the opposite direction.”
A simple structure and strategy, he writes, “has one of the best chances of surviving for many decades.”
In a telephone interview, Mr. Maynard said that tracking complex strategies is increasingly difficult.
“For a long time, I have been of the camp that the nature of the short-term markets ... is markedly different from a lot of the assumptions that are used for most of the standard tools (used) to track portfolios and quantify risk,” he said in the interview. “Most assume normal randomness.”
But, he said, the world is not like that in the near term. Rather, “it is earthquake math,” with “fat tails and high peaks. The problem with most of the tools ... is they work when we don't need them to, and don't when we do. They can fool you.”
The paper is available on The 300 Club's website.
