An Introduction to Adaptive Investing

Most investors, especially institutional investors, follow the wrong processes, says Ben Hunt of Salient Partners. Here’s a good article he wrote recently on the high points of his theory, which he calls Adaptive Investing. It’s also entertaining, especially if you don’t mind The Godfather trilogy.

It’s our acceptance of The Central Tendency as The Way The World Works that transforms our healthy respect for econometric modeling into an unhealthy trust in econometric modeling. It’s what creates our unhealthy trust in projections of asset price returns. It’s what creates our unhealthy trust in projections of monetary policy impact.

It also creates an unhealthy trust in the mainstream tools we use to project risk and reward in our investment portfolios.

I’m not saying that The Central Tendency is wrong. I’m saying that it is (much) less useful in a world that is polarized by massive debt and the political efforts required to maintain that debt. I’m saying that it is (much) less useful in a market system where exchanges have been transformed into for-profit data centers and liquidity is provided by machines programmed to turn off when profit margins are uncertain.