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A Great Rabbi  stands, teaching in the marketplace. It happens that a husband finds proof that morning of his wife’s adultery, and a mob carries her to the marketplace to stone her to death.

There is a familiar version of this story, but a friend of mine – a Speaker for the Dead – has told me of two other Rabbis that faced the same situation. Those are the ones I’m going to tell you.

The Rabbi walks forward and stands beside the woman. Out of respect for him the mob forbears and waits with the stones heavy in their hands. ‘Is there any man here,’ he says to them, ‘who has not desired another man’s wife, another woman’s husband?’

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They murmur and say, ‘We all know the desire, but Rabbi none of us has acted on it.’

The Rabbi says, ‘Then kneel down and give thanks that God has made you strong.’ He takes the woman by the hand and leads her out of the market. Just before he lets her go, he whispers to her, ‘Tell the Lord

Magistrate who saved his mistress, then he’ll know I am his loyal servant.’

So the woman lives because the community is too corrupt to protect itself from disorder.

Another Rabbi. Another city. He goes to her and stops the mob as in the other story and says, ‘Which of you is without sin? Let him cast the first stone.’

The people are abashed, and they forget their unity of purpose in the memory of their own individual sins.

‘Someday,’ they think, ‘I maybe like this woman. And I’ll hope for forgiveness and another chance. I should treat her as I wish to be treated.’

As they opened their hands and let their stones fall to the ground, the Rabbi picks up one of the fallen stones, lifts it high over the woman’s head and throws it straight down with all his might. It crushes her skull and dashes her brain among the cobblestones. ‘Nor am I without sins,’ he says to the people, ‘but if we allow only perfect people to enforce the law, the law will soon be dead – and our city with it.’

So the woman died because her community was too rigid to endure her deviance.

The famous version of this story is noteworthy because it is so startlingly rare in our experience. Most communities lurch between decay and rigor mortis and when they veer too far they die. Only one Rabbi dared to expect of us such a perfect balance that we could preserve the law and still forgive the deviation.

So of course, we killed him.

– San Angelo, “Letters to an Incipient Heretic”

? Orson Scott Card, “Speaker for the Dead” (1986)

It takes a village to manage a portfolio. Or a country. Discipline to maintain process. Flexibility to tolerate deviance … err, I mean tracking error. We need better Rabbis. Who we don’t kill.

n all cases, not only in the two which we have analyzed, recovery came of itself. But this is not all: our analysis leads us to believe that recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another crisis ahead. Particularly, our story provides a presumption against remedial measures which work through money and credit. For the trouble is fundamentally not with money and credit, and policies of this class are particularly apt to keep up, and add to, maladjustment, and to produce additional trouble in the future.

? Joseph Schumpeter, “Depressions: Can we learn from past experience” (1934)

Schumpeter famously wrote that his personal goals were to be the smartest economist in Europe, the finest horseman in Austria, and the most accomplished lover in Vienna. He judged these to be equally difficult and equally praiseworthy accomplishments. I think he over-rated the whole economist thing.

The Hunt family has three dogs, each with a distinct job. The German Shephard’s job is to protect. The

Sheltie’s job is to herd. The Golden’s job is to love. Each dog is very good at its job, sometimes in an annoying way (particularly the Sheltie), but they’re oh-so happy with what they do well, and it fits our entire family dynamic. There are sacrifices we make for having this particular pack, like we can’t have any other dogs drop in for a visit or else the GermanShephard might eat them, but the positives far outweigh the negatives. We’re a solid pack, and there’s nothing quite like that feeling of knowing that the dogs are there for you and you for them, and that the entire Hunt family – human and dog alike – is stronger not just in fact but in spirit for giving ourselves over to the pack.

It’s the same with investment portfolios. Every dog needs a job, and every investment does, too. No single dog can be all things to all people, and neither can a single investment. Nor can any pack of dogs accomplish anything and everything you like.

The biggest mistake people make when they get a dog is

trying to make the dog fit into the life they wish they led, rather than the life they actually lead. You better know thyself before you get a dog, much less a couple of dogs, and it’s exactly the same thing with making an investment. But if you get it right … man, there’s nothing better. Like a confident pack, a confident portfolio provides both streng thin fact, as well as – and this is the part I bet you’re missing right now and the focus of this note – strength in spirit.

In my experience, most people don’t particularly like their portfolios, much less get a lift from them. They tolerate their portfolios. They may be pleased enough with the performance, but they don’t get a psychic boost from their portfolios. They don’t enjoy the confidence and strength of spirit that a solid pack or a solid portfolio can provide. And before you say that this really doesn’t matter to you, that so long as your portfolio performs up to a certain standard you could really care less whether it provides any “psychic strength” or any such mumbo-jumbo hogwash, let me stop you to say that you’re not just wrong, you’re completely wrong. In truth, the only thing that matters to you about your portfolio is its psychic reward, the positive way it makes you feel.

Now don’t misunderstand me. Performance is part of that psychic reward, usually the biggest part. But in the same way that the Economic Machine is part of a larger social phenomenon I call

the Narrative Machine, in the same way that Newtonian physics is part of a larger set of natural laws called Einsteinian physics, in the same way that Game Theory is part of a larger intellectual construct called Information Theory, so is “performance enjoyment” part of a larger behavioral attitude toward our portfolios. I first wrote about all this in Epsilon Theory with It’s Not About the Nail” and “It’s (Still) Not About the Nail”, and it’s high time I picked up on this thread as part of the current Anthem!” series.

The fact is that most model portfolios that come down from on high at the big wealthmanagement firms like UBS or Morgan Stanley or Wells Fargo suggest that alternative strategies should be anywhere from 10-20% of a portfolio. But the fact is also that most actualportfolios for actual clients have a small fraction of the recommended allocation, say 3-4% at most. Why the disconnect?

To answer that question, let me start by telling you what the answer is not. The answer is NOT that financial advisors or professional investors need more “education” about the virtues of an alternatives- heavy portfolio. You can just smell the smarter-than-thou elitism that oozes from the word “education” in this context, the implication that you are stupid if you don’t have a heaping plate of alternative investments in your portfolio. I think that this focus on “education” is the single most tone-deaf and wrong-headed aspect of the business of modern investment management, which I suppose is a pretty bold statement given the sheer number of tone-deaf and wrong-headed things in our line of work. But there you go. I see it every day. Another email, another webinar, another white paper, another earnest effort to “educate” financial advisors about alternatives.

Please. The truth is that it is entirely rational for financial advisors to be wary of alternative investment strategies. Why? Because a)they’ve been pushed onto financial advisors as some sort of wonder dog that can be all things to all portfolios, and b) they’ve been pulled into portfolios by financial advisors who were thinking more about the portfolio and clients that they wish they had rather than the portfolio and clients that they actually have. As a result, the alternatives portion of most real world portfolios, even if it’s only 3-4% of the total, is probably the least satisfying aspect of those portfolios. They just don’t feel right to most investors and advisors, regardless of performance.

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