Tagged: Pioneering Portfolio Management

Perverting Professional Usage

I should sit down and ponder sometime why it is that I’ll occasionally respond to grocery-store cashiers’ casual questions as if I believe in their pretense of interest. When the bearded youth asked me last week what I’d been doing with my day, it might have been his earnest look– someone so obviously as-yet unjaded by life couldn’t be totally insincere, after all– that prompted me to admit, “Finance,” followed by the qualification (I have to protect my liberal-arts cred, after all) that I never in the most implausible scenarios I’d imagined for my life ever thought I’d be saying that. Turns out (surprise, surprise) we were both frustrated writers, and I went on my way as the wordsmith of Trader Joe’s asked the next customer the same question.

But enough with the evidence of failed human connection; let’s talk this crazy numbers stuff I confessed to have been dabbling in. Much as I’ve learned about– and enjoyed– budgeting and non-profit financial management over the past few months, my eyes still assume they should glaze over when faced with a new quantitative concept or piece of loosely-defined jargon (“best practices,” anyone?) that could almost mean anything you’d like it to mean. I’m not an entirely stupid person, but even with all my fancy education and newfound fascination, this stuff can be simultaneously tricky and tedious. Hence, based solely on the technical ideas involved, I’m unsurprised that history has been filled with banking scandals, spectacular economic crashes, and difficulty in regulating the whole mess– and that’s without taking into consideration a lamentable human baseline of greed and childish competition.

The non-secular hand’s about to wreak havoc on your concepts. Guildford Cathedral, courtesy of Gordon Lawson on Wikimedia Commons.

Currently, I’m making my mostly comfortable way through a standard on institutional investment– and I’ve been pretty pleased with how straightforwardly written and clearheaded it’s been. But then I came across this gem: “Combining the tendency of a high risk premium to mean revert with the observation that the equity risk premium seems to decline secularly, justifies an assumption of U.S. equity returns of 6 percent real with standard deviation of 20 percent.”* Say what? Right: it sounds like something that came right out of the artificially constructed language in Václav Havel’s The Memorandum, and we could all get in a few chuckles about this clumsy chunk in general. But here’s what I zeroed in on: “the equity risk premium declin[ing] secularly.” Yeah, yeah, Investopedia‘s keyed me in to the fact that “secular” here just indicates “a long-term time frame,” so my snarky grin had to disappear in the face of legitimate word usage.** But student of culture and religion that I am, this phrase is loaded with rich and telling possibilities – as in, when dealing with wily securities, the best form of hedging might be prayer– or a reconsideration of just what sorts of benefits the transcendent could offer, especially upon realizing that the systems we’ve created and kid ourselves are “natural” are just as prone to error and irrationality as are the humans who crafted them.

In short, I’m having all sorts of dorkily speculative fun in moving this specialized terminology across disciplinary boundaries– and I haven’t even gotten around yet to toying with Adam Smith’s oft-cited and ofter-misunderstood concept of the “invisible hand.” You can be certain, though, that that appendage will be just as eager to wreak ill-informed havoc in my imaginary economic universe as some of its extreme fans are still doing in our current one. To asset allocation, then! Who knew it could be so creatively philosophical?


* David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment (New York: Free Press, 2009), 111. In case you’re wondering, the chapter in which this gets thrown down deals with asset allocation.

** Massive props to this website, which has allowed me to understand a whole welter of concepts without driving my mentor to check himself into an asylum. I’m still going to do some etymological investigation of how this particular usage came about; why use “secular” to deal with longer terms, instead of “sacred” or “immortal”? You’d think something of a secular nature would have to do with the very non-eternal– and hence, shorter-term– reality of buying and selling and borrowing.