“Modern portfolio theory is dead. It’s an utter failure. It was incorrect to begin with.”
David Wright might be soft-spoken with a professorial tone, but he didn’t hold back with his controversial comments at NAPFA’s Spring Conference 2013 about future trends and where the markets are headed.
“We’re tactical, and don’t believe in buy and hold,” the co-founder of Sierra Investment Management said. “I am going to cheerfully attack the concept of ‘new normal.’ If this is the new normal, than God help us. This isn’t the new normal yet, but it could be in another five or 10 years.”
To illustrate his disapproval of buy and hold, Wright noted that he entered the business in 1966.
“In 1965 the Dow hit 1,000,” he explained. “Seventeen years later it was at 764. If clients were taking distributions during that period they would never have recovered.”
Wright noted that the theme of almost every conference of the past two years has been either risk mitigation or alternative investments.
“That because of the failure of the efficient market hypothesis,” he said. “It assumed markets are perfectly efficient but failed to consider behavioral economics and the role of humans. Most Nobel theories, with the exception of Bill Sharpe, have blown up. The investing public is sick of theories.”
Taking what he called a long-term perspective, he noted the massive debt bubble that began in the 1980s and the painful deleveraging that is still ongoing, some of which will include default.
He also noted deflation taking place in some parts of the U.S. economy, some parts of Europe, and “in Japan since 1989,” as well as the massive consumption of the American public.
“Fully 70% of our economy provides goods and services to households. That will change.”
Lastly, he argued that the “employment recession” is far from over, and that it will take at least 10 years to get back to full employment.
“New job seekers are entering the market just as we’re trying to recover from the worst recession since the 1930s. That will take time to sort itself out.”
As a result, the Federal Reserve has the U.S. economy on “life support,” and any bank can borrow up to $10 billion at next to nothing.
For these reasons, Wright concluded that he believed “we are at the top of the market.”