Market Earthquakes

The best thing I read this week comes from Bob Maynard, CIO of the $14.2 billion Idaho Public Pension Plan. Maynard’s entire approach is based on the premise that increased complexity is failing professional investors.

Instead of fighting complex markets with complex strategies, Maynard favors a simpler approach, as he states in a write-up for Chief Investment Officer:

However, a complex investment world does not require a complex response, either in the nature of the investment organization or the particular investment strategies chosen.

The cockroach lives in a highly complex environment with one of the best long-term success rates of any creature. Yet it has only one defense mechanism – running in the opposite direction from a puff of air. The equivalent for the investment world is, at the core, a very simple structure founded upon public market diversification with one basic defense mechanism: see a volatile movement, react in the opposite direction (i.e. rebalance into it). A simple structure and strategy, if adhered to, has one of the best chances of surviving for many decades.

It’s difficult for intelligent people, especially in the world of finance, to admit that less is more and simple can be a far more effective framework than complex for the majority of investors. Some view this as an admission of ignorance. In fact, I view it as the ultimate sign of intelligence. Understanding your limitations is one of the best ways to improve.

Maynard goes on to compare the short-term moves in the stock market to an earthquake, an apt analogy. Here’s what the seismic activity during an earthquake looks like:

Now compare that to the daily moves in the stock market:

It looks eerily similar. Although the market is more or less random on a daily basis, these short-term moves do have an impact on returns:

The fact that we’ve had so many fat tail events over the past couple of cycles has pushed most investors to focus even more on the short-term behavior of the markets.  But Maynard’s conclusion is that, just like an earthquake, it’s impossible to predict with any precision when the next market correction or crash will hit.

Ralph Wanger, the eccentric portfolio manager of the Acorn Fund, once summed up the stock market to Bill Bernstein with an analogy about walking a dog:

He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.

Maynard is focusing on the owner, but most investors are preoccupied with the dog. It’s easy to say you should ignore the noise in the markets, but this is nearly impossible in today’s world because information is all around us. Your plan should include ways to eliminate the amount of noise that finds it’s way into your portfolio, even though you’ll never be able to completely escape it. The trick is being able to sift through the noise and figure out the difference btetween what’s actionable and what’s entertainment.

This is why portfolios should be managed for risk, not returns, a simple yet important distinction.

The Four Pillars of Investing
Managing Risk in a Complex World


This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Ken commented on Nov 07

    Excellent article, summing up market strategy with great analogies. Thanks.

    • Ben commented on Nov 07

      Thanks. Sometimes the simple ones are the best ones.

    • Ben commented on Nov 07

      Huh, interesting. I’m sure at least half of all quotes about the market are attributed to the wrong person. Same thing with motivational quotes. Good to know.

    • Ben commented on Nov 07

      Good one. I like it. I’ll be sure to share. Thanks for this one.

  2. Tyler Cruickshank commented on Nov 07

    I appreciated the Fat Pitch article and how it does not apply to me. Wish I had known that several years ago. Sigh. There are so many “good ole boy” Buffet quotes out there, but one of the only ones that applies to the regular retirement saver/allocator is the “I would buy and hold an SP500 index fund”. It can be hard to discern between them.

    The 30 second allocation article was enlightening also.