Disruptive Investing

We're going to build upon our ideas that the financial industry is a supply chain and information and value flow in both directions, inbound and outbound. See our Mutual Fund Industry Supply Chain Model post. The greatest point of value creation is at the portfolio construction stage (creating and maintaining that list). Preservation of that value (capital) must be supported across the supply chain. Propagation of that value can be diluted when repackaging occurs, that is, when mutual fund wholesalers and distributors (middle men) and financial advisors create bundles of mutual funds with other assets that change the expected returns, diversification, volatility and relative performance, while also adding on expenses and fees, directly charged against the capital. Pervasive technology, proven processes, and experienced people, at all stages assures value, preservation and risk control, or at least, it should. Because of time periods and variability, regeneration (maintenance) must...

• Mutual Fund (List of Assets) – Does not have physical size, weight, color – Does have a ‘particular collection’ of virtual assets – The construct of the collection defines the potential for value – It can be sold as-is, repackaged with other funds, grouped with dissimilar asset classes for added diversification and preservation of capital – Hence, the concept of a supply chain can be applied to the distribution of funds (via wholesalers and distributors) and in the reverse to the collection of capital (AUM) and management and distribution fees (loads, premiums, expenses, …) •Fund of Funds (List of Lists) – This is layering cost upon cost, idea upon idea – Value created, perhaps also undermined?

We usually think of assets as stocks, bonds, bank accounts, real estate, mutual funds, and other securitized instruments. Stocks are documents that grant rights to their owners, rights that relate to a particular company. • Companies are legal entities recognized by federated corporations (countries, states, municipalities, each other, persons, …) – Hard assets (equipment, factories, …) – Soft assets (processes, patents, secrets, …) – Operate in uncertain markets, thus have risk – Risk needs to be divided and shared, to reduce it • Companies thus sell financial instruments (virtual assets, ideas) – Stocks and Bonds, for “Cash” or “Credit” • Cash is a Promissory note to pay some form of value (capital) • Value is “created” by the signatures of the executors – Exchanged for either “shares” or “promise of coupon” – Shares pay dividends and / or have “growth” – Bonds pay interest and have “stability” – Promise of future performance determines market value of inst...

Risk is hard to define and even harder to measure. Because you can’t manage what you can’t measure, you cannot manage risk. You can only attempt to weed it out. Various selection processes and trading tactics can help reduce many types of risk. What is a useful definition of risk as applied to mutual funds? It is the probability of or chance of the loss of capital. It is this probability and its potential causes that create so much trouble. People disagree on what to measure and further can’t agree on how to measure it. Do we use standard deviation, semi-variance, maximum drawdown, value at risk, downside deviation or estimated tail loss? Do any of these truly explain risk or account for it completely? This places investors in jeopardy of loss of capital, because they’re placed into positions of risk they do not understand. Without understanding there's no plausible means of managing money effectively. This means there's always a chance of loss of capital, no matter how well co...