I love the periodic table of asset management -displayed above- published by wealthmanagement.com recently. It is clever because it insinuates a correlation with science, and thus instills confidence in the asset management strategies one ought to deploy.
The only proper contradiction to the validity of and dependence on this “scientific” table would be to source from the same well of science:
Just because you understand the material does not mean you understand the interaction between the materials.
Richard Feynman (1918-1988), Nobel Prize Physicist
As I explained in my narrated exposé of Asset Management Reinvented, risk must be detached from distribution. Risk should define distribution, not distribution defining risk.
This distinction yields the grave depravity of reason stemming from confounding of cause and consequence in risk analysis in asset management today and is a major contributor to the inconsistency of returns.
Let me break that down a little using venture as an example. It is not hard to imagine a venture capital deal incurring low risk because prominent seed investors have primed the pump of valuations, turning the distribution of venture capital into micro private equity. Conversely, a venture capital deal pushed off to secondaries for low and disappointing residual valuations, makes for subprime returns at best. Examples abound across other asset classes.
Do not forget the allocation and deployment of capital is subject to an embedded diversification of risk in the asset management realm, no less than ten levels deep before any money is deployed. Meaning, embedded risk not asset risk greatly and negatively influences the probability and consistency of returns.
In terms of risk, the risk of producing cash on cash, er growth for the sake of growth using the ideology of a cancer cell, is quite different from the risk associated with producing cash on evolutionary value. Humanity must deploy finance programs that improve human adaptability to nature’s entropy to produce renewable value.
Risk must be reframed by evolutionary first-principles.
I’ll be pondering how to turn this periodic table into a risk assessment table that meets and greets reality.
