Epsilon Theory: Tell My Horse

Ben Hunt is one of my favorite writers on the market narrative and the business of managing money. His latest Epsilon Theory post, Tell My Horse, perfectly captures the anxiety that is now pervasive in parts of the active investment community - under siege from passive and algorithmic strategies and a narrow market.

"So here’s my question. How do you survive, both physically and metaphysically, in a market you don’t trust but where you must act as if you do? How do you pass? How do you reconcile the actions and beliefs necessary to be successful in this market with the experiences and training of a lifetime that tell you NOT to act this way and believe in all this?"

"Here’s the human answer. You make accommodations. You surrender little by little to the new religion and its transactional catechism. It starts off easy enough. At first it’s just staying quiet while others talk. Then it’s simple superstitious behavior that you can laugh off. Who does it hurt to pour a shot of rum and leave it out on the table for Baron Samedi? Ha ha ha. But then a friend testifies to you in a private moment. You can see with your own eyes the earthly rewards his faith has brought, while your caution and doubt have brought you nothing but portfolio underperformance and difficult conversations with unhappy clients. And then one day you feel it. Yes, I, too, can purchase Big Data. I, too, can purchase Cloud Computing. I, too, can purchase an ETF Model. I don’t need ideas of my own. I can transact for whatever ineffable machines or models I require to succeed in this market of ineffable machines and models, so that I can tend to more important things like “building my business” or “interacting with clients.”"

"To hedge out our most pronounced career risk — which is not a large portfolio loss, because so many others will be in the same boat, but is rather a small portfolio loss from independent decision-making while others are making non-independent, collective gains. How do we accomplish this hedge? By eliminating independent risk-taking and embracing collective risk-taking, that’s how. By blindly serving the loas of the market — sometimes ancient ones like Value Investing but more frequently new ones like Modern Portfolio Theory or Passive Investing — and letting them ride us like a horse."

I cannot recommend his writings at Epsilon Theory enough.

Epsilon Theory: Tell My Horse