In one of the morning breakout sessions, I attended “Investing 501” with Bill Bernstein, the author of a number of books on investing and economic history.Â Mr. Bernstein talked a lot about modern portfolio theory and the use of asset class allocation to obtain a return on the efficient frontier.Â Â Mr. Bernstein clearly favors a top-down approach to investing, where the investor starts by selecting the macroeconomy desired, then the asset class, then the industry, and finally the individual equity or fund.Â Â The processes and techniques we follow here at ModernGraham are clearly at odds with a number of Mr. Bernstein’s ideas.Â However, some of what he said can be thought provoking and valuable to the value investor.
Specifically, he talked about threshold rebalancing as opposed to date or time rebalancing.Â The process of threshold rebalancing requires setting thresholds for the size of the allocation to each asset in a portfolio while time rebalancing simply rebalances the portfolio when on a time interval basis.Â I personally think the threshold method could be useful to a value investor.Â We may not necessarily use asset classes in our portfolio, but the strategy can be applied to individual equities within the portfolio very easily.
Mr. Bernstein made a couple of interesting analogies.Â First he said that investing can be compared to flying an airplane – you must learn to resist your instincts.Â Very important message there.Â We must all remember to avoid the human instincts when investing and remain fundamentally focused. Â Finally, he reminded us that entering into a stock trade is similar to playing tennis with an invisible opponent.Â Whenever you enter a trade, there is a person on the other end of it.Â The upside is that the person may be a complete idiot and you may take advantage of them.Â However, it also could be that your opponent is an allstar investor and you may be the one being taken advantage of.
More coverage of the conference will come later today.