The Janus Factor: Trend Follower's Guide to Market Dialectics

Chapter 2

The Assignment

I must create a system or be enslaved by another man’s.

—William Blake, “Jerusalem”

Nearly two decades ago, our fledgling firm took on a new client, a professional corporation with a retirement plan. The principals asked us to rate money managers bidding to run the plan’s assets. Rating money managers was not our normal business, but we could not afford to turn away a new client. Over the next few weeks, we prepared a tutorial for trustees on the fundamentals of modern portfolio theory (MPT). Since MPT equates risk with standard deviation, or volatility, the way to reduce risk, according to the theory, is to reduce portfolio volatility. That bit of magic is accomplished by including investments that zig as other portfolio ...