Wealthfront on Steroids?

Ever heard of the company Wealthfront, or the term Robo Advisor?

The promise is a disruptive technology which typically offers Mean Variance Optimized portfolios (Portfolios that optimize a level of expected return for an expected unit of risk) which are customized to an investor’s own risk tolerance, but most importantly, at a super affordable price.  There are other bells and whistles typically built in like an optimized tax loss harvesting algorithm, utilization of low cost index funds (typically via ETFs, Exchange Traded Funds) and some basic personal financial planning tools.

Wealthfront in particular has gained significant traction over the past few years, garning over a Billion $ in AUM (Assets Under Management).  As a competitor, I am actually quite fond of these technology companies.  I see far too many advisors charging a fee which is 6 to 8 times higher for effectively the same thing (often even worse given no systematic process for investing or financial planning).

I say, “Bring on the hybridization of technology and human insight, and see how it fuels the world of capital markets…”  It should ultimately keep more money in investors own pockets, make markets more efficient and place capital where it’s needed most, right?

As Newton’s Third Law States, “For every action, there is an equal and opposite reaction…”  I personally have found this to be an insightful statement which can be applied to numerous aspects of life, particularly when looking at markets, strategy, etc.; in that if a technology presents something which is fraught with potential hazards, then it likely can also produces potential nuggets of pure “amazingness,” & yes, the opposite holds true as well (I tend to be more of an optimist, thus the prioritization of outcomes).

So, in the world of applying Algorithms and Artificial Learning Sciences to the world of investing where newer forms of the technology can be extremely expensive, it should come as no surprise that firms with vast amounts of capital will be experimenting.  And who is arguably the most successful Hedge Funds firms out there today:


So the question is, will machine learning only help those with Wealth or could it be as many technologies before it which eventually finds it’s way to the masses as costs are driven down?  What will the Wealthfront of the future look like?

Risk and Return – Inserparable…In the long run!

First, I have to point out that this post references one of my all-time heroes (you can find more information on the Investor Superhero page under Menu), Cliff Asness, whom I have an unhealthy propensity to scour the web for any tidbit of info he posts/shares.

Cliff's Perspective figure 10
Risk and Return apparently do go hand-in-hand…Sometimes it just takes a while to realize it.  Don’t mistake Luck, or small time series samples for having no Risk and being all Skill!

 The article does a wonderful job at showcasing statistically insignificant short time intervals in proper context vis-à-vis  a larger sample.  A few thoughts:

  1. If risk and return are in fact related then seeking out recent back tested strategies that have faired extremely well in one particular market could very well play out to produce a lower expected return in the future (Meaning you get out of sample returns with lower Sharpe ratios than the benchmark used for comparison).  Not a bad idea to test things, but simply looking at history and not applying an economic or behavioral rational to the outcome (Combo of the two likely better) has a high probability of being a fools errand.
  2.  If you stop and think about it, at a very basic level this makes since…Risk and Reward must be interrelated at the large sample size level, and yet doesn’t appear as such when viewed from a narrow lens.  Think about all the silly things you did once, twice or possible three times as a youth, and yet it didn’t materially harm you.  Take that same event and imagine doing it 1000 or 10000 times…Probably pretty hard now to imagine that you didn’t experience at least a few really bad outcomes, right?  You might be able to catch a falling knife once without a scratch, but chances are you’ll need a box of Band Aids if you try it 100 times.

Price vs. Value and/or Pricing vs. Valuation

A rather interesting discussion by NYU professor Aswath Damodaran on Valuation.  Yeah, yeah – I know…Another value investing guy who talks about intrinsic value and discounted cash flows, but the conversation brings up some interesting ideas:

  1.  Are valuations completed by sell side analysts (analysts at institutions selling you something), or perhaps some buy side institutions as well, actually masking simplicity with seeming complexity by placing a  multiple on price (As noted, think about how Real Estate Agents come up with the “Price” of a property)?
  2. If something has no future cash flow, can it be valued?  More importantly, does it even have value?
  3. Which do you wish to play; the long run value game or the short run price game?
  4.  Uncertainty exists, don’t shy away from accepting this and estimate…Does finding the distribution of outcomes yield the answer, relative to the percentile the “Price” sits currently?
  5.  Number Crunches vs. Storytellers, should it be one or the other?  Why not fuse the two?
  6.  Luck vs. Skill (I will add some posts by Michael Mauboussin in this topic soon), why do investors seemingly pay so much for luck (i.e. Hedge Funds)?

Investment/Finance topics with a healthy dose of humility, honesty and compassion!

Our hope is that this site will be a springboard/resource for a detailed discussion on topics of investment/finance.  We are three industry insiders who choose to remain anonymous at this time (It is our desire to present topics without censorship from any establishment).  Although it is nearly impossible to steer clear of opinions, we will try to keep them to a minimum.  Our goal is to be insightful while remaining accessible to a broad audience, share relevant data and resources while also pointing out any potential conflicts of interest or profit motivations, keep humility in the forefront while opining on our own remedial thoughts, and most importantly, making our families, our friends and our community proud…Let’s get started!!!