Not everything that counts can be counted, and not everything that can be counted counts

If you follow Howard Marks of Oaktree Capital,  you know he is clearly one of the most astute investors around and his newsletters are among the best as well. In his latest missive, he references the above Albert Einstein quote when discussing the measurement of risk and reward. This quote got us thinking as to the state of the investment landscape today. The explosion of Algorithmic trading based on up- to- the second “information” as well as a fixation on monthly data which is itself suspect in its measurement and meaning leaves capital markets appearing to focus on only that which can be counted.  The focus on what cannot be counted has never been more absent, as the prevailing thinking is that the risks associated with the unknown can be alleviated with the existing, or further iterations of, Central Bank policy. Nassim Taleb would refer to these uncountables as black swans, and it would seem as we move further and further away from the events of 2008/2009, the capital markets amnesia regarding the potential for such black swan moments becomes greater and greater. Those asset classes whose returns have been driven by leverage and momentum are most at risk when the amnesia wears off.

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