My guest in this episode is Adam Butler, Chief Investment Officer at ReSolve Asset Management.  Adam’s story is the near quintessential example of my belief that every investor’s approach is colored by their experience.  From nearly blowing up his firm’s omnibus account at his first job, experiencing the tech wreck first hand, and going all in on the commodity and emerging market super cycle narrative, it took three “frying pans to the face” – his words, not mine – to finally rebuild his mental framework from the bottom up.  The evolution of his thinking ultimately lead him to embrace what he believes is the ultimate gift: embracing uncertainty in strategy specifications as a means of exploiting the benefits of diversification.

I hope you find this conversation just as entertaining and enlightening as I did.

You can find more of Adam on Twitter (@GestaltU) or on his blog.


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Show Notes

1:57 – Corey introduces Adam via a blog post Adam wrote about his experience with the emerging market and commodity super cycle theory of the early 2000s.

3:43 – Adam discusses when he first got interested in investing and managed a bit of money for friends and family.

5:03 – Adam enters a trading competition and parlays it into a trading job.

6:09 – Adam grows his trading account up to $8mm before blowing up and getting dismissed from the desk.

8:54 – Adam turns his career towards technology with IBM.

11:01 – Adam discusses his dot-com boom-and-bust experience and his eventual transition to living in Bangkok.

12:59 – Corey tries to connect some dots between Adam’s time in Thailand and his eventual interest in the emerging market and commodity super-cycle narrative.

13:28 – Adam outlines the basics of the emerging market and commodity super-cycle theory.

16:27 – Adam and Corey talk the “illusion of knowledge.”

18:11 – Adam talks about the eventual bust of commodities and how “nobody goes to God on prom night.”

20:29 – Adam stumbles upon the work of Philip Tetlock while at a pool in South Beach, Miami.

25:24 – Adam adopts quantitative investing and comes across Meb Faber’s A Quantitative Approach to Tactical Asset Allocation.

26:34 – Adam begins running some simple, relative momentum strategies for clients that, in retrospect, was probably overfit and how August 2011 caused him to rethink his approach.

29:01 – Corey asks Adam to discuss what he means by “first principles.”  Adam proceeds to discuss the different assumptions associated with different portfolio techniques and introduces his Adaptive Asset Allocation framework.

32:33 – Adam opines on the role and limits of optimization in portfolio construction.

34:56 – Corey and Adam discuss the example of optimizing portfolios of sectors and the theoretical implications of the empirical success of a naive, equal-weight approach.

41:48 – Adam explains why he believes there is more opportunity for alpha in asset allocation than security selection.

45:13 – Adam discusses the importance of the implementation in his theory of Adaptive Asset Allocation and the importance of appreciating uncertainty and the role of randomness.

49:14 – Adam explains why embracing diversification is the ultimate gift.

56:31 – Adam talks about why overly embracing a KISS – keep it simple, stupid – mentality can lead to fragility.

58:14 – Adam posits on how he would think about building a portfolio of individual securities instead of asset classes.

1:00:31 – If you were an investment strategy, what would you be and why?