Managing Wealth in a Post-9/11 World

Advisors who believe that they know better may be righteous—but the investors are right. Things have changed since 9/11 and advisors must adapt to survive. Over the past decade, the S&P has returned 1% adjusted for inflation. The Lost Generation of Investors that I predicted in a Venture Populist blog post in March 2009 has come to pass—people used to buy the dips; now they are selling the rallies and exiting the playing field.

Good timing, too. JPMorgan recently noted that the correlation between the movements of U.S. stocks is at the highest level since Black Monday as individual company fundamentals are no longer the primary driver of stock price. The historical average correlation is 30%. Today the correlation stands over 80%. The measure peaked at 88% during the October 1987 crash.

One of the primary culprits is high-frequency trading (HFT) by institutions and hedge funds that trade the broader market indices for short-term movements according to technical considerations and without regard for company fundamentals. A typical high-frequency trader owns a stock for just nine seconds. As columnist Jason Kirby recently noted, "The vast bulk of trades now involve no humans at all, but rather sophisticated computer programs that swap stocks at lightning speed." Most believe that HFT was the primary cause of the flash crash of May 2010.

But a larger factor is in play that began with 9/11—unpredictable "macro" forces such as natural disasters, geopolitical shocks and systemic failures of other national economies and currencies. Now investors recognize that there is a distinct difference between measureable endogenous market risks and external uncertainties capable of extolling immeasurable devastation to the markets.

As the last decade clearly illustrates, none of this is conducive to long-term, buy-and-hold or fundamental, "know the company" investing once promoted by the likes of Peter Lynch. Moreover, even most of the conventional "alternative" investments no longer provide evidence of sustained non-correlation. Cash (and some bonds) is king right now—and are likely to be for the immeasurable future. True fundamental investing in a company's long-term growth prospects has become the sole domain of some micro-cap stocks and direct private venture investment in early-stage companies.