Changing as Markets Change

U.S. Global Investors Weekly (02/26/2010)
"I had the chance to listen to a prominent MIT finance professor talk about how market participants make their decisions, and I came away thinking that his big-brain ideas validate the approach that we've been using for years.

Andrew Lo, the MIT professor, has developed what he calls the 'adaptive markets hypothesis' (AMH) as a more sophisticated framework than the long-standing 'efficient markets hypothesis' (EMH).

I won't go into a lot of detail, but the EMH assumes that all market participants act rationally at all times, and that all available information is immediately reflected in market prices.

In Lo's AMH, market participants are not always perfectly rational, he says—they often make bad decisions. They learn from those bad decisions and, driven by competition, the survivors constantly innovate. Those who don't adapt don't last.

At U.S. Global, we have long viewed markets as 'complex adaptive systems'—they are made up of many moving parts that are interconnected across a global network, and they learn from experiences and change accordingly.

In our case, we use a matrix of top-down macro models and bottom-up micro stock selection models to determine weighting in countries, sectors and individual securities. We believe government policies are a precursor to change, and as a result, we keep tabs on the fiscal and monetary policies of the G-7 and what we call the 'E-7'—the world's developing nations by population.

We also focus on historical and socioeconomic cycles, and we apply both statistical and fundamental models to identify companies with superior growth and value metrics. We overlay these explicit knowledge models with the tacit knowledge obtained by domestic and global travel for first-hand observation of local and geopolitical conditions, as well as specific companies and projects."

 PRINT THIS PAGE   EMAIL THIS PAGE

Under SEC rules, analysts are required to disclose their interest in securities that they cover. We strongly encourage you to contact them to understand any potential conflicts of interest they may have.

Related Quotes: