Redefining risk: Modern Portfolio Theory and our attitude

by Edward Robertson   25 Nov 2016
[Note: this article was made the cover story for The Private Investor (formerly Exempt Edge) Issue 19, January 2017]

Fund manager Scott Vincent’s 2011 article “Is Portfolio Theory Harming Your Portfolio?” [1] is a compelling manifesto to support the position that knowledgeable investment can reliably beat the market.

His message is that Modern Portfolio Theory (MPT) dominates financial thinking, even though it is demonstrably faulty in real world application. MPT and its close association with large scale quantitative methods are deeply engrained in the financial services industry. This in turn has exerted a detrimental influence on our attitudes towards investment. It pushes us to accept very poor market returns, to over-diversify and water down our portfolios, and to confuse and cloud our view of risk.

Revisiting Due Diligence for Private Market Investments

by Edward Robertson

In the eyes of the investor, the due diligence (DD) process carried out by Exempt Market Dealers (EMDs) for private market investment products seems very problematic.


First is the question of motivation of EMDs and their representatives. Motivation can be oriented more towards immediate profitability of the EMD rather than towards safeguarding the financial soundness of the product issuer. For example, an EMD may select an issuer on the basis of an inordinate commission or preferential terms, or charge a high fee for conducting due diligence. From the perspective of the EMD, it is difficult to maintain a viable operation without somehow looking out for its own interests.

Benefits of risk assessment applied to investments

by Edward Robertson

Exempt Market Dealers and investment firms carry out due diligence. Each firm seems to have its own method; it is scarcely evident to the investor that there is a universal standard guiding due diligence. Beyond that, it is even less evident that risk assessment -- that is, the investigation of uncertainty -- is actually done. I propose that many prior signs of project failure or under-delivery are detectable and manageable in advance.

Maturity vs risk in investments

by Edward Robertson

The maturity model
The Capability Maturity Model (CMM) developed at Carnegie Mellon University back in 1993 [1] is a fairly famous assessment tool for organizations. The need at the time was to have some uniform way of assessing potential software development service firms, as their internal capabilities to meet deliverables were highly variable. 

Due diligence: the deal structure

by Edward Robertson
[Note: this article was re-published under the title: "Deal Structure: A Key Concept When Exploring Private Investments" for The Private Investor Issue 21, July 2017.]

Is investment loan interest always a tax deduction?

minimize tax

by Edward Robertson

[UPDATE: 23 Jun 2018. After discussions with my accountant as to what deductions can actually be claimed, and remembering Garth Turner's pronouncement on the subject, the rules outlined in this blog post are decidedly the conservative, by-the-book version. Turner said: "Some advisors will tell you investment loans are only tax-deductible if the money is used to earn actual income (interest, dividends) as opposed to buying stuff that goes up in value (capital gains). In the real world, that’s hokum. The CRA will never enforce this arcane tax code verbiage for average investors." [3] ]

Investors in private market assets will likely contemplate at some point borrowing to invest. I thought it worthwhile to summarize rules around using investment loan interest as a tax deduction, and comment with respect to private market products.

Vertical maturity in investments

by Edward Robertson [revised 24 April 2017]

It is axiomatic that investors will demand higher return on investment in exchange for accepting a higher degree of risk. In the blog post “Redefining risk…”, I drew a distinction between that axiom and the reflexive, unthinking attitude that high returns themselves necessarily signify high risk. I also rejected the traditional idea of risk as volatility. Risk is the uncertainty associated with planned goals and objectives. My hypothesis is that uncertainty is reduced by what we could call vertical maturity in the investment.

The ultimate argument for home ownership

by Edward Robertson

This article digresses from discussion of the exempt market to focus instead on direct ownership of real estate. Consider the pros and cons of holding the principal residence, especially mortgaged, as part of the overall financial portfolio.

Private assets market - philosophy and vision

National Exempt Market Association

by Edward Robertson and Peter Falohun
[Updated 02 February 2017.]

The prominent Canadian Exempt Market professionals' publication Exempt Edge [now rebranded The Private Investor] is a quarterly magazine of the National Exempt Market Association (NEMA), edited by Cora Pettipas.

Avoiding the effects of volatility

Avoiding volatility - private market investments

by Edward Robertson and Peter Falohun
[revised 18 November 2016]

In Modern Portfolio Theory, volatility, measured as standard deviation, has become "the most used gauge for investment risk". [1] 

Volatility is a measure of the variability of a security's price, or of its returns. The basic meaning is fluctuation or deviation from the mean; it is used as a proxy for risk, giving a kind of shorthand to characterize a security.

Let us focus on volatility in the sense of downturns in the price or reduced distributions of an asset, in the short to medium term (even if the asset later recovers). We identify underlying causes and downstream effects, stated as risks, and consider mitigation using private assets investments.


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