In our view, investors should have little faith left in the mainstream approach to protect them from these severe declines given three permanent problems in the industry:

• An inability to see the big picture
  The industry takes comfort in phrases like “markets are efficient” and “no one could see it coming”. In fact, bubbles are often so obvious that experts are blind to them.  Most in the industry are so focused on the details of their research that they fail to step back and observe the big picture unfolding. Seeing the big picture through all of the noise requires common sense, adherence to a sound economic philosophy and a keen understanding of human history and behavior.  After all, as the philosopher George Santayana prophetically warned: “those who cannot remember the past are condemned to repeat it.”
• Misaligned incentives
  The industry remains riddled with hidden conflicts of interest and incentive structures that are sales-oriented and not in the best interest of clients. Most investment advisors are not trusted voices for clients, but rather sales teams for Wall Street very far removed from the actual investment research. Further, few advisors share the key ingredient to successful investing – the edge of an entrepreneurial mindset that is found in most prominent business owners and savvy investment minds.
• Career risk
  Portfolios must look different than benchmarks to beat benchmark performance. Yet, advisors worry that this approach may get them fired in the interim since there is so much focus on short-term results.  Most in the industry believe clients may fire them if they perform out of sync with benchmarks. Accordingly, they would rather track benchmarks down 38% when the market is down 40% to be able to say “we did better”. They construct portfolios that over-diversify and do not deviate much from general stock and bond benchmarks because the main risk in their careers is deviating from benchmarks. We think this is the wrong way to invest.