After reading through all of the comments from last week’s controversial posting I spent quite a bit of time this past week in attempting to better explain both the reasoning behind my accusations as opinions and the point in writing the article. It’s specifically in response towards Mr.Anderson, zacharydavid, and mikesswimn but I want to thank you all for you challenging comments.


Assumption of Risk-Aversion
I’m proposing that economic risk-aversion is one dimensional and that a person who invests in a safer certain sum over a potential higher riskier one also prefers more money to less which incentivizes risk-staking. Thus, not only are their risk-neutral but there risk-seeking investors, like performance-based arbitrageurs in Andrei Scheifer’s: Inefficient Markets? I argue that risk-seeking and loss-aversion can be mutually inclusive. Think about the risk premium, if a Markowitz portfolio is optimized for risk then should it not be constrained in its returns? In other words, this would not be a sufficient condition for risk-seekers (i.e. arbitrageurs) in my opinion and I think that this assumption defines market investment too restrictively.

Portfolio Theory is a construct of Harry M. Markowitz from the University of Chicago that economically models a risk-return adjusted optimal portfolio based upon two primary factors: risk and correlation. Sounds like a beautiful thing, right? WRONG! Textbook models are just that, textbook and are not enirely relevant outside of academe. They serve as restricted versions of actual market processes and I will argue against four of Markowitz's flawed assumptions. Also, despite quantum leaps in practical market theory over the last 60 years, some in the financial industry still apply this dusty-old model when managing their client’s money! Why, I can only suspect but read on to find out where the problem starts...

I have always been a big fan of Jim Rogers. His old school gentleman style, with the bow tie and the folksy drawl, always seems to confound the "savy types". I often imagine what an odd couple he and Soros must have made back in the late 60's/early 70's.

For several years now Mr. Rogers has been telling anyone who will or will not listen about the coming commodity bubble. Specifically, in regards to the basic necessities of life. While many of us think of only gold, oil and natural gas, the commodity landscape covers such daily necessities as bread and corn. Though not as volatile in the short term, they are the true indicators over the long haul.