[In developing new solutions to an old problem, whole new avenues can open up just by challenging traditional thinking and purposefully changing your perspective to ask tough questions. Especially in our new business environment of accelerating change, every operating idea needs to be regularly challenged. Not to worry though as good established ideas will always stand up to scrutiny, but stand up they must: Why are we still using this approach? Is there any way we can strengthen or further support what we are doing? Are their new tools or approaches we could use to enhance our methodology? Are there things changing in the markets or investor behavior that we need to address?
Sometimes it is not novelty or something wholly new that drives change, but just a different application of an old idea or looking at something from a different lens to uncover new ways of doing things. This formula of opening up your thinking and developing a different mindset helps you see what others don’t or won’t and allows you to build a path to truly different solutions to problems. Risk management has been going through this evolutionary path since the 2008-9 market downturn where standard risk management definitions and approaches, like Modern Portfolio Theory, seem to be openly under reconstruction and dynamic experimentation.
To explore this further, the Institute was recently introduced to Eric Dugan, chairman and portfolio manager, of 3D Capital Management – an investment management firm that exclusively positions itself as an active, defensive, equity manager for investors who are seeking a proven solution to stock market declines. The firm has over 100 years of compelling investment experience, including researching and developing equity risk mitigating strategies and managing money for multibillion-dollar firms. We were curious to learn how their goal to protect client equity portfolios led to their singular focus on profiting from stock market declines in the S&P500.]
Bill Hortz: Can you share with us the motivations and thought process you originally went through in creating your investment approach? How did you see your challenge and why did you take the road you took in redefining traditional portfolio and risk management processes?
Eric Dugan: Conventional wisdom teaches stock market investors to be patient, think long-term, and be willing to endure the pain associated with stock market declines. I love the stock market as a long-term investment, but my motivation in creating 3D Capital Management was simple: I don’t like pain and I don’t like losing.
As the S&P 500 chart above reminds us, guaranteed losses when the stock market declines are the problem. We are problem solvers and decided to do something about this problem. Our solution encourages stock market investors to stay invested in the stock market for the long-term AND manage stock market declines (i.e. risk) over the short-term.
3D Capital’s expertise is managing stock market declines. Our solution to stock market declines is an S&P 500 program called 3D Defender which seeks to identify intraday weakness in the S&P 500, profit from it, and step aside during rallies.
I have never really thought of our investment approach as redefining the traditional portfolio and risk management process. Taking this road is the most logical solution. The data makes that abundantly clear. We are not proposing an either/or solution. 3D Defender was created to protect investors from stock market declines. We assume the investor is going to stay invested in the stock market for the long-term to take advantage of rallies AND wants to manage the pain associated with stock market declines.
The stock market is going to move up and down forever. Stock market declines represent risk. Stock market declines also represent an opportunity to profit. 3D Capital has a long history of profiting from stock market declines.
The most important question for stock market investors and their financial advisors is “Do you have anything in your portfolio that specifically seeks profits from stock market declines?”