This book is about effective asset allocation. It's not enough to rely on some investment manager's "one-size-fits-all" software to allocate your precious capital: you need to understand the process, and take control. In Understanding Asset Allocation, world-class economist, investment expert, and hedge fund manager Victor Canto shows exactly how to understand the process of assett allocation. Canto introduces a flexible, intuitive, easy-to-use approach to asset allocation that leverages powerful business cycle information and investment vehicles most investors ignore. Canto reveals what you can (and can't) learn from historical data; how to find and focus on sectors that offer exceptional opportunity; and how to manage risk far more effectively. Whether you manage your own investments or rely on an advisor, Understanding Asset Allocation will help you optimize all your asset allocation decisions -- and maximize the returns they deliver.
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Victor Canto, Ph.D., is founder of La Jolla Economics, an economics research and consulting firm based in La Jolla, California. He formerly served as chief investment officer of Calport Asset Management and president of A.B. Laffer, V. A. Canto & Associates.
Dr. Canto taught finance and business economics at the University of Southern California (USC) from 1977 to 1985 and has served as visiting professor at both the Universidad Central del Este, Dominican Republic, and the University of California at Los Angeles (UCLA).
He has authored, edited, or co-edited several books, including the landmark Foundations of Supply-Side Economics (Academic Press, 1983), as well as Monetary Policy, Taxation, and International Investment Strategy (Quorum Books, 1990); Supply-Side Portfolio Strategies (Quorum Books, 1988); and Currency Substitution: Theory and Evidence from Latin America (Springer, 1987). His work has appeared in the Wall Street Journal, Investor’s Business Daily, and many leading economic journals, including Economic Inquiry, Journal of Macroeconomics, and the Journal of International Money and Finance.
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Understanding Asset Allocation
Understanding Asset Allocation
An Intuitive Approach to Maximizing Your Portfolio
Thinking about the origins of this book takes me back to my days as a graduate student. I was fortunate to attend the University of Chicago (U of C) during the 1970s, a very special time in the school's history. Back then, there was a future Nobel Prize winner running almost every workshop. Both the teachers and students had an incredible energy level, despite the very high pressure to perform. Graduate students worked hard to be well prepared, and the debates and discussions were phenomenal—regardless of which workshops one attended. The sheer number of high-quality seminars and the luminaries who ran them allowed one to accumulate an incredible breadth of economic knowledge. I was a regular participant in the money and banking, international trade, and public finance workshops run by Milton Friedman, Harry Johnson, and Arnold Harberger, respectively—teachers among the brightest in the economics profession. I also fondly remember Gary Becker's lectures on price theory.
Many faculty members at the U of C, in addition to being outstanding economists, were gifted teachers. But, instruction skills were not restricted to the elder statesmen in the department. There were also some incredible junior faculty members—among them: Robert Barro, Jacob Frenkel, Arthur Laffer, and Jeremy Siegel. In addition to their delivery skills and their content mastery, my professors all shared an interest in policy issues—in particular, the fiscal and regulatory legislation both federal and local elected officials pass. In their lectures, they repeatedly illustrated the way top-down incentives and disincentives affect both economic behavior and the economy's performance. In particular, they taught their students the way to trace government policies' impact through the economy.
I carried much away from my experience at the U of C, but the two sector models' power Harry Johnson drilled into his students highlights my understanding. Gary Becker taught incentives' role in human behavior. It was in Harberger's class, however, I was able to put it all together. He beautifully combined his famous interpretation of the corporate income tax incidence and his general-equilibrium approach's discipline with his analysis of tax rate distortions and waste measurement, applying all to real-world situations. In my opinion, this is where Harberger really excelled. With his incredible depth and range of knowledge, he was able to propose simple and elegant solutions to the problems public policy often relegates to an economy.
I have tried to follow Harberger's example in my professional life. During my years at the University of Southern California (USC), I paid close attention to policy issues and applied many concepts and ideas I learned from "Alito," the name Harberger received from his admiring Latin-American students. In time, my interest in the interconnection of policy and economic behavior evolved. After leaving USC in the mid-1980s, I worked for AB Laffer, VA Canto & Associates, where I focused more and more on government policies' impact and implications. But, it was not until 1997—at which point, I had started my own firm with encouragement from my wife, Ana, and three daughters, Vianca, Victoria, and Veronica—I decided to focus on what I really had become interested in: I had found that seldom does government action analysis apply to the strategies vital to business managers, financial analysts, and investors. With this in mind, I set forth to discover the policy actions' investment implication. My discoveries would certainly be useful to not only investors, portfolio managers, and financial analysts, but also corporate strategists, government officials, and the policymakers themselves. This book represents the sum of this knowledge gained in my professional career. For the reader, I hope it represents a new path for investing—the extra step demanding it be taken.
Along the way, while developing my investing theories, I have met many wonderful people (many of whom have become great friends). Sometimes, during difficult times, people find out who their true friends really are. In 1997, as I began my new firm, Harlan Cadinha, Herb Gullquist, Kevin Melich, Robert Doede, Christian Carrillo, and Danielle Andrews were wonderfully supportive and proved to be exceptional friends. More recently, I have gotten to know David Cleary, Robert Holz, Tom Gangle, Peter Carl, and Peter Mork, and in one way or another, I have benefited from their friendships. Charlie Parker, Robert Webb, and Larry Kudlow have always been supportive and encouraging.
One person without whom this project would not have become reality is Chris McEvoy. His dedication, initiative, and many editorial suggestions greatly enhanced the manuscript. Andy Wiese and Samir Ghia were outstanding research assistants.
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