Asset Rotation: The Demise of Modern Portfolio Theory and the Birth of an Investment Renaissance

CHAPTER 6CHALLENGING CONVENTIONAn Introduction to Asset Rotation

Widely regarded as one of the most influential scientists of all time, Sir Isaac Newton’s laws of motion and universal gravitation provided the foundation for our modern day understanding of the physical universe we live in. In Newton’s groundbreaking work, The Principia, first published in 1687, he outlined his three universal laws of motion.

Among these universal laws, Newton’s First Law of Motion states, “An object at rest will remain at rest unless acted upon by an unbalanced force. An object in motion continues in motion unless acted upon by an unbalanced force.” This law is often called “the law of inertia.”

The Newtonian laws of motion provided a final testament as to the validity of a heliocentric model of the universe, first set forth by Nicolaus Copernicus during the 1500s. With curiosity sparked by the Great Comet of 1680, Sir Isaac Newton provided mathematical proof of the existence of gravitational forces and orbital tracts in the cosmos. As a result, this comet later came to be known as Newton’s Comet.

As we reflect on the nature of the capital markets, we can’t help but draw parallels to Newton’s Laws of Motion. If you think about it, the investment markets have a propensity to behave in a very similar manner. Ultimately, more than anything else, it is the underlying psyche of the investment community at large that provides the catalyst for the direction taken by security prices. When investor ...