The World Series of Poker is currently running in Las Vegas, so it seems as good a time as any to start with a long-winded poker anecdote. After selling my software startup in 2005, I played poker full-time for the next two years. Poker was booming, triggered by the unlikely win of the 2003 World Series of Poker by an accountant from Tennessee with the actual last name of Moneymaker. “If this guy could win it, why couldn’t I” was a thought that thousands and thousands of people had simultaneously. The influx of players led to a funny dichotomy - the old poker players were gigantic men from Texas with gigantic cowboy hats smoking gigantic stogies. The new guys were kids like me with physics degrees from Harvard. They were armed with the kind of practical wisdom you can only get from staring down the business end of a shotgun in a backroom in Amarillo; we were armed with computer simulations. Consistent with the arc of 21st century history, eventually the computers won. Today most big poker tournaments are won by a 20-something whiz-kid du jour.

Despite that inevitable outcome, the wisdom of the old gamblers had a lot more value than just supplying Kenny Rogers with his lyrics. I often think back to old poker adages when pondering over decisions at Avos. One such adage is “money you don’t lose still buys groceries.” The point is that you make money in the long run not only by scooping big pots, but also by losing the least amount possible when you lose.

For most investors, the biggest source of losing - by far - is taxes. So losing less to taxes means you can buy more groceries. But for some unfathomable reason, the tax code is written to punish diversification. For example, the US government taxes you more for lending them money than for holding equities. That leaves you with the choice of having a more diversified portfolio and paying more in taxes, or paying less in taxes and taking the risk of all equities. We have our own way of balancing those considerations in our client portfolios, but reasonable people can certainly disagree.

Right now we are seeing a very strong trend towards wanting more diversification…but trying to do it without paying heavy taxes. This trend makes perfect sense to us. In our investment systems that power our equity ETF, 29 of the 38 countries we trade have negative long-term value signals. Or put more plainly, for most of the world’s equity markets we expect the next 10 years to be worse than average. The flipside of that observation is that diversification is likely to be more useful than average over the next 10 years.

A strong demand signal from investors is, in turn, leading to an explosion in tax-advantaged products. Our 351 exchange ETF is one example, but there are many others, such as long-short equity strategies, PPLI, and exchange funds. As we look forward, we think this trend is likely to continue to pick up steam, and we plan on participating. So stay tuned. And in the interim, if you want help thinking about how to get more diversification in a tax-advantaged way, don’t hesitate to reach out for a chat.