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When the author literally lists dozens of ideas that me and other people have spent their entire lives working on and dismissed them out of hand, I can’t even b

by smabie 7y ago

When the author literally lists dozens of ideas that me and other people have spent their entire lives working on and dismissed them out of hand, I can’t even bring myself to read anymore. I don’t know anything about the firm GMO, but this guy is a troll and no one who actually cared about or respected finance would start a white paper with that sentence.

Zelphyr 7y ago
What are some examples? Genuine question since I really don’t have a dog in this fight and am curious about learning more.
- smabie 7y ago
  It would take days to talk about the stuff that guy doesn’t believe, but let’s talk about risk premia. Put simply, risk premia is the idea that a greater risk should yield a greater return. That is, no rational investor would bear more risk without being compensated for it. Here’s an example. You can play one of two games an infinite number of times in an instantaneous amount of time: one game you flip a coin and win a dollar on heads, tails you pay 99 cents. The other game you flip a coin and either win 1,000,000 dollars or pay 990,000 dollars. Which game would you play? Any rational person would play the former game, it has the same expected value with less risk or less volatility. I haven’t read this guy’s thoughts on why it’s stupid, but it’s a fundamental underpinning of finance and you would be hard pressed to find any real non-trolling financial professional arguing against it. It’s so intuitive that almost all everyday people would agree. Further reading would be about the capital market line (CML), the security market line (SML), and the efficient market hypothesis (EMH). Another idea he thinks is stupid is VaR (value at risk). While there are different ways of calculating it, all it simply means is: what is the probability that my portfolio loses x% of value tomorrow. There’s many ways of calculating it, the simplest being just calculate the historical correlations of all the assets in your portfolio and figure out the portfolio variance. Using linear algebra the variance is: Var(portfolio) = x^T P x where x is a column vector of security weights and P a square covariance matrix of all assets. Assuming a normal distribution (a bad assumption btw), we can easily calculate the, day, 5% chance of losing x amount of dollars tomorrow. Anyways, all I’m saying is that the stuff he’s shitting on (CAPM, EMH, Beta, etc) is so fundamental to the very fabric of finance itself, that he should get a Nobel prize if he actually had any good rebuttals. What he’s saying is like someone proposing an alternative to Newtonian physics in the 18th century. Which would be fine, but if he truly believed in what he was saying he would either have completely remade finance or he would be working in a different industry. Seeing that this firm GMO is working in the asset management space, I find it almost impossible that the employees of said firm aren’t using or don’t believe in the above mentioned concepts. In fact as a finance professional, I bet they believe in and use the aforementioned concepts every day and this guy is just stirring up shit in order for their firm to get more assets.
  - ikeboy 7y ago
    >Here’s an example. You can play one of two games an infinite number of times in an instantaneous amount of time: one game you flip a coin and win a dollar on heads, tails you pay 99 cents. The other game you flip a coin and either win 1,000,000 dollars or pay 990,000 dollars. Both have the same risk percentage wise.
    - smabie 7y ago
      The risk of extinction is greater for the second game. Which game would you play?
      - chowells 7y ago
        Both have a 100% risk of extinction when played infinite times instantly. Doesn't matter which you choose.
        jbeam 7y ago
        Betting infinite dollars does tend to lead to extinction.
        ikeboy 7y ago
        There's a 0% chance if you have infinite leverage.
  - roenxi 7y ago
    Part of what you are saying seems to focus on the idea that "these ideas are fundamental and everyone is doing this", which is true but a slight misdirection from other important issues. The reason they are fundamental and popular is because they are very compelling ideas with very plausible assumptions, and they tend to chronically outperform other strategies. It is like someone saying "Assuming average performance going forward is the stupidest idea since beanie babies" - ok, they can say that. Sometimes it is true. But it is a default position of such overwhelming practicality that there needs to be a really good reason to move away from it. The issue isn't going to be the ideas, misinterpretations and misconceptions about applications are the problem and that happens no matter how good or bad the underlying idea is.
EliRivers 7y ago
Is he wrong? It's not necessary to care about or respect something to critique it. Is he wrong?
jcims 7y ago
Not sure why it's so en vogue to communicate this way any more. What's the point? If you're trying to rile up your tribe members I suppose it helps there, but it doesn't actually change anything. Folks that don't agree with you are going to go shields up and bounce everything you say.
SliderUp 7y ago
If you can't see that in the main, using Shareholder Value as the main driver of corporate behavior is a bad thing, well, sorry. In a society where society provides infrastructure, defense, etc, corporations should have a trio of responsibilities. 1) Shareholder (including primarily stock compensated executives) returns 2) Employee (non primarily stock compensated) pay, benefits, and well-being. 3) Society. American capitalism has embraced #1 to the exclusion of all else, enabled by lax labor laws, corporate tax loopholes, and lower capitol gains taxing. ¯\_(ツ)_/¯
- smabie 7y ago
  I didn’t mention anything after his first sentence. I’m not going to get into shareholder value, but I will get into his flippant disregard of the most important discoveries of finance.
asveikau 7y ago
With respect, the fact or idea that some group of people has spent their life on something does not necessarily make it into the correct choices.
- weberc2 7y ago
  You misunderstood the GP. He isn’t saying it’s correct, only that it doesn’t deserve to be dismissed out of hand. I.e., it deserves a more robust treatment before dismissal is warranted.
- BurningFrog 7y ago
  It does make them experts in the field, and qualified to call out bullshit.
  - asveikau 7y ago
    Which means experts in the field were qualified to call bullshit on, say, Galileo or Copernicus? Sometimes entire fields are themselves based on bullshit, until a better theory comes along. I don't think it's this extreme in this case, and the parent provided some good elaborating context elsewhere, but do remember to stay humble and open.
Lazare 7y ago
Yeah, that opening sentence was extremely valuable, because it let me decide to stop reading so quickly.
gerbilly 7y ago
Why do you feel you need to defend finance? The fiance mindset has won and taken over the world. Being this defensive about one opening sentence makes you sound like sore winner. I don't know anything I'm sure compared to you, but I do know that we are trashing the environment and we aren't even bothering to feed clothe and give basic health care to everyone yet and we probably never will. I suspect maybe it's because we think in terms of finance. In medieval times they used to have people debate endlessly on obscure points of theology and catechism. Just because they had a lot of erudite people poring over that esoterica doesn't meant it was useful.
- BurningFrog 7y ago
  > I suspect maybe it's because we think in terms of finance. You're only stating a bias here. It tells us something about you, nothing about the world.

by smabie 7y ago

Zelphyr 7y ago

What are some examples? Genuine question since I really don’t have a dog in this fight and am curious about learning more.

smabie 7y ago
It would take days to talk about the stuff that guy doesn’t believe, but let’s talk about risk premia. Put simply, risk premia is the idea that a greater risk should yield a greater return. That is, no rational investor would bear more risk without being compensated for it. Here’s an example. You can play one of two games an infinite number of times in an instantaneous amount of time: one game you flip a coin and win a dollar on heads, tails you pay 99 cents. The other game you flip a coin and either win 1,000,000 dollars or pay 990,000 dollars. Which game would you play? Any rational person would play the former game, it has the same expected value with less risk or less volatility. I haven’t read this guy’s thoughts on why it’s stupid, but it’s a fundamental underpinning of finance and you would be hard pressed to find any real non-trolling financial professional arguing against it. It’s so intuitive that almost all everyday people would agree. Further reading would be about the capital market line (CML), the security market line (SML), and the efficient market hypothesis (EMH). Another idea he thinks is stupid is VaR (value at risk). While there are different ways of calculating it, all it simply means is: what is the probability that my portfolio loses x% of value tomorrow. There’s many ways of calculating it, the simplest being just calculate the historical correlations of all the assets in your portfolio and figure out the portfolio variance. Using linear algebra the variance is: Var(portfolio) = x^T P x where x is a column vector of security weights and P a square covariance matrix of all assets. Assuming a normal distribution (a bad assumption btw), we can easily calculate the, day, 5% chance of losing x amount of dollars tomorrow. Anyways, all I’m saying is that the stuff he’s shitting on (CAPM, EMH, Beta, etc) is so fundamental to the very fabric of finance itself, that he should get a Nobel prize if he actually had any good rebuttals. What he’s saying is like someone proposing an alternative to Newtonian physics in the 18th century. Which would be fine, but if he truly believed in what he was saying he would either have completely remade finance or he would be working in a different industry. Seeing that this firm GMO is working in the asset management space, I find it almost impossible that the employees of said firm aren’t using or don’t believe in the above mentioned concepts. In fact as a finance professional, I bet they believe in and use the aforementioned concepts every day and this guy is just stirring up shit in order for their firm to get more assets.
- ikeboy 7y ago
  >Here’s an example. You can play one of two games an infinite number of times in an instantaneous amount of time: one game you flip a coin and win a dollar on heads, tails you pay 99 cents. The other game you flip a coin and either win 1,000,000 dollars or pay 990,000 dollars. Both have the same risk percentage wise.
  - smabie 7y ago
    The risk of extinction is greater for the second game. Which game would you play?
    - chowells 7y ago
      Both have a 100% risk of extinction when played infinite times instantly. Doesn't matter which you choose.
      - jbeam 7y ago
        Betting infinite dollars does tend to lead to extinction.
      - ikeboy 7y ago
        There's a 0% chance if you have infinite leverage.
- roenxi 7y ago
  Part of what you are saying seems to focus on the idea that "these ideas are fundamental and everyone is doing this", which is true but a slight misdirection from other important issues. The reason they are fundamental and popular is because they are very compelling ideas with very plausible assumptions, and they tend to chronically outperform other strategies. It is like someone saying "Assuming average performance going forward is the stupidest idea since beanie babies" - ok, they can say that. Sometimes it is true. But it is a default position of such overwhelming practicality that there needs to be a really good reason to move away from it. The issue isn't going to be the ideas, misinterpretations and misconceptions about applications are the problem and that happens no matter how good or bad the underlying idea is.

EliRivers 7y ago

Is he wrong? It's not necessary to care about or respect something to critique it. Is he wrong?

jcims 7y ago

Not sure why it's so en vogue to communicate this way any more. What's the point? If you're trying to rile up your tribe members I suppose it helps there, but it doesn't actually change anything. Folks that don't agree with you are going to go shields up and bounce everything you say.

SliderUp 7y ago

If you can't see that in the main, using Shareholder Value as the main driver of corporate behavior is a bad thing, well, sorry. In a society where society provides infrastructure, defense, etc, corporations should have a trio of responsibilities. 1) Shareholder (including primarily stock compensated executives) returns 2) Employee (non primarily stock compensated) pay, benefits, and well-being. 3) Society. American capitalism has embraced #1 to the exclusion of all else, enabled by lax labor laws, corporate tax loopholes, and lower capitol gains taxing. ¯\_(ツ)_/¯

smabie 7y ago
I didn’t mention anything after his first sentence. I’m not going to get into shareholder value, but I will get into his flippant disregard of the most important discoveries of finance.

asveikau 7y ago

With respect, the fact or idea that some group of people has spent their life on something does not necessarily make it into the correct choices.

weberc2 7y ago
You misunderstood the GP. He isn’t saying it’s correct, only that it doesn’t deserve to be dismissed out of hand. I.e., it deserves a more robust treatment before dismissal is warranted.
BurningFrog 7y ago
It does make them experts in the field, and qualified to call out bullshit.
- asveikau 7y ago
  Which means experts in the field were qualified to call bullshit on, say, Galileo or Copernicus? Sometimes entire fields are themselves based on bullshit, until a better theory comes along. I don't think it's this extreme in this case, and the parent provided some good elaborating context elsewhere, but do remember to stay humble and open.

Lazare 7y ago

Yeah, that opening sentence was extremely valuable, because it let me decide to stop reading so quickly.

gerbilly 7y ago

Why do you feel you need to defend finance? The fiance mindset has won and taken over the world. Being this defensive about one opening sentence makes you sound like sore winner. I don't know anything I'm sure compared to you, but I do know that we are trashing the environment and we aren't even bothering to feed clothe and give basic health care to everyone yet and we probably never will. I suspect maybe it's because we think in terms of finance. In medieval times they used to have people debate endlessly on obscure points of theology and catechism. Just because they had a lot of erudite people poring over that esoterica doesn't meant it was useful.

BurningFrog 7y ago
> I suspect maybe it's because we think in terms of finance. You're only stating a bias here. It tells us something about you, nothing about the world.