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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.

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.