Flirting with Models 15 Ideas, Frameworks, and Lessons from 15 Years
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Aug 28, 2023 On their 15th anniversary, the speaker reflects on their unexpected journey from starting the company in undergrad to its success. They share 15 lessons learned in the financial industry, including risk transformation, diversification, and the challenges of drawdowns and backtesting. They also discuss the importance of diversification in investment portfolios and the nature of backtesting.
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Risk Transforms, Not Disappears
- Risk in finance cannot be destroyed, only transformed and transferred between parties.
- Diversification spreads risk across different exposures but never eliminates it entirely.
No Pain, No Premium
- Higher expected returns come from bearing risk, implying short-term pain is inherent to investment premiums.
- The difficulty of sticking with a strategy preserves its premium by preventing overcrowding.
Diversify Beta Before Alpha
- Diversifying cheap beta sources can be as beneficial and more reliable than chasing expensive alpha.
- Exhaust beta opportunities before seeking alpha to improve portfolio returns.