Primers

Why Indexing Fails

The recent paper “Why Indexing works” [1] gives a probabilistic explanation of the futility of the Active process and why Passive Indexing is hard to beat. For every 1000 people who read the Wall Street Journal, maybe 10 read the Bloomberg Markets (BM) magazine and for every 10 who read the last month’s issue of…

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Are good months followed by good months?

Comment on ‘What is Value?’ – Mukul Pal, September 20, 2015. Roxana Crisan roxana.crisan@tralio.com It’s shocking how Nobel Prize winning economists have relied on naive assumptions. Harry Markowitz [1] assumed that good months (performance) would tend to be followed only by good months and bad months by bad months. Was Harry correct in making such…

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The Black Swan

Finance does not understand the physics of preferential attachment. According to Taleb, the intuitively appealing preferential attachment is incomplete. This is a tragedy for his ‘Black Swan’ because preferential attachment is the other name for ‘Rich Get Richer’. Taleb bases his philosophy of randomness on the non-normal power law behavior which is also another way…

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Web Singularity

Abstract Tim Berners Lee’s vision of the Semantic Web (Web 3.0) as defined in his 2001 paper with Hendler and Lassila though accurate is incomplete. The evolution of the web is not going to stop at its cognitive stage but will move towards becoming an ultra-smart agent and for that to happen the web needs…

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Jack, Your Revolution is Over.

Dear Jack, Standing against the establishment, having a voice and speaking up needs courage. This is what you did. You spoke up against the industry which started the first Mutual Fund in 1775. Bloomberg calls it a revolution, you call it a revolution, Wall Street Journal is calling it differently, but that does not matter….

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How The Noise Killed A Signal!

The Big Lesson When you make a big claim, you have to be careful. This is the lesson hardest to learn. I am still learning it. My stock market education helped me a lot. The one thing it always taught me was to be ready for a surprise. It happened again today, as markets got…

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How Blockchain Could Disrupt Wall Street!

  Implosion Before Disruption Before we talk about Blockchain disruption, let us talk about the implosion happening on Wall Street. The Realization that stock picking is dead [1] after decades of Active underperformance [2] has made beating the market an adventure sport, where only a few succeed. There was only one Peter Lynch [3], the…

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Firefighter from Idaho

Explaining to Mom If you can explain your money management innovation (rule-based portfolios) to your mom, it is golden. My mom gets it. Succeeding in selling and marketing a new financial innovation just like any other innovation will be about design. If it is not intuitive, no overselling, branding and marketing money is going to…

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Fruit Basket Paradox

Abstract Investment management which is worth USD 70 trillion can be seen like a fruit basket. The job of the fund manager was to select the fruits from the market and sell it to the investor. Global pensions are a part of this pool. Despite the important role fund managers play, there is a lot…

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Beyond Robo-Advisors

Robots vs. Advisors Ok! advisors might be inefficient but is it enough reason for the media wave against them. Agreed that evolution has to happen, and after the industry restructured broking, sized up researchers, and the equity sales, maybe it’s time to disrupt advising. One may argue that somebody has to take the responsibility for…

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Fake Gucci Illusion

  I was in Mumbai recently, meeting fund­­­ managers to understand where India was on the smart beta road. How fast was investor education evolving? What was the appetite for ETF’s? And what should be done from the regulation point of view to take the Indian markets to the next stage? I don’t know how…

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The frantic call

A few of our readers might remember, ‘The frantic call index’. Once in a few years, we receive many anxious calls. What’s happening to China? Are we in for another 2008? Is it going to be worse than 2008? What do you think? What about Oil? Forecasting is a weak science, whether it is sentiment…

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The Law of Ruin

Picture Source: Wikipedia Jules Augustin Frédéric Regnault was a French stock broker’s assistant who first suggested a modern theory of stock price changes in Calcul des Chances et Philosophie de la Bourse (1863) and used a random walk model. He is also one of the first authors who tried to create a “stock exchange science”…

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Winner's Curse

Inefficiency Searching for alpha is searching through inefficiency, because there are no super normal returns in efficiency. This seems intuitive and correct because there is cost to searching through inefficiency. And agents who spend that cost have to be rewarded for that effort. The case for inefficiency is unassailable. Subjective Inefficiency The case for what…

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The Intelligent System

Intelligent System Over the post event dinner at the Princeton – UChicago quant conference, the conversation veered to the definition of an intelligent system. My co-speaker (a physicist) from the conference defined intelligent system as a system that is entropy reducing. Science and Markets Connecting entropy with intelligent systems was brilliant not only because we…

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