@ReformedTrader: 88/ "The core of the risk mana...

88/ "The core of the risk management is evaluating the risk of each market based on an exponentially weighted moving average of the daily dollar range per contract.

"Through the chaos of 2008 and 2009, our volatility remained very near our target level of 12%." (p. 155)

89/ "Allowing the OTC markets to be unregulated and opaque makes as much sense as leaving 50 eight-year-olds unsupervised for a month. The OTC markets are very often used to take advantage of clients who are 'sophisticated' in the legal definition but naive in practice." (p. 156)

90/ "The OTC markets have been built to maximize asymmetries of information and are an example of how markets should not operate. Markets should be fair and transparent, as the futures and equities markets have mostly evolved to be." (p. 156)

91/ "Periods of poor performance are difficult. I generally handle it by focusing very hard on improving the trading system.

"Look where others don't. Adjust position sizes to overall risk to target a particular volatility. Pay careful attention to transaction costs." (p. 157)

92/ Ed Thorp:

Assuming winning and losing months are coin tosses, "the odds of getting at least one track record ≥ Thorp's would still be less than 1 out of 10^62. The odds of randomly selecting a specific atom in the earth would be about a trillion times better." (p. 162)

93/ "Track records such as Thorp's prove conclusively that it is possible to beat the market and that the large group of economists who insist otherwise are choosing to believe theory over evidence. (Thorp's track record is only one of many refutations of EMH.)" (p. 163)

94/ "This is a very conservative assumption since, in fact, the size of Thorp's average win was significantly higher than his average loss, which implies that the probability of Thorp achieving his win percentage by chance will be even lower than the estimate we derive." (p. 162)

95/ "Physicists would discuss models but wouldn't explain the assumptions carefully. Once I learned the logic of math, I could come back to physics and see quite clearly the assumptions they were making and why they were making them." (p. 170)

96/ "Life published an article, 'The Professor Who Breaks the Bank," which created a lot of publicity for blackjack betting systems.

"They discussed various alternatives, including getting rid of me and breaking knees. Fortunately, they settled on changing the rules." (p. 180)

97/ "The abstract committee reviewed my [blackjack paper/talk] proposal, and unbeknownst to me, they were going to reject it as the work of another crank.

"Fortunately, one of the members on the abstract committee was a number theorist whom I had worked with." (p. 181)

98/ "There was a much larger number of players who heard you could beat blackjack but were poor players. The casinos had a good thing, but they thought it was a bad thing. They started a war with the card counters. They tried to ban them. They beat up some of them." (p. 183)

99/ "The next day, on the drive home, the accelerator locked in the down position on a mountain road, and the car couldn't be stopped. The car sped up to 80 on this curvy mountain road.

"Something had fallen off to make the accelerator rod lock down." (p. 188)

100/ Schwager: "Don't you think you might be have been better off exploiting the warrant trading on your own instead of publishing?"

Thorp: "I don't think so, because historically, ideas don't just appear in one place; they tend to appear in several at the same time." (p. 190)

101/ "Warrants with less than two years to run typically traded at premiums that were too high. The typical trade we did was to short the warrant and hedge it by buying the stock. We started out with a static hedge and then decided that dynamic delta hedging was better." (p. 191)

102/ "The embedded optionality in convertible bonds tended to be underpriced, and funds could earn considerable profits by buying underpriced bonds and hedging the risk with short stock. Increased competition made the sophistication of the model more important." (p. 193)

103/ "The innovation vis-a-vis stat arb was that he grouped the stocks by industry and set up long/short portfolios. By adding industry neutrality, he significantly reduced the risk." (p. 201)

A paper was published about this in 2011 (26 years later):

View Tweet

104/ "I decided there was a better way (1986): make the strategy factor neutral. We did a principal components analysis of the portfolio and tried to neutralize the principal factors.

"The biggest PC is the stock market. The returns went up, and the risk went way down." (p. 203)

105/ "Over the years, hedge funds began to shift from having edges to being asset gatherers. At the same time, the fees increased. There was a time when a flat 20% profit incentive fee would do it. Then it became 20% incentive plus 1% management, then 2% management." (p. 209)

106/ "This tanker had a scrap value of $4 million, and Bruce Kovner bought it for $6 million. We just sat on it. It was sort of like an option on the oil market. When activity picked up, there was a huge demand for tankers, so our tanker got used over and over." (p. 210)

107/ "There are some versions of futures trend following that have a Sharpe ratio of about 1.0 or more, but that is low enough that there is still a significant risk of getting shaken out.

"It worked but was risky enough that it was hard to stay with it." (p. 211)

108/ "[Our strategy] combined technical and fundamental information. In metal/agricultural markets, backwardation/contango can be important, as can the amount of storage relative to storage capacity." (p. 212)

2007 for Thorp; this came out 12 years later:

View Tweet

109/ "We tracked a correlation matrix that was used to reduce exposure in correlated markets. If two markets were highly correlated, and the technical system went long one and short the other, that was great. But if it wanted to go long both or short both, we would take a smaller

110/ "position in each.

"A 60-day lookback was best. Too short of a window, and you get a lot of noise; too long, and you get old information that isn't relevant.

"We also had a risk management process that worked a bit like the old portfolio insurance strategy." (p. 213)

111/ "We didn't use the Kelly criterion at all in trend following because the bet size was such a small fraction of Kelly that it didn't make any difference. I would guess that we were probably using something equivalent to 1/10 or 1/20 of Kelly." (p. 214)

112/ "When I looked at Madoff's record, I noticed that miraculous trades (in S&P futures) would be put on periodically that would get rid of the potential losing months and make them winners and get rid of the big winning months and make them moderate winners." (p, 215)

113/ "Half of the option trades were for options that didn't even trade on the transaction date (zero volume). A quarter of the rest couldn't have traded at the prices quoted.

"His organization didn't appear as counterparty on any of [the 10 trades that were checked]." (p. 216)

114/ "I had previously found some small frauds and was told by a lawyer friend of mine who sent eight years working for the SEC that it would be a waste of time reporting it... because they didn't care about stuff like that." (p. 217)

115/ "Try to figure out what your skill set is and apply that to the markets. If you are really good at accounting, you might be good as a value investor. If you are strong in computers and math, you might do best with a quantitative approach." (p. 218)

116/ Jamie Mai

Schwager: Due to enormous contango, "it was possible to store oil on a tanker, hedge it by selling much higher-priced futures, and deliver it against the contract at expiration. The price difference far exceeded the costs of operating the tanker." (p. 224)

117/ Because the fund was too small for opportunities like the one above, "Mai decided to open it to a handful of like-minded, sophisticated investors with whom he could be reasonably transparent and share ideas rather than seeking to maximize assets under management." (p. 225)

118/ "My father nudged me toward accounting as a backdoor way to get into private equity (better than the traditional career path of investment banking or management consulting). There is some truth to the adage that accounting is the language of business." (p. 229)

119/ "Markets are generally good at estimating the magnitude of a contingent liability, but they are often poor at evaluating outcomes probabilistically. Examples include litigations, regulatory actions, and other events that create the perception of going concern risk." (p. 231)

120/ "Markets tend to overdiscount the uncertainty related to identified risks and underdiscount risks that have not yet been expressly identified. Whenever the market is pointing at something as a risk, most of the time, the risk ends up being not as bad as anticipated." (p.232)

121/ "We had already seen cases where the option market assigned normal probability distributions to situations that had clearly bimodal outcomes. Altria option prices still implied a normal distribution, which meant the out-of-the-money options were way too cheap." (p. 232)

122/ "Options are priced lowest when recent volatility has been very low. In my experience, however, the single best predictor of future increases of volatility is low HV. When volatility gets very low in a market, we look for ways to get long volatility." (p. 234)

123/ "Often, the longer the duration of an option, the lower the IV, which makes absolutely no sense. We recently bought OTM 10-year calls on the Dow as an inflation hedge. IV on the index is very low. If rates go up, the value of the options can go up dramatically." (p. 235)

124/ "Option models generally assue that forward prices are predictive of future movements in the spot price. Academic research and common sense suggests that this relationship is often invalid. Forward option-pricing models can break down, particularly in interest rate markets

125/ "with steep term structures and low volatility levels." (p. 235)

AQR generalizes this idea (carry) and applies it to a broad set of futures. They find that futures are worse forecasters than spot prices: in other words, carry works everywhere.

View Tweet

126/ "In 2010, the current Brazilian interest rate was ≈8%; the 6-month forward rate was >12%. 6-month forward option prices were distributed around the forward rate.

"IV was 100 bps normalized... the market was assigning the odds of rates staying ≈8% as >4 SD event." (p. 235)

127/ "We structured a trade that had a strike price ≈10%, which was cheap because it was well OTM based on the forward interest rate but was actually well ITM based on the current rate. Rates could have gone up by half the difference, and we would still have made money." (p.236)

128/ "Despite XLP's low beta, net percentage changes in XLP and the S&P 500 were almost identical.

"We went to an exotic option dealer and asked them to price an outperformance option. XLP had to outperform the S&P,and the S&P had to be unchanged to higher." (p. 240)

129/ "By making the option conditional on XLP outperforming the S&P, we were able to get beta exposure to the market extremely cheaply. Figuring out how to make the premium cheaper is one way of mitigating time decay." (p. 240)

Betting Against Beta (AQR):
papers.ssrn.com/sol3/papers.cf…

130/ "Volatility is a terrible proxy for measuring potential price change over longer intervals of time. One of our strategies, 'cheap sigma,' is predicated on the idea that markets sometimes trend and that volatility will dramatically understate the potential move." (p. 241)

131/ "In 2007, the Canadian dollar was trending very smoothly as it broke the dollar mark for the first time in decades. Spot went from about 1.10 to 0.92—a very large move. Based on the very low market volatility, a nonsensically improbable event had just happened." (p. 241)

132/ "Vol ∝ √t may provide reasonable approximations for shorter time intervals, say ≤1 year, but if you have a very low SD and extend it for a very long time, it doesn't scale properly. If one-year SD is 5%, assuming that 9-year SD = 15% is probably an underestimate." (p.242)

133/ "We achieve our margin of safety by having a high expected value. We are comfortable losing 100 percent of our premium four times in a row as long as we believe that a 25x payout is likely to occur if we make the bet 10 times consecutively." (p. 243)

134/ "We got to the subprime trade late, which is typical for us because we like situations where there is a compelling reason why a trade should be working, and the only counterargument is that everyone says it should work, but it hasn't." (p. 243)

135/ "Due to the zero correlation assumption implicit in the CDO construction, we were able to buy protection on the AA tranche, which consisted entirely of the worst quality subprime MBS, for only LIBOR + 50 bps. It was, without a doubt, complete and utter insanity." (p. 249)

136/ "The dealers had bought massive amounts of MBS to hold in inventory in anticipation of turning them into CDOs. So they were stuck with a huge amount of inventory of the crappiest MBS at the time when the ABX index based on those securities was falling sharply....

137/ "If proper mark-to-market prices were allowed on the existing CDOs, it would have killed the CDO market, and dealers would have been stuck with huge inventories of MBS."

Schwager: So the dealers were deliberately mispricing the CDOs?

Mai: "Oh, yes. The buyers of CDOs...

138/ "were not the most sophisticated investors.

"We asked, 'How could you issue a CDO at 70 bps that you are unwilling to assume the risk on at 300?' They said they would get back to us. Of course, they never did....

139/ "The ABX fell 30%, and our CDOs were still being marked at cost [by Bear Stearns].

"We were concerned about the integrity of the financial system. We bought a ton of puts and CDS on Bear Stearns because we though they would go bankrupt." (p. 250)

140/ "The ratings agencies rated thousands of securities with the same grade as U.S. Treasuries when they weren't worth more than the paper they were printed on. And yet, despite this horrific record, the market still jumps when the rating agencies opine." (p, 251)

141/ "It is difficult to come up with a more extreme case of failure to do a job. Until recently, ratings agencies have shielded themselves from responsibility, not on the substance of their argument, but rather by deflecting any claims under the shield of free speech." (p. 251)

142/ In early 2007, the newly launched TABX index "provided the first observable data indicating that the mezzanine tranches, up to the 'A' tranches, and perhaps even the 'AA' tranches of an index replicating CDOs had already lost total value. Yet the banks, who were desperately

143/ "trying to get their MBS inventory off their books, were still issuing similar CDOs at par. The TABX made it impossible for the banks to continue this charade.

"We love trades that are so close to their absolute limit tht they have tremendous asymmetry." (p. 252)

144/ "For several years, Korean companies that generated steady and impressive cash flows kept getting cheaper. Investors who had bought Korea earlier as a value trade had gotten burned. By the time we arrived, there were lots of companies trading at substantial negative

145/ "enterprise values. There were companies with market caps of $300 million, no debt, and $550M cash on the balance sheet, which was expected to increase to $650M the following year. There was tremendous asymmetry because these companies had nowhere to go but up." (p. 253)

146/ "One U.K. bank (Aug 2007) was 60x leveraged. Its balanced sheet was 7% of world GDP and >150% of U.K. GDP. Banks wouldn't lend to each other b/c they had too much exposure.

"We shut the [market-neutral equity] strategy down.... I was afraid of a lack of liquidity." (p. 271)

272/ "There was huge excess leverage in the system everywhere you looked, and when LIBOR jumped by 10 bps, it was like seeing the first crack. [LIBOR liquidity after that point] went straight down. The LIBOR-OIS spread started to widen." (p. 272)

148/ "In 2008, BlueCrest made the most money for investors in its history up to that point. Even so, many of our investors redeemed simply b/c they couldn't get their cash from anyone else. We were making $500 million a month and in numerous months paying out $1 billion." (p.273)

149/ "We faded a lot of the very big call and put skews in the market in 2009. The OTM strikes were insanely expensive, so we shorted a lot of OTM options and protected ourselves with offsetting long ITM options. The tails were enormously fat because of what had happened in 2008.

150/ "The breakeven points on the shorts in the OTM strikes were so crazy that you needed to have another major crisis to come anywhere near losing money on the position. And I didn't think we were going to have another crisis six months after the 2008 crisis." (p. 274)

151/ "The most dangerous risks [if correlations drop] is spread risks. If I assume that IBM and Dell have a 0.95 correlation, I can put on a large spread position with relatively small risk. But if the correlation drops to 0.50, I could be wiped out in 10 minutes." (p. 276)

152/ "Being long volatility is great protection against all scenarios. Typically, we are neutral to long volatility, and I hate shorting OTM strikes. We made an exception in 2009 because the OTM options were very overpriced, and we hedged them with long ITM positions." (p. 276)

153/ "I want guys who when they put on a good trade immediately start thinking about what they could put on against it. They have paranoia.

"Analysts and economists have big egos, which gets in the way of making money because they can never admit that they are wrong." (p. 278)

154/ "How you implement a trade is critical.... there are 20 different ways I can play it. Which way gives me the best risk/return ratio? My final trade is rarely going to be a straight long or short position." (p. 279)

155/ "Losing money kills you. It is not the actual loss... it messes up your psychology. You feel like an idiot, and you're not in the mood to put on anything else. Then the elephant walks past you while your gun's not loaded.

"80% of profits come from 20% of ideas." (p. 279)

156/ "You need a decent fundamental story, a good trend that looks like it will carry on, and the market handling news the way you think it should. Bull markets ignore any bad news, and any good news is a reason for a further rally." (p. 280)

157/ "The minute you ask people for their opinion, they feel important. If I ask a hedge fund manager for his opinion on where the 30-year bond will be trading in three months' time and he starts talking about factors that will push rates up, I know he is short bonds." (p. 281)

158/ "You have the option to keep 20% of your P&L this year, but you also want to own the serial option of being able to do that every year. You can't blow up.

"The two biggest mistakes traders make is that they don't do enough homework and are too casual about risk." (p. 282)

159/ Steve Clark: "Fear cripples people who have been in the business too long. Very few people maintain their ability to take risk throughout their careers. Most don't. Most can't. They have had too many bad things happen to them, too many fat tails; it damages people." (p. 293)

160/ "I've seen this happen to many traders, and I have gone through it several times myself. When you find that you can't make any money, smaller and smaller losses take on greater and greater emotional significance, and you lose all perspective." (p. 295)

161/ "Price is irrelevant; it is size that kills you. If you are too big in an illiquid stock, there is no way out. I wanted to cut the position, but I couldn't." (p. 298)

162/ "I had terrible experiences with people—company politics, people lying. In my view, all I had ever done for any of my employers was make money. Yet I didn't have much money. Either I didn't get paid properly, or even when I had a contract, I got screwed on that." (p. 304)

163/ "Running a fund doesn't make me happy. I enjoy it, but I used to enjoy it a lot more. It was less complicated: just trading. Now it's running a business.

"When you have a business, you can't walk away. It becomes a prison, whereas being a trader was very free." (p. 307)

164/ "I constantly think I am about to be found out, which is another personal driver. A number of times in my career, I have thought that maybe I have just been lucky. Maybe I don't really know what I'm doing, and I have just bluffed my way through." (p. 308)

165/ "If you are the type of person who doesn't handle volatility well, you will end up cutting and losing money, even if the trade was ultimately a big winner. It is the size of the position rather than the price that determines your ability to keep the position." (p. 309)

166/ "Liquidity is very important. When a merger deal breaks, we cut it straight away because you get a pocket of liquidity. It may be at a much lower level, but if you wait you will be left with an outsized position in what has become a directional trade." (p. 310)

167/ "Traders come from an information-rich environment, such as a big investment bank, and find that the information flow is all gone. It is like trading in a vacuum. They find they can't make money and maybe even lose a little bit. It becomes a downward spiral." (p. 310)

168/ "It is a very good thing to be busy.

"You don't want to be sitting in front of your screen and staring at market prices for 12 hours a day; that won't tell you much. You will overprocess and overtrade.

"You will feel physical pain with every tick against you." (p. 311)

169/ "Watch for signs that the stock is resilient on down days in the market, suggesting that there is underlying buying support, and nibble away at establishing a position." (p. 312)

This sounds like a discretionary version of risk-adjusted momentum:

View Tweet

170/ "I kept asking a question I knew he couldn't answer. I asked the same question 10 different ways. There were so many things that would have been perfectly reasonable for him to say, but all he said was, 'I can't answer that question.' "

"I said, 'Sell it now.' " (p. 313)

171/ "Because Deutsche Bank was a large seller of rights and the stock was difficult to borrow, the rights [embedded options] were trading below intrinsic value." (p. 314)

Impracticality of actual arbitrage made options available at arbitrage-like prices.

View Tweet

172/ "Nearly all successful traders I know are one-trick ponies. When they stray from that single focus, it often ends in disaster.

"A number of great macro traders decided to branch into multistrategy funds. It didn't work too well in 2008 when they were all exposed." (p. 315)

173/ "You need to be a bit obsessive to do the same thing 10 hours a day. People who are obsessive can become very good traders.

"Really good traders are also capable of changing their minds in an instant. If you can't, you will get caught in a position and wiped out." (p. 316)

174/ "In an instant, I completely switched my orders and started selling whatever I could.

"I recognized in a moment of clarity that if I had reached a fever pitch in trying to buy at any price, the moment the market turned, it would just head straight down." (p. 316)

175/ "OTM puts would provide protection against a change in margin requirements."

"In 2008, volatility quadrupled. I decided we should trade a fraction of what we used to. Most people didn't do that and got blown up." (p. 318)

Volatility targeting:

View Tweet

176/ "If you wake up thinking about a position, it's too big.

"Never stop asking questions. Speak to as many people as you can. Research every opposing opinion.

"When everything lines up, swing for it because even if you're wrong, you probably won't be by much." (p. 318)

177/ "If the position starts behaving in a way you don't understand, cut it because you clearly don't know what is going on.

"The market is not about facts; it's about people's opinions and positions. Anything can be any price at any time. You need to have stops." (p. 318)

178/ Martin Taylor: "High-level accounting is about opinion. You don't necessarily want someone who just looks at nuts and bolts because they're not going to get the big picture. That is why I think the London accounting firms recruit from across disciplines." (p. 326)

179/ "I expected to meet smart people; my list of companies included a lot of highly regarded firms. What both fascinated and appalled me was that all these [investment bankers, stockbrokers, asset managers] were just out of university, making hundreds of thousands of pounds...

180/ "while I'm making £12,000, and I thought 99% of them were just plain stupid. They were thick and arrogant, and yet they were earning these staggering sums of money.

"If you interview a trader for an audit, they try to blind you with jargon: alphas, deltas, gammas...

181/ "in the hope that you'll run away in 10 minutes because you can't understand.

"I hate failure, so I would make them take me through it. By doing that, I became fascinated by how markets work. Also, the 1% of traders who were smart were *really* smart." (p. 327)

182/ "I started with £2,000, and after six months, my account was up to £10,000. I thought I was a bit of a genius.

"As I made more money, I got more and more confident, and I increased my position each time. Ultimately, I put on a position where I was completely wrong." (p.328)

183/ "I sold it when my account was back to £2,000. Over a five-day period, I lost everything that I had made over the prior six months.

"Because I had lost money that I never had in my hand, it didn't feel as bad.... In another two days, I would have lost it all." (p. 329)

184/ "The Russian market had more than tripled during the Asian crisis as investors fleeing Asia shoveled money into a country that was being touted by brokers as a post-Communist 'miracle.'

"Although I was disgusted by Russia at the time, I had been willing to stay in it...

185/ "as long as it kept going up. I wasn't going to argue with all the idiots who were buying. If I had gotten out, and it kept going up, it could have been the end of my career. Remember, Russia was 40% of my benchmark.

"What I did was to be a bit underweight in Russia...

186/ "relative to the benchmark. So if it suddenly collapsed, I would still do better. The day the market collapsed, I felt physically sick because I was only underweight by 3%, and this was a situation [fraud in Russia] of which I had developed enormous conviction." (p. 334)

187/ "People who had missed out on the Russian bull market saw the previous day's sharp correction as an amazing buying opportunity.

"I was right to start selling that day because the spell created by the senseless bull market had been broken by the previous day's collapse....

188/ "When markets are trending up strongly and there is bad news, it counts for nothing. But if there is a break that reminds people what it is like to lose, suddenly the buying is not mindless any more. They start looking at fundamentals, which I knew were ugly indeed." (p.335)

189/ "No one in Russia wanted to buy ruble-denominated T-bills [at a 30% real rate of return]. The Russians knew perfectly well what was going on, and they put all their money in Switzerland. In an emerging market, the smart money is domestic, not international." (p. 336)

190/ "Having $2 billion to invest in a tiny market, as East European equities were at the time, was insane. I would have a good idea, put on about 25% of the position, and then the stock would run away because other people would hear what I was doing. I felt trapped." (p. 339)

191/ "If you're investing in assets with an annualized volatility of 20% to 40%, you're inevitably going to take two or three decent hits to your NAV each year. If you can't live with those hits because your clients are telling you that they can't live with monthly drawdowns...

192/ "as soon as a position starts going against you a bit, you will sell it in a panic near the lows. You will then be psychologically impaired in regard to that position, which means you will never buy it back and will miss out on any subsequent upside." (p. 340)

193/ "The people who annoy me the most are the market strategists that work for brokers. They will recommend being aggressively overweight or being net short, and then they are wrong for two or three years. They are total bears or total bulls. If they worked for a hedge fund...

194/ "they would been wiped out many times over. Running people's money, I can't take extreme positions and maintain my mental equilibrium.

"Being dogmatic is why a lot of hedge funds who did brilliantly in 2008 because they were short then blew up in 2009." (p. 341)

195/ "We didn't have a single redemption until October 2008. From that point on, our fund was used as a cash machine: given my golden rule of investing only in liquid securities, we remained open for monthly dealing. Most of our peers resorted to gating their funds." (p. 344)

196/ "Managing long-only money is easy because if you are up more than the index, everyone loves you, since a huge majority of the managers (85%) underperform the index. Even when you lose, as long as you are losing less in relative terms, people still love you....

197/ "Whereas if you are a hedge fund manager, when the market is up, investors want you to perform like the market or better. When the market is down, they want you to perform like cash." (p.345)

People don't diversify; they can't handle being different:

View Tweet

198/ "Management fees in emerging markets are relatively high: typically, 1% to 2%.

"The high volatility leads to managers making poor investment decisions, such as panicking out of positions near the bottom and jumping in near the top.

"The composition of the emerging market

199/ "index changes frequently, leading to a negative bias when managers sell a stock that has been dropped (widespread selling pressure).

"Emerging markets behave more irrationally than any other because a large proportion of participants are retail investors." (p. 345)

200/ "There are several reasons why emerging market long-only funds have persisted despite their appalling performance. One key reason is marketing. Look at the Templeton funds, for example, managed by Mark Mobius....

201/ "Contrary to his media image as an emerging markets investment guru, he has massively underperformed the index over the past 20 years. This fact hasn't stopped them raising tens of billions of dollars because he is always in the papers visiting and opining on emerging market

202/ "The world of investment advisors is heavily influenced by media image, so they suck their clients into this stuff.

"Clients are not looking at relative performance. If the index is up 10%/year and the advisor is up 6%/year, they are just looking at being up." (p. 346)

203/ "Previously, a large percentage of my clients were funds of funds who were driven by monthly data because a large percentage of their clients were as well. You end up obsessed with monthly returns, which can influence poor long-term investment decisions." (p. 348)

204/ "Bad companies have the greatest risk of being takeover targets. Emerging markets are full of sectors where multinationals want exposure, and the only companies they can generally take over are bad companies.

"It is much more difficult for a foreign firm to get government

205/ "approval for a takeover of a local company that is doing well or about to do well; the authorities will fear being seen as 'selling out' to foreigners. Whereas for a bad company, regulators are much more likely to approve the acquisition because it will be seen as saving

206/ "the company and saving jobs. You can be long a good stock at 7x earnings and short a bad stock at 15x , and some stupid foreign company comes along and pays a 50% premium for the bad company.

207/ "Most of our net exposure adjustment is done through shorting stock index futures rather than individual companies."

Robeco looked at the long and short legs of factors and found that the short leg has no alpha after controlling for the long leg:

View Tweet

208/ "We only short bad companies that can't be taken over because they are owned by the government or their own pension fund. If owned by the pension fund, it will never be sold because the workers are afraid that the acquiring company will sack 20% of the labor force." (p. 351)

209/ "In controlling risk, it is very important to have people in your team whose opinions you respect who can push back at your ideas in a way that will make you stop, listen, and test your own views." (p. 352)

210/ "Normally, I let winners run and cut losers. I consider taking quick profits in 2009 a dreadful error that came about because I had lost confidence due to experiencing my first down year in 2008. I was constantly worried markets were going to go down again." (p. 355)

211/ Tom Claugus: "My father was a product of the Depression and was scared to death of being poor again. I knew I wanted to be financially independent.

"I calculated that by saving 2/3 of my income and investing at 10%/yr, I could be a millionaire by the time I was 53." (p.362)

212/ "I never wanted to depend on my job for money, so I started investing from day one. I tried to give myself motivation to save money. My plan was to live on one-third of my income plus 3% of my net worth (based on the assumption that I could earn at least 10%/year)." (p. 363)

213/ "I started shorting. A lot of times, before the market cracks, lower-quality stocks zoom. I remember being on the tennis courts with my friends the summer of 1987, and I was losing so much money that I had to call my mother to get a loan to meet the margin call." (p. 363)

214/ This is consistent with the idea that factors' short legs are more vulnerable to tail risk (more negative skewness and higher kurtosis) than their long legs are.

View Tweet

215/ "I was short fly-by-night companies, some of which were prob. manipulated. I think there were two stocks that were up on 10/19/87; I was short one of them. It eventually cratered.

"The fundamental underpinnings were completely different from the way it was priced." (p. 364)

216/ "The responsibility of having other people's money really weighed on me. If you have a 10-year time horizon, you can make good decisions and make a lot of money.

"But if you have only a three-month horizon, anything can happen." (p. 366)

217/ "I didn't have the guts [to replace my shorts]. I have people tell me all the time that I should short stocks after they break. All I can tell you is that if you didn't short the stock when it was 80, psychologically, it is very difficult to sell it when it's 50." (p. 373)

218/ "Being short in a rising market is very difficult from an investor relations standpoint. In 2008, we were losing money, but so was everyone else. It's a lot easier to keep your capital base in that scenario." (p. 374)

219/ "Companies that are trying to jump the Grand Canyon and prob. won't make it: first, the company is trading at >5x book; second, the company is losing money.

Regardless of 1999, "I would short these types of stocks again because 99x/100, I am going to make money." (p. 375)

220/ "Just b/c you made money doesn't mean you were right; just b/c you lost money doesn't mean you were wrong. It is all a matter of probabilities." (p. 375)

Schwager: "It's not a matter of whether you won or lost, but whether you would make the same decision again." (p. 375)

221/ Joe Vidich:

As a stockbroker, "I didn't know anything. I was probably dangerous to my customers. I was literally following the firm's research, but if you work for a firm that has bad ideas, you don't have a chance." (p. 388)

222/ "It is always better to do your own work and get your own information because then you will have confidence. If you listen to someone else to get into a trade and things go bad, then you have to listen to that person again to get you out....

223/ "I have real antipathy to outside research analysts calling us with trading ideas because if you follow their advice to get into a trade, then you have to wait for their advice to get out, and things can change. The price could be down 10-15% before they call again." (p.390)