WEBVTT - Gappy Paleologo 0:00:02.560 --> 0:00:11.840 Bloomberg Audio Studios, podcasts, radio news. Wait, Gapy Palio logo or. 0:00:14.000 --> 0:00:16.160 I'm so excited for you to tackle that and not me. 0:00:16.560 --> 0:00:17.040 Good luck. 0:00:17.200 --> 0:00:18.680 I thought I had it down, but then I heard 0:00:18.760 --> 0:00:19.279 you say. 0:00:19.120 --> 0:00:21.959 It, and I feel like when I first met you, 0:00:22.440 --> 0:00:25.960 I think I asked you if you go by Gappy 0:00:27.440 --> 0:00:32.040 because of your famous track record of taking gardening leave, 0:00:32.920 --> 0:00:35.040 like having gaps in your career. 0:00:35.400 --> 0:00:39.000 Oh okay, I didn't you remember that. Yeah, that's a 0:00:39.040 --> 0:00:43.160 great excuse for for a nickname. No, but the reason 0:00:43.360 --> 0:00:46.080 is when I came to the States for grad school, 0:00:46.840 --> 0:00:48.960 and this was a long time ago, in ninety five. 0:00:49.320 --> 0:00:52.519 So the first thing that you did was set up 0:00:52.560 --> 0:00:56.160 an email account. You still have the freedom to choose 0:00:56.200 --> 0:00:58.640 an email account. Now, they just give you your initials with 0:00:58.680 --> 0:01:04.679 the number, and so my initials are gap Gap, and 0:01:04.840 --> 0:01:09.040 of course it was taken. So I said, okay, well Gappy, 0:01:09.560 --> 0:01:13.479 and then everybody in grad school, and then my wife 0:01:13.600 --> 0:01:17.280 was Italian, everybody started to call me Gappy and that's stuck. 0:01:17.680 --> 0:01:21.000 And now at work they just have dispensed with my 0:01:21.080 --> 0:01:24.319 real name, like on all systems, I'm just Gappy Paliologo. 0:01:24.360 --> 0:01:27.479 So I expect that that will be you know, prosecuted 0:01:27.520 --> 0:01:31.120 for tax evasion because on my tax forms there is 0:01:31.160 --> 0:01:32.800 Gappy Palaiologo or something like that. 0:01:33.080 --> 0:01:36.480 Well, hello, and welcome to the Artistuff Podcast. 0:01:36.560 --> 0:01:39.480 I'm Matt Livian and I'm Katie Greifeld. 0:01:39.120 --> 0:01:43.800 And we have a guest today, Gabby pale Oligo, who 0:01:43.880 --> 0:01:48.120 is now at pali Asne and has been at most 0:01:48.160 --> 0:01:51.440 of the other couch funds and Hudson River Trading. I 0:01:51.480 --> 0:01:53.600 do want to start by talking. 0:01:53.320 --> 0:01:56.600 About gardening me, okay, natural. 0:01:57.000 --> 0:02:01.000 I think that we counted for your link Your LinkedIn 0:02:01.120 --> 0:02:05.080 is like famous for discussing your gardening live in some detail, 0:02:05.640 --> 0:02:08.680 and I think we counted three years of gardening. Leave No, 0:02:08.760 --> 0:02:12.040 I think it's a bit okay, it's not precise. Fifteen 0:02:12.080 --> 0:02:16.040 months from Citadel one you're Hudson River Trading and four 0:02:16.080 --> 0:02:19.280 months from millennium. Okay, so pretty close. 0:02:19.360 --> 0:02:21.880 Not terrible, though a bit less than two years. 0:02:22.560 --> 0:02:26.720 From my perspective, it seems very fun. Did you enjoy 0:02:26.760 --> 0:02:28.080 your three years of gardening? 0:02:28.360 --> 0:02:33.519 I do so. I try to keep myself busy, so 0:02:34.280 --> 0:02:37.480 I teach typically at some university. So the first time 0:02:37.880 --> 0:02:41.720 during my Seitaadel two Millennium, Guardian leve I was teaching 0:02:41.760 --> 0:02:45.440 at Cornell and in the HRT to Bam Guardian Leve, 0:02:45.440 --> 0:02:49.040 I was at NYU and I love teaching, and then 0:02:49.080 --> 0:02:53.560 what I do is it helps me focus on on stuff. 0:02:54.440 --> 0:02:58.680 Usually what I do in you know, whenever I read 0:02:58.680 --> 0:03:02.320 a book or paper that I like, I take notes. 0:03:02.560 --> 0:03:06.040 I take notes in Lattech and then I really arrive 0:03:06.280 --> 0:03:09.600 or think about things, and so that typically is the 0:03:09.639 --> 0:03:13.240 basis for my course material, and then it becomes the 0:03:13.280 --> 0:03:16.360 basis for my books. I've written a couple of books 0:03:16.400 --> 0:03:17.320 during my noncompetes. 0:03:17.560 --> 0:03:20.800 Interesting because thinking about gardening leave. Matt and I talk 0:03:20.840 --> 0:03:23.720 about it all the time because it's very alluring to me. 0:03:23.960 --> 0:03:27.200 Gardening leave doesn't really exist in journalism. I love to 0:03:27.240 --> 0:03:29.440 imagine what I would do. But one of the questions 0:03:29.440 --> 0:03:31.239 I had for you was, you know, do you ever 0:03:31.320 --> 0:03:34.840 have anxiety about losing your edge or falling behind? But 0:03:35.320 --> 0:03:37.600 it sounds like teaching is one of the ways. 0:03:37.320 --> 0:03:41.720 That particularly worried with that. I think that there is 0:03:41.760 --> 0:03:46.080 only a very specific subset of quantitative researchers who are 0:03:46.120 --> 0:03:50.000 afraid of losing their edges. And yeah, that's not been 0:03:50.040 --> 0:03:52.560 my case. I keep reading, I try to stay up 0:03:52.600 --> 0:03:53.120 to date. 0:03:54.200 --> 0:03:57.160 Feedback into the work like, do you get ideas or 0:03:57.200 --> 0:03:59.920 like deep in your understanding of techniques by teaching and 0:04:00.000 --> 0:04:02.360 writing the books? Or are they just sort of like. 0:04:03.760 --> 0:04:07.360 Extracurricular No, no, No, it's definitely I learn a lot 0:04:07.360 --> 0:04:08.360 from writing the books. 0:04:08.640 --> 0:04:10.119 How long do you I go to your next job 0:04:10.120 --> 0:04:13.320 and generate more profits by of. 0:04:13.240 --> 0:04:16.279 Course plenty more profits. Tell that to my employers. No, 0:04:16.400 --> 0:04:20.159 but I definitely I learn a lot from writing, from 0:04:20.200 --> 0:04:24.360 the first drafts, and then I rewrite and rewrite, and 0:04:24.480 --> 0:04:27.560 I learn a lot from discarding material too. It's very 0:04:27.640 --> 0:04:30.320 useful to discard material. It makes you really focus on 0:04:30.360 --> 0:04:34.039 what matters and what doesn't. So I try to give 0:04:34.040 --> 0:04:38.560 a narrative, like a logical connection between various topics, and 0:04:38.760 --> 0:04:41.960 that is something that is possible only when you write 0:04:41.960 --> 0:04:46.159 a book. I really do not like writing. That Nobody 0:04:46.200 --> 0:04:48.440 I think likes writing, maybe except for you. 0:04:48.760 --> 0:04:54.120 I understand that it's weird even among writers, but it is. 0:04:54.160 --> 0:04:57.200 Very I find it very painful. I find painful letting 0:04:57.279 --> 0:05:01.480 go of material, Yes, but I also like it. You know, 0:05:01.600 --> 0:05:05.480 it's some kind of strange delayed gratification. 0:05:05.640 --> 0:05:08.200 I guess one theory that I have written is that 0:05:09.520 --> 0:05:14.760 Hedge fund and quantitative research gardening leave is like a 0:05:14.920 --> 0:05:17.920 source of like human flourishing because you have all these 0:05:17.960 --> 0:05:20.680 like highly trained people who haven't enforced a year of 0:05:21.279 --> 0:05:23.720 And I've written that all the hedge fund researchers should 0:05:23.760 --> 0:05:27.920 go work at LM companies or like analytics departments of 0:05:27.960 --> 0:05:32.039 sports teams, and I'm like, partially kidding and partially not. 0:05:32.680 --> 0:05:36.520 How true is it for you? Like how much of 0:05:36.600 --> 0:05:43.680 like your quantitative skills at this point are really just 0:05:43.720 --> 0:05:45.560 for investing, and how much of it is like if 0:05:45.600 --> 0:05:50.080 you spent three months, you know, consulting for a soccer team, 0:05:50.160 --> 0:05:51.520 you would be able to tell them how to find 0:05:51.560 --> 0:05:52.680 better players. 0:05:54.760 --> 0:05:57.560 I'm not sure, so I'll say this right. I was 0:05:57.600 --> 0:05:59.880 thinking a few days ago if there was a kind 0:05:59.880 --> 0:06:03.680 of a common thread in my professional life, because it 0:06:03.720 --> 0:06:07.880 seems kind of random, And actually I think that there is, 0:06:08.320 --> 0:06:12.560 because I think that I was about fourteen when I 0:06:12.600 --> 0:06:16.159 realized that I had an aptitude for applied math. I 0:06:16.200 --> 0:06:20.880 discovered physics, and I liked math, and I also liked 0:06:20.880 --> 0:06:25.000 literature very much, so I loved reading. I read a lot. 0:06:26.000 --> 0:06:29.680 I was not a very social animal. And then basically 0:06:29.760 --> 0:06:33.960 since then, I've been doing the same thing in various forms. Right, 0:06:33.960 --> 0:06:36.960 I did physics, I did applied math. I didn't do 0:06:37.040 --> 0:06:40.360 applied math in finance. I did applied math in weird 0:06:40.440 --> 0:06:44.479 things like optimization and logistics. So I have been doing 0:06:44.560 --> 0:06:46.440 kind of the same thing over and over, which has 0:06:46.480 --> 0:06:50.400 been writing and applying math to something. So I think 0:06:50.440 --> 0:06:52.640 that I could do it. I would like to do it, 0:06:52.960 --> 0:06:58.039 but I also think that it's not that simple to 0:06:58.720 --> 0:07:01.119 go to a new field and oh, after three months, 0:07:01.160 --> 0:07:04.280 I know soccer. No, there is a lot of specificity. 0:07:04.400 --> 0:07:08.520 And the beauty of I think being a good applied 0:07:08.720 --> 0:07:12.680 mathematician is that they start with the problems and with 0:07:12.720 --> 0:07:16.720 the domain first, and that they're sufficiently mature from a 0:07:16.720 --> 0:07:20.720 mathematical standpoint that they are not making too much of 0:07:20.760 --> 0:07:24.320 an effort in using math. So I think the good 0:07:24.480 --> 0:07:29.200 art of being an applied mathematician is to study persistently 0:07:29.400 --> 0:07:32.360 the application. So no, I don't think that after three 0:07:32.360 --> 0:07:35.080 months it would be good enough. But after a year, 0:07:35.760 --> 0:07:37.960 you know, about a year of being fully immersed in 0:07:38.000 --> 0:07:41.360 an application, then you start getting a little bit better, 0:07:41.560 --> 0:07:44.920 and then the math is not the problem, and then 0:07:44.920 --> 0:07:46.320 you start doing some good work. 0:07:46.720 --> 0:07:49.720 You have a famous essay on like advice for quant 0:07:49.760 --> 0:07:53.160 careers and you say that like the things that matter 0:07:53.240 --> 0:07:59.240 the most creativity and genuine interest in the problems more 0:07:59.280 --> 0:08:03.440 than you know, math, coorse power. Yeah, this is a 0:08:03.520 --> 0:08:06.560 dumb question. But how does one develop how does one identify, 0:08:07.280 --> 0:08:11.400 you know, creativity and interest in financial topics? And is 0:08:11.440 --> 0:08:14.000 the obvious answer those are where the money is? Or 0:08:14.080 --> 0:08:16.680 like like why why did you fall in love with 0:08:16.720 --> 0:08:19.720 finance as a topic, And is the answer because that's what. 0:08:19.680 --> 0:08:21.320 The money is. So first of all, I think that 0:08:21.480 --> 0:08:25.720 creativity is either a personality trait doesn't belong to You're 0:08:25.760 --> 0:08:28.920 not creative in finance, you know, you're you're creative in 0:08:28.920 --> 0:08:32.160 in cooking, you're creative in whatever. And it's a mix 0:08:32.320 --> 0:08:37.200 I guess of extraversion opening and as to experience, and 0:08:37.360 --> 0:08:39.360 I don't know what else. I'm not a psychologist, but 0:08:39.440 --> 0:08:43.200 I do believe that people are genuinely creative. And in fact, 0:08:43.320 --> 0:08:47.600 you see it right that sometimes you ask someone and 0:08:47.640 --> 0:08:51.880 you find out that yes, they like writing, they play 0:08:51.960 --> 0:08:55.600 some instrument if badly, and you know, and they paint 0:08:55.800 --> 0:08:58.679 and they do whatever. And so I would say, if 0:08:58.679 --> 0:09:01.160 you go to finance because where the money is, there's 0:09:01.200 --> 0:09:03.680 nothing wrong with that. And in a way, that's my 0:09:03.760 --> 0:09:06.800 story you know, I was, I was a researcher. I 0:09:06.880 --> 0:09:11.360 wanted to have more money and whatnot. But eventually you 0:09:11.400 --> 0:09:13.600 stay in finance, or at least in my you know, 0:09:13.679 --> 0:09:19.840 little domain, because you're genuinely curious about finding out stuff, right, So. 0:09:20.480 --> 0:09:24.400 Like why are the problems like why do they arouse curios? 0:09:24.520 --> 0:09:27.000 Like why are the problems of finance intrigue you after 0:09:28.240 --> 0:09:30.360 years of doing it? Right? Like what's interesting about those 0:09:30.360 --> 0:09:31.880 problems as opposed to other domains. 0:09:32.040 --> 0:09:34.160 It's really hard for me to say, Like I think 0:09:34.160 --> 0:09:37.960 that I read once that a young songwriter asked Bob 0:09:38.040 --> 0:09:41.079 Dylan how to become a good songwriter, and Bob Dylan 0:09:41.240 --> 0:09:44.240 just answered, well, what's going on? I said, what do 0:09:44.320 --> 0:09:46.240 you mean, what's going on? Yeah, what's going on? What's 0:09:46.280 --> 0:09:48.840 going on in your life? Just you know, look around. 0:09:49.400 --> 0:09:52.960 So sometimes I get these questions from investors, But you know, 0:09:53.160 --> 0:09:55.840 how do you keep yourself interested? How do you find problems? 0:09:56.520 --> 0:10:00.480 It's not a problem like the problems jump at you 0:10:00.520 --> 0:10:02.480 like there are too many problems. There are too many 0:10:02.480 --> 0:10:07.160 interesting problems. So if anything, the skill is in sorting 0:10:07.200 --> 0:10:10.079 the problems in the right order, right. That is where 0:10:10.240 --> 0:10:14.080 maybe having some maturity in doing research kicks in. But 0:10:14.480 --> 0:10:18.640 there are lots of problems, infinite problems, weird problems. 0:10:18.720 --> 0:10:20.000 What's your favorite problem right now? 0:10:21.240 --> 0:10:23.080 I don't like right now? What are we working on? 0:10:23.120 --> 0:10:26.640 I mean, we are trying to understand how earnings are monetized? Right? 0:10:26.679 --> 0:10:29.320 How do you make money in earnings? It's such a 0:10:29.400 --> 0:10:31.760 basic thing in fundamental equities. 0:10:32.480 --> 0:10:35.480 And you mean, if you're like correct about predicting. 0:10:35.160 --> 0:10:38.280 Earnings, yes, what are I mean without getting too much 0:10:38.320 --> 0:10:42.760 into details, but you know there what are the relevant variables? 0:10:42.880 --> 0:10:45.360 Imagine that you had an oracle who told you what 0:10:45.480 --> 0:10:47.640 the variables are? What would you do with that? What 0:10:47.679 --> 0:10:49.880 would you do if you'd had all the information in 0:10:49.920 --> 0:10:53.160 the world right and everything in your world here in 0:10:53.200 --> 0:10:55.600 existence would be like an approximation problem. 0:10:56.080 --> 0:11:00.560 There's an incredible STYLI story of like the guys into 0:11:01.400 --> 0:11:04.040 I think, like one of the newswire services and got 0:11:04.360 --> 0:11:07.840 earnings releases early like for hundreds of companies, and they 0:11:07.880 --> 0:11:10.559 traded on this and they had like a seventy percent 0:11:10.600 --> 0:11:13.480 success rate, which is great, but also like it means 0:11:13.480 --> 0:11:15.960 that had a thirty percent, like they traded the wrong way, 0:11:16.080 --> 0:11:19.520 knowing earnings perfectly in advance. It's like a good yeah, yes, 0:11:19.800 --> 0:11:21.960 so I had the you know, it's still hard. 0:11:22.160 --> 0:11:25.320 Yes, it's still very hard. Actually, shout out to Victor Hagan, 0:11:25.360 --> 0:11:27.240 who wrote the paper about ten years ago on this. 0:11:27.640 --> 0:11:31.199 He made a organize a simple controlled experiment where he 0:11:31.360 --> 0:11:34.400 gave basically a biased coin where you, I think had 0:11:34.400 --> 0:11:37.480 a success rate of sixty percent forty percent failure, and 0:11:37.520 --> 0:11:39.640 you had some capital and you could invest it over 0:11:39.679 --> 0:11:44.040 time on these informed predictions, and a lot of subjects 0:11:44.080 --> 0:11:48.240 went bankrupt. Okay, now I think we are better than that, 0:11:48.320 --> 0:11:52.199 but still there are lots of problems related to trading 0:11:52.240 --> 0:11:52.960 around an event. 0:11:53.280 --> 0:11:57.120 For example, before we get too far away, you mentioned 0:11:57.160 --> 0:12:00.679 Bob Dylan. It actually reminded me of another Dylan quote 0:12:00.679 --> 0:12:03.840 which I'm going to paraphrase poorly, but he basically said, 0:12:03.880 --> 0:12:06.520 when asked about writing songs, do you think that you 0:12:06.520 --> 0:12:09.400 could write whatever the work that was being referenced now, 0:12:09.400 --> 0:12:12.440 And he said, I don't think so. It's like the 0:12:12.480 --> 0:12:15.280 words were in the air and I just plucked them out. 0:12:15.400 --> 0:12:17.679 They were just sort of hanging in the air and 0:12:17.720 --> 0:12:20.120 they came to me. And it kind of also rang 0:12:20.160 --> 0:12:21.720 true with what you were saying about you didn't go 0:12:21.800 --> 0:12:26.160 looking for problems, They're just there. Necessarily. I actually want 0:12:26.160 --> 0:12:28.400 to go back to applied math if it doesn't interrupt 0:12:28.400 --> 0:12:31.640 the course of conversation too much. You tweeted on June 0:12:31.679 --> 0:12:35.000 twenty fourth that there's no child prodigies when it comes 0:12:35.040 --> 0:12:38.800 to poetry, when it comes to applied mathematics. And I'm 0:12:38.800 --> 0:12:40.480 not saying that. You said that you were a prodigy, 0:12:40.600 --> 0:12:43.560 but you were a child at fourteen. I mean, how 0:12:44.400 --> 0:12:47.600 at fourteen do you realize that you have an aptitude 0:12:47.640 --> 0:12:49.800 for something like applied mathematics? 0:12:50.400 --> 0:12:52.360 All right, I don't want to flex about this stuff, No, 0:12:52.440 --> 0:12:56.600 you should. I think I'm honestly a little weird. I'm 0:12:56.679 --> 0:12:58.600 just a little weird, I think, honestly, but I. 0:12:58.640 --> 0:12:59.960 Like prodigy weird or. 0:13:00.840 --> 0:13:03.720 I did have my share of yeah, adults telling me 0:13:04.160 --> 0:13:06.720 that I was good at this or that or you know. 0:13:07.000 --> 0:13:11.480 But yeah, I mean, okay, I'm just a little bit atypical. Also, 0:13:11.480 --> 0:13:14.640 when I talk to investors, I think investors enjoy my 0:13:14.720 --> 0:13:20.320 presence because I think I'm incredibly unfiltered for somebody who's 0:13:20.360 --> 0:13:23.679 talking to them, so it's like fun for them. And 0:13:23.760 --> 0:13:26.720 I was very unfiltered when I talk to my professors 0:13:26.760 --> 0:13:31.960 in school. Sometimes I corrected them stuff like this, Yeah, 0:13:31.960 --> 0:13:34.240 I don't know, honestly, I don't know. 0:13:34.400 --> 0:13:37.560 When you talk to like fundamental equity portfolio managers, like 0:13:39.120 --> 0:13:43.400 how much like matrix algebras they're in your conversations like 0:13:43.440 --> 0:13:46.920 how quantity are the fundamental pms or whatever. 0:13:47.480 --> 0:13:49.280 I don't think they're quantity, but I think that they're 0:13:49.360 --> 0:13:53.079 very analytical. So I don't think that they would make 0:13:53.720 --> 0:13:57.920 great mathematicians, but I think they would make very very 0:13:57.960 --> 0:14:01.720 decent applied mathematicians. Actually, they tend to be very analytical. 0:14:01.960 --> 0:14:04.880 They tend to be very process oriented. And they have 0:14:04.960 --> 0:14:08.920 also additional qualities that actually mentioned in that essay, like 0:14:09.160 --> 0:14:13.560 they have very little disposition effect, so that's part of 0:14:13.600 --> 0:14:17.560 being analytical. They have no sound cost fallacy in them. 0:14:17.960 --> 0:14:19.880 So even though they don't do a lot of math, 0:14:20.040 --> 0:14:21.880 but they do some math. Okay, So first of all, 0:14:21.920 --> 0:14:25.520 they're fluent in a sense in basic literacy. But I 0:14:25.520 --> 0:14:28.840 think it's more their process that is closer to if 0:14:28.920 --> 0:14:31.760 not a mathematical one, but more of a scientific one. 0:14:32.920 --> 0:14:36.200 And when it comes to being a quant does it 0:14:36.240 --> 0:14:38.720 basically boil down to being good at math and being 0:14:38.760 --> 0:14:42.000 interested in math? Are things such as statistics and physics? 0:14:42.440 --> 0:14:46.400 I mean, do you need to have any finance or 0:14:46.440 --> 0:14:49.120 economics background at all. 0:14:49.280 --> 0:14:53.840 So I think that having an economics background is not 0:14:54.280 --> 0:14:58.600 necessarily a benefit, might even be a disadvantage actually, But 0:14:59.040 --> 0:15:01.520 just based on very few samples that I have a 0:15:01.560 --> 0:15:05.640 lot of very good, outstanding quantitative researchers actually come from 0:15:05.680 --> 0:15:10.040 physics and specifically from astrophysics. That's the experience that I've 0:15:10.040 --> 0:15:11.920 had in a couple of places. 0:15:11.680 --> 0:15:16.000 In broad brushstrokes, could you talk about why economics in 0:15:16.040 --> 0:15:19.320 the small sample size you have, how could that possibly 0:15:19.400 --> 0:15:21.640 be a detriment good? 0:15:22.880 --> 0:15:25.400 So I can answer the second question more easily. I 0:15:25.440 --> 0:15:30.560 think that astrophysicists deal with large amounts of data, and 0:15:31.080 --> 0:15:34.280 they deal with observational data, so they don't get to 0:15:34.440 --> 0:15:38.280 do a lot of experiments. And that's good for finance, right, 0:15:38.400 --> 0:15:40.160 you deal with a lot of data. You need to 0:15:40.240 --> 0:15:43.520 know how to have good agen for observational data, and 0:15:43.560 --> 0:15:45.520 you need to have very good theory, like you need 0:15:45.560 --> 0:15:49.040 to have very good instruments without being falling in love 0:15:49.120 --> 0:15:54.640 with those instruments. Whereas I think economists, Okay, first of all, 0:15:54.840 --> 0:15:59.040 my statement is purely empirical. Okay, So I'm just really 0:15:59.080 --> 0:16:02.000 guessing on a economists and I'm going to be hated 0:16:02.080 --> 0:16:07.520 by all economists or economists in finance, but I do 0:16:07.600 --> 0:16:10.240 have my issues with their methods. 0:16:10.320 --> 0:16:10.480 Right. 0:16:10.520 --> 0:16:12.480 So, first of all, I think that there is an 0:16:12.480 --> 0:16:16.160 original scene in economics, which is I think a lot 0:16:16.200 --> 0:16:21.160 of economics is informed by a desire to be as 0:16:21.240 --> 0:16:25.760 rigorous as mathematics. Right, And so a lot of theoreticians 0:16:25.760 --> 0:16:29.200 in economics are very deductive in their approach. If you 0:16:29.280 --> 0:16:33.040 think of you know, the unrealistic assumptions behind the welfare 0:16:33.080 --> 0:16:38.440 theorems or arrows impossibility theorem or whatnot, or just pick 0:16:38.520 --> 0:16:42.400 up you know Samuelson textbooks, and I think this is 0:16:42.640 --> 0:16:48.280 just axiomatic rather very axiomatic, very deductive. Whereas physicists are 0:16:48.400 --> 0:16:53.120 very happy to think in terms of small idealized models 0:16:53.120 --> 0:16:56.560 that apply to a specific domain, and if the model 0:16:56.560 --> 0:16:59.200 doesn't work out, they will discard and make another one. 0:16:59.800 --> 0:17:03.960 The grand theory behind physical theories exists, like there are 0:17:03.960 --> 0:17:06.680 people who do this for a living. But many, many 0:17:06.760 --> 0:17:11.240 good theoretical economists physicists starting the small and then they 0:17:11.359 --> 0:17:16.680 expanded domain of their models. So economists tend to maybe 0:17:16.680 --> 0:17:18.880 in a sense, fall in love with methods too much, 0:17:18.920 --> 0:17:20.040 with techniques too much. 0:17:32.800 --> 0:17:35.160 We had cliff Astness on the podcast a little while ago, 0:17:35.760 --> 0:17:38.440 and my father, not a finance person, listened to the 0:17:38.480 --> 0:17:41.399 episode and said, I still don't know what a quant is. 0:17:41.880 --> 0:17:46.600 I just read skimmed your new book which is called 0:17:46.600 --> 0:17:50.600 The Elements of Quantitative Investing, and as lays out the elements, 0:17:51.119 --> 0:17:52.800 what is a quant like? What are the elements? Like? 0:17:52.840 --> 0:17:55.280 What's the thing that makes someone a quant investor that, 0:17:55.359 --> 0:17:58.639 like someone reading a slim book about the Elements of 0:17:58.720 --> 0:17:59.960 quant investing needs to learn? 0:18:01.040 --> 0:18:04.480 Well, if I am being consistent with my book, investing 0:18:04.560 --> 0:18:08.080 is really about problems and not about specific techniques or 0:18:08.119 --> 0:18:10.920 anything like this, Right, So it's basically a way to 0:18:11.200 --> 0:18:14.640 go through the whole investment process from let's say preparing 0:18:14.680 --> 0:18:20.679 the ingredients to cooking to eating. That is very process driven. Ultimately, 0:18:21.320 --> 0:18:24.760 you would imagine that one thing that you know, quant 0:18:24.840 --> 0:18:28.480 investing has in common across multiple domains, you know, if 0:18:28.480 --> 0:18:33.679 you do futures, stocks, event based and whatnot, is I 0:18:33.720 --> 0:18:36.480 think the number of bets tends to be high in 0:18:36.560 --> 0:18:41.120 systematic investing. Right, so you can be a very successful 0:18:41.520 --> 0:18:45.760 microeconomic investor portfolio manager. And you you know, according to 0:18:45.840 --> 0:18:49.280 even several statements by Buffett, you know, he made like 0:18:49.920 --> 0:18:53.600 ten twelve very good bets. Okay, so that's great, and 0:18:54.160 --> 0:18:57.040 that's not quant investing. You know, you could put enough 0:18:57.160 --> 0:19:00.119 pms making you know, twenty bets in their lives, you 0:19:00.359 --> 0:19:03.680 will get a few that have let's say twelve thirteen, right, 0:19:03.840 --> 0:19:07.439 and they will be rich. We do not have that luxury, right. 0:19:07.480 --> 0:19:09.639 We have to make millions of bets. You know, we 0:19:09.720 --> 0:19:13.240 trade a portfolio with three thousand stocks sometimes in waves 0:19:13.320 --> 0:19:17.600 of half an hour. You can't make a judgment on 0:19:17.680 --> 0:19:20.120 all of these bets. So you need a method that 0:19:20.200 --> 0:19:23.920 reduces the dimension of your problem to something that can 0:19:23.960 --> 0:19:28.280 be treated in a systematic manner. I don't know if 0:19:28.280 --> 0:19:31.280 that answers for you. You know that, but you know, basically, 0:19:31.280 --> 0:19:33.520 basically the idea is, think about if you make a 0:19:33.560 --> 0:19:36.560 lot of bets, you cannot bet individually. You have to 0:19:36.640 --> 0:19:38.760 have some kind of juristic or some kind of method 0:19:38.800 --> 0:19:39.439 around that. 0:19:39.640 --> 0:19:41.480 Right, and like to me, like the book sort of 0:19:41.560 --> 0:19:44.360 you know, the standard method I guess I'm quite investing 0:19:44.440 --> 0:19:48.160 is you build a factor model of what drives your 0:19:48.240 --> 0:19:50.840 universal investments. You're shutting your. 0:19:50.720 --> 0:19:53.920 Head, Yeah, I yes, and no, I think yes because 0:19:53.960 --> 0:19:55.920 the book, you know, has maybe one hundred and fifty 0:19:55.920 --> 0:20:00.600 pages on factor models, but also no, because maybe in 0:20:00.600 --> 0:20:03.119 one hundred years from now, I suspect there will be 0:20:03.119 --> 0:20:06.520 still something left. But you know, we might have better 0:20:06.560 --> 0:20:09.360 techniques and not necessary factor models any longer. 0:20:09.600 --> 0:20:11.879 I don't know, we don't want to go. Two attractions 0:20:11.880 --> 0:20:13.960 of that, one is like, are the better techniques something 0:20:14.000 --> 0:20:17.440 more neural netty unstructured? 0:20:17.720 --> 0:20:20.320 Who knows? Yeah, something like that. I mean there is, 0:20:20.560 --> 0:20:22.120 there is a revolution every five years. 0:20:22.280 --> 0:20:29.720 So my other question is like I've never fully understood 0:20:30.560 --> 0:20:33.240 like a factor model is like the here are some 0:20:33.359 --> 0:20:37.520 factors that drive the returns of stocks, and then there's 0:20:37.560 --> 0:20:41.639 like some residual idiots and credit return. There are clearly 0:20:41.640 --> 0:20:46.359 people whose business is to identify factors and then invest 0:20:46.400 --> 0:20:50.200 in factors. My impression is that at like the places 0:20:50.200 --> 0:20:52.639 that you work, the business is the opposite of that 0:20:52.800 --> 0:20:55.600 is to hedge out your factor risk as much as 0:20:55.640 --> 0:20:59.240 possible and to get as much idiosyncratic risk as possible. 0:20:59.840 --> 0:21:03.119 Is that right? And like, like, how do you discriminate 0:21:03.200 --> 0:21:05.879 between like a factory return and idiosymcratic return, Like what 0:21:05.960 --> 0:21:08.399 makes the thing a factor as opposed to another ring. 0:21:08.520 --> 0:21:11.159 So that's a good question. So first, a lot of 0:21:11.240 --> 0:21:14.920 systematic investing is still about factors, just not the factors 0:21:14.960 --> 0:21:17.439 that get published in the literature, you know, not the 0:21:17.440 --> 0:21:21.560 factors that Cliff maybe was talking about. And yet a 0:21:21.600 --> 0:21:25.320 lot of successful systematic investing is really factor driven. 0:21:25.960 --> 0:21:27.639 It in the sense that you have a model that 0:21:27.680 --> 0:21:31.560 has like twenty factors and like ten are like value, 0:21:31.960 --> 0:21:34.080 and you neutralize those and you try the other time. 0:21:34.280 --> 0:21:36.080 You do, and you do the rest. You have other 0:21:36.240 --> 0:21:39.879 terms that matter. So that's one thing, But there are 0:21:39.880 --> 0:21:44.840 two other things. There are sometimes sources of returns that 0:21:45.160 --> 0:21:50.159 are factor like but not quite like factors. So you 0:21:50.240 --> 0:21:52.639 may have a theme. For example, you may identify a 0:21:52.720 --> 0:21:57.440 theme in the market that is not pervasive enough or 0:21:57.600 --> 0:22:00.520 is alive only for a few months, but is there 0:22:00.600 --> 0:22:03.560 and it's not only affecting let's say two stocks. Right, 0:22:03.640 --> 0:22:07.640 So these brought thems can be invested on, but cannot 0:22:07.760 --> 0:22:11.960 really model in the traditional way as a traditional factor model. Also, 0:22:12.040 --> 0:22:15.560 there is a lot of good modeling in factors as 0:22:15.560 --> 0:22:18.119 opposed to bad modeling, So it's it seems easy, but 0:22:18.160 --> 0:22:20.119 it's not that easy. So there is a little bit 0:22:20.119 --> 0:22:24.040 of craftsmanship in making these models, okay, And then the 0:22:24.080 --> 0:22:27.040 third thing is that there are also returns that have 0:22:27.119 --> 0:22:29.560 nothing to do with factors, or almost nothing to do 0:22:29.680 --> 0:22:33.320 with factors. So if you really know how a company works, 0:22:33.720 --> 0:22:35.439 and you have a little bit of an edge in 0:22:35.640 --> 0:22:39.440 predicting its future performance, you can bet on it, and 0:22:39.680 --> 0:22:42.359 you make enough bets and again you will make some 0:22:42.520 --> 0:22:46.120 money if you repeat, and you know recycle. So even 0:22:46.160 --> 0:22:50.560 discretionary investing in this sense has inherited a little bit 0:22:50.600 --> 0:22:53.200 of the spirit of systematic investing. 0:22:53.400 --> 0:22:54.960 I think of that as like that a pod job, 0:22:54.960 --> 0:23:00.840 but like aval like you have discretionary investors who know 0:23:00.920 --> 0:23:03.160 a lot about a company make bets on the company, 0:23:03.520 --> 0:23:06.560 and then someone like you tells them, these are your 0:23:06.560 --> 0:23:08.639 factory exposers. You have to get those down to zero. 0:23:09.000 --> 0:23:12.040