Nassim Taleb makes the rounds again

[steve46]

Hey Maverick:

Certainly can't help but acknowledge your experience and skill in the markets, but I have to take a little issue here with this comment;

"I've always laughed at the Sharpe Ratio as a way of measuring risk for a fund."

Dr. Sharpe shared a Nobel prize for his work in CAPM, with Markowitz and Merton Miller if memory serves. I realize you have a great depth of experience..Perhaps you like to tell us about your Nobel prize(s). I am sure you must have won at least once.

I used Sharpe ratio in my business pretty successfully. Like Black-Scholz equation, it has its limitations, but in general it allows us to put an effective face on risk and it has kept me (and many others) out of trouble for more than a decade.

Steve

 

[marketsurfer]

Quote from Dr_Risk:

Apparently my wording isn't clear. The email was unsolicited. Therefore, NNT's email wasn't a response. I believe it may have been a case of mistaken identity.

interesting, dr. obviously you are on his email list, this isn't just a purely random occurrence.... or is it.....?



surfer:eek:

 

[Algorithm]

The revelation and the reality that chance plays in day to day life isn't anything new. Taleb merely gives another point of view amongst a sea of voices that exist today. I agree that many investors/traders really don't realize their exact risk exposure and sometimes kid themselves about this reality. At the end of the day it's all how you use this perspective, and how it helps one navigate the markets/life at large.

The only problem I have with Taleb as well as Niederhoffer is that they adhere to their views with unflappable rigidity bordering upon an almost religious fanaticism or quest. Taleb (indelibly influenced by his past life experiences), chaos and uncertainty swirls about constantly and if you think you have a definite edge, you are only kidding yourself. Taleb's edge seems to almost lie in the fact that he acknowledges the fact that having a definite edge is near impossible (fooling ourselves due to the nature of random events). As soon as we are comfortable in the fact that we have acquired some knowledge, the world will inevitably smack you down and make you rethink your "edge". He places his positions and waits for the chaos to happen, hopefully being well positioned and catching the move.

An analogy of surfing is pretty apt when I think about Taleb. Its like he's going surfing day in and day out and letting the majority of waves pass him by while all the other surfers evaluate each wave as they come and take those that they want. Taking opportunities as they present themselves. Taleb, on the other hand, passes up a lot of waves in hopes of catching a tsunami. As long as he can wait in control of himself he will profit eventually.

I find his investment style very interesting and I'm sure he's very successful with it. But, at the end of the day, it's just one point of view. The idea of "markets" and "marketplace" is an elastic idea in my opinion. Marketplaces are resilient beyond almost human comprehension, and adherence to a single point of view with plastic rigidity is a mistake in my opinion. The world works too hard at putting each of us into a neat box, labeling us in order to deal with and understand each of us better. I try to resist the tendency of the human nature's propensity towards laziness by remaining open, pliable.

Just through simple observation of the game of poker and its players one can see that the most successful players are those that can change and adapt their methods as they see fit as the game progresses. Too often the player with a "system" is the one that finds themselves, in the long run, defeated because the other player that has adapted his/her game accordingly has overcome the rigidity of the others system. The key is to acquire the vast knowledge and discipline necessary in order to become the player that can identify the actions of those around them in order to overcome the enacted "systems". Knowing how to play the cards one is dealt correctly is only half the game.

I enjoy Taleb and also find him intriguing, but at the end of the day, his is just but another one of many ways of looking at the same thing. The living, breathing, ever expanding and contracting world of the marketplace.

Just my .02 of course.

 

[Maverick74]

Quote from steve46:

Hey Maverick:

Certainly can't help but acknowledge your experience and skill in the markets, but I have to take a little issue here with this comment;

"I've always laughed at the Sharpe Ratio as a way of measuring risk for a fund."

Dr. Sharpe shared a Nobel prize for his work in CAPM, with Markowitz and Merton Miller if memory serves. I realize you have a great depth of experience..Perhaps you like to tell us about your Nobel prize(s). I am sure you must have won at least once.

I used Sharpe ratio in my business pretty successfully. Like Black-Scholz equation, it has its limitations, but in general it allows us to put an effective face on risk and it has kept me out of trouble for more than a decade.

Steve

Steve,

It can only be effective if used as a relative measure of risk. The problem with the Sharp Ratio is not that it's worthless or meaningless or that Dr. Sharpe did not deserve the credit he got for it. The problem is that its like a transsexual. Nice legs, lipstick, blonde hair, but what's underneath? The sharpe ratio tells you nothing about the truly hidden risks of the fund. And it lulls people into complacency regarding what's really underneath that "skirt" so to speak.

The other negative about the Sharpe Ratio is like anything else, the hedge fund world has found ways to manipulate it to their advantage. Hence the preponderance of index premium selling funds out there that advertise very high sharpe ratios. I assure you, those risks are being dramatically underplayed.

I have seen first hand how traders can manipulate their sheets and their performance numbers and I have seen first hand the consequences of doing that. I think Taleb explains the weakness of the Sharpe ratio better then I can so I encourage you to read his articles concerning the subject.

 

[marketsurfer]

Quote from Maverick74:

Surf,

No, I don't think you want to fade these funds. I think the one advantage you have to buying a fund that appears on paper to have really bad numbers is that one, you know to expect large drawdowns, therefore there is no surprise factor. Two, the fund manager is also aware of the risk and hits his fund has taken, and if he is still around and his fund is still active, then he cleary has the temperament to withstand the losses.

This is one of the areas of finance that does not get talked about and I have mentioned it a few times on ET when people ask me why I want to see traders trade in real time vs just looking at their sheets as a way to evaluate them.

See, when traders are making money, all is well and they are executing their plan whatever the plan and strategy is. What you don't know, is how will a trader handle himself when he is under heat. When he is sitting on large losses, when things are starting to happen that he never dreamed of happening.

Now, how does he handle that, what decisions does he make. Does he double up in anger, does he keep averaging down, does he throw all his risk parameters out the window in panic to quickly try to make his money back?

See, this is the kind of stuff that doesn't show up on the sheets or the performance reports. This is the kind of stuff investors only find out about AFTER the fact. sharpe Ratios will reveal nothing about this. Neither will max drawdown figures.

So the advantage I see of going with a fund that has a large drawdown is again, the fact that the manager was able to recover from the heat he had to take. A fund manager that has not had a large drawdown (yet), has not revealed how he will act under those same circumstances. Another words, it will be a surprise!

thank you for the cogent reply.

JWH sharpe ratios have been abysmal yet the trend followers seem to overlook this fact..... instead pointing to his personal success.

when i was taking art history in school, my professor stressed to never judge a painting, or any art for that matter based on your opinion of the moral qualities of the artist. can the same be said for money managers??

as a firm's manager, are you able to share the percentage of traders that find success with your firm, and what personal qualities to you look for when hiring ( or is track record the sole arbiter of the decision) ? do you believe luck is involved in your hiring decisions--any stories you can share would be cool.

surfer

 

[Osiris]

Quote from Maverick74:

For those of you that read the Trader Monthly article or the one in Active Trader, the articles weren't so much about him, but rather about the fallacy of historical performance as it relates to determining the risk of an individual trader or fund. I find this area of finance fascinating, especially in light of the 12,000 or so hedge funds out there.

I've always laughed at the Sharpe Ratio as a way of measuring risk for a fund. Or the min and max drawdowns that funds like to advertise. They tell you nothing about a fund. Well, that's not entirely true. Bad numbers certainly reveal many red flags, but the problem is, good numbers don't necessarily mean the fund is any better.

Taleb spends a lot of time explaining the difference between evaluating how risky a fund has been in the past vs how risky it could be going forward. As an options trader myself, I have a very intimate understanding and respect for risk. And since I now run an office and have to look at new traders and their risk profiles, it's fascinating to see how dangerous they are, yet how well they hide it. I can see through the BS pretty fast. What's even more amazing is they don't even realize they are BSing me. They really truly do not see their own risk and they are completely ignorant of it. I see a lot of that on ET.

This is one of the reasons I found Taleb's "Fooled By Randomness" book so interesting. It forces us to look beyond our own reflection in the mirror and instead think about what our reflection could look like in a different time and under different circumstances. I think many of us are scared to really admit, that luck plays a much larger factor in our lives then we care to admit, especially with trading. Because with luck as a variable, we have to come to terms with the fact that we do not have as much control as think we do, it's really quite scary if you think about it.

If any of you get the chance to see the new Woody Allen film "Match Point", it focuses on the role luck plays in our everyday lives and how little control we really have. I look forward to Taleb's new book "Black Swans" as it will go more into how luck plays a role in society as a whole vs just the trading environment.

_________________________________________________


Good post Maverick. I am curious, what sort of things do you look for when evaluating traders? I have thought as well, that the historical draw downs, sharpe ratio's, etc are not quite enough to really get a full picture. I think i can tend to be a bit paranoid about some of the risks, likely becuase i trade super volatile micro-caps :eek:

I liked your post as well about the managers/traders that have never had a big draw down and how they will react when/if it happens...but obviously we would all rather prepare for and mitigate those eventual bigger than plan draw downs. I have to say, that is something i worry about ....maybe more than i should, but the possibility of a massive collapse in multiple of my positions at once....like a huge 20+% sudden drop in most of my long positions....ouch.

 

[momoneythansens]

Quote from Maverick74:

...I also happen to really like Scarlett Johansson.

Way OT but yes, she did make it just about watchable. Nice hair, lipstick etc. but what's underneath? LOL

Seriously though, she has talent and promise. Let's see if she screws it up.

 

[iloveoptions]

Quote from Osiris:

Quote from Maverick74:

For those of you that read the Trader Monthly article or the one in Active Trader, the articles weren't so much about him, but rather about the fallacy of historical performance as it relates to determining the risk of an individual trader or fund. I find this area of finance fascinating, especially in light of the 12,000 or so hedge funds out there.

I've always laughed at the Sharpe Ratio as a way of measuring risk for a fund. Or the min and max drawdowns that funds like to advertise. They tell you nothing about a fund. Well, that's not entirely true. Bad numbers certainly reveal many red flags, but the problem is, good numbers don't necessarily mean the fund is any better.

Taleb spends a lot of time explaining the difference between evaluating how risky a fund has been in the past vs how risky it could be going forward. As an options trader myself, I have a very intimate understanding and respect for risk. And since I now run an office and have to look at new traders and their risk profiles, it's fascinating to see how dangerous they are, yet how well they hide it. I can see through the BS pretty fast. What's even more amazing is they don't even realize they are BSing me. They really truly do not see their own risk and they are completely ignorant of it. I see a lot of that on ET.

This is one of the reasons I found Taleb's "Fooled By Randomness" book so interesting. It forces us to look beyond our own reflection in the mirror and instead think about what our reflection could look like in a different time and under different circumstances. I think many of us are scared to really admit, that luck plays a much larger factor in our lives then we care to admit, especially with trading. Because with luck as a variable, we have to come to terms with the fact that we do not have as much control as think we do, it's really quite scary if you think about it.

If any of you get the chance to see the new Woody Allen film "Match Point", it focuses on the role luck plays in our everyday lives and how little control we really have. I look forward to Taleb's new book "Black Swans" as it will go more into how luck plays a role in society as a whole vs just the trading environment.

_________________________________________________


Good post Maverick. I am curious, what sort of things do you look for when evaluating traders? I have thought as well, that the historical draw downs, sharpe ratio's, etc are not quite enough to really get a full picture. I think i can tend to be a bit paranoid about some of the risks, likely becuase i trade super volatile micro-caps :eek:

I liked your post as well about the managers/traders that have never had a big draw down and how they will react when/if it happens...but obviously we would all rather prepare for and mitigate those eventual bigger than plan draw downs. I have to say, that is something i worry about ....maybe more than i should, but the possibility of a massive collapse in multiple of my positions at once....like a huge 20+% sudden drop in most of my long positions....ouch.

It happened to me several times and I was fortunate to pull out it of unharmed. It will happen to everyone at one point or another. If you have a solid well thought out plan and most importantly a good edge, you'll make it just fine.

 

[cnms2]

"Past results are no guarantee for future performance". But still, betting (sensibly and consistently) on winners offers a higher probability of success.

 

[dis]

Quote from Maverick74:

Do you want to put up his track record next to yours?

That would be unfair to Mr. Taleb if only because the combine value of accounts that I manage is orders of magnitude smaller than his.

Somehow Nassim Talib's scare mongering reminds me that of a sleazy televangelist's crowing about the Rapture to scare up some change from senior citizens. Besides, he can not keep his story straight.

Derivatives Strategy: Crising hunting? So you are back to trading
full time? How does it feel? Did your break help you?

NT: I returned in late 1997 after a two-year study
sabbatical. I find trading far more pleasurable
than writing and debating.

Trader Daily: Do you miss trading?

NT: I've been a trader for 20 years, and I still hate trading as much as I did the first day.

So, which of the above statements is the truth? Does NT hate trading, or find it pleasurable?