Preface
1. America's investment markets are most active and efficient in the world. Provide capital to more than 10,000 companies
2. Local, state, and national government agencies seek funds
Peter Lynch
1. Human Nature hasn't changed much in 40,000 years. Corporate profits have their ups and downs. Markets have their ups and downs. Companies turn around; companies deteriorate. I don't think these things are going to change in the next hundred years
2. My premise is that there are good stock everywhere. Prejudices and biases prevent people from looking at a lot of different industries. I think there are good and bad stock everywhere
3. The more industries you look at, the more companies you look at, the more opportunity you have of finding something that's mispriced
4. The stock market and the stock price dont always run in synch. Sometime the fundamentals are getting better and the stock is going down. This is what we are looking for
5. I dont think that with great stocks you need a Cray super-computer or an advacned Sun microstation to figure out the math
6. The problem with technical analysis is that somebody could love the stock at 12 and hate it at 6
William Sharpe (Nobel Price 1990)
1. A number of us have found that, in various places, value stocks have outperformed growth stocks over time. The issue od whether or not they will in the future is still very much debatable
2. The Fama-French position is this kind of bizarre metaphysics that says, "value stocks do better; but we know in an efficient market things that do better ought to, in some sense, be riskier, ergo, value stock are riskier! Now we dont happen to have seen the manifestation of the risk, but it must be so, therefore the market is efficient
3. Value stocks - This might be what we generically call a peso problem. You get something that has a very small probability of a real disaster; you can look at 20, 30, 40 years and never see the manifestation of the disaster [because the probability is so small]. As a result, you wont see the evidence of the risk, but it's still there. There's a small probability of a total wipe out.
4. If you're a real believer in passive management and efficient markets, you'll assume that the active managers will add on average negative amounts per unit of risk and then you wont give them any money at all
5. I'm interested in the normative (means - what ought to be) aspects as well. I certainly work with people who believe that their active managers have an expected positive added value. The question is, how do we put that information together and come up with an appropriate mix, not only of active and passive but also how we allocate the active money among them?
Merton Miller (Nobel Price 1990)
1. The market value of any firm is independent of its capital structure, so the portions of stock (equity) and bonds (debt) doesnt affect the value of the corporation.
2. I regard Black-Scholes formula as one of the major intellectual breakthroughs of the latter part of the 20th century. It was not only a intellectual achievement, but spawned a whole new industry
3. Black & Scholes developed a formula which priced options as a function of observables. By observables, I mean that the warranted option price is a function of the strike price, the price of the underlying security, the interest rate, the time to maturity and the volatility of the underlying security
Eugene Fama (Nobel Price 2013)
1. The efficient market theory and the random walk theory aren't the same thing. The efficient market theory is much more powerful than the random walk theory, which merely postulates that the future price movements cant be predicted from past price movements alone.
2. One extreme version of the efficient market theory says, not only is the market continually adjusting all prices to reflect new information but, for whatever reason, the expected returns
3. Expected return on the stock market may not be the same through time - it could be higher in bad time if people become more risk averse; it could be lower in good times when people become less risk-averse.
4. The evidence is pretty strong that active management doesn't really do better than passive management
5. Three-factor model - The three factors are the market factor, the size factor, and the value factor. What we find is, in addition to the market factor in returns, small stock move together, so do big stocks, but not in the same way.
D E Shaw
1. We might be trading in stocks, bonds, options, futures, warrants, convertible bonds - a large number of different instruments. Our technique is to look at all of them, all at once. There's no one single trade. By way of contrast, the early approaches to quantative trading might involve buying one thing and selling short some related security
2. We have virtually no people here who study companies and decide whether the products that they make are good products or whether the CEO is a good CEO, or whether the market they're attacking is a good one.
3. Our particular niche involves understanding the mathematics of the market. The service we provide is that we make the markets more efficient and liquid.
4. Even with extermely low execution and clearing expenses, every time you buy something you push the price up a little bit and every time you sell , you push the price down a bit. In our case, this effect is unsually small because we've done a huge amount of research on minimizing the transaction costs and market impact.
5. The range of things that we trade on varies, from things that happen very quickly, all the way up to things that can last for years.
6. The key thing that distinguishes pure quants, which is what we are, from other type of investors, is whether human judgement is involved in finding opportunities.
1. America's investment markets are most active and efficient in the world. Provide capital to more than 10,000 companies
2. Local, state, and national government agencies seek funds
Peter Lynch
1. Human Nature hasn't changed much in 40,000 years. Corporate profits have their ups and downs. Markets have their ups and downs. Companies turn around; companies deteriorate. I don't think these things are going to change in the next hundred years
2. My premise is that there are good stock everywhere. Prejudices and biases prevent people from looking at a lot of different industries. I think there are good and bad stock everywhere
3. The more industries you look at, the more companies you look at, the more opportunity you have of finding something that's mispriced
4. The stock market and the stock price dont always run in synch. Sometime the fundamentals are getting better and the stock is going down. This is what we are looking for
5. I dont think that with great stocks you need a Cray super-computer or an advacned Sun microstation to figure out the math
6. The problem with technical analysis is that somebody could love the stock at 12 and hate it at 6
William Sharpe (Nobel Price 1990)
1. A number of us have found that, in various places, value stocks have outperformed growth stocks over time. The issue od whether or not they will in the future is still very much debatable
2. The Fama-French position is this kind of bizarre metaphysics that says, "value stocks do better; but we know in an efficient market things that do better ought to, in some sense, be riskier, ergo, value stock are riskier! Now we dont happen to have seen the manifestation of the risk, but it must be so, therefore the market is efficient
3. Value stocks - This might be what we generically call a peso problem. You get something that has a very small probability of a real disaster; you can look at 20, 30, 40 years and never see the manifestation of the disaster [because the probability is so small]. As a result, you wont see the evidence of the risk, but it's still there. There's a small probability of a total wipe out.
4. If you're a real believer in passive management and efficient markets, you'll assume that the active managers will add on average negative amounts per unit of risk and then you wont give them any money at all
5. I'm interested in the normative (means - what ought to be) aspects as well. I certainly work with people who believe that their active managers have an expected positive added value. The question is, how do we put that information together and come up with an appropriate mix, not only of active and passive but also how we allocate the active money among them?
Merton Miller (Nobel Price 1990)
1. The market value of any firm is independent of its capital structure, so the portions of stock (equity) and bonds (debt) doesnt affect the value of the corporation.
2. I regard Black-Scholes formula as one of the major intellectual breakthroughs of the latter part of the 20th century. It was not only a intellectual achievement, but spawned a whole new industry
3. Black & Scholes developed a formula which priced options as a function of observables. By observables, I mean that the warranted option price is a function of the strike price, the price of the underlying security, the interest rate, the time to maturity and the volatility of the underlying security
Eugene Fama (Nobel Price 2013)
1. The efficient market theory and the random walk theory aren't the same thing. The efficient market theory is much more powerful than the random walk theory, which merely postulates that the future price movements cant be predicted from past price movements alone.
2. One extreme version of the efficient market theory says, not only is the market continually adjusting all prices to reflect new information but, for whatever reason, the expected returns
3. Expected return on the stock market may not be the same through time - it could be higher in bad time if people become more risk averse; it could be lower in good times when people become less risk-averse.
4. The evidence is pretty strong that active management doesn't really do better than passive management
5. Three-factor model - The three factors are the market factor, the size factor, and the value factor. What we find is, in addition to the market factor in returns, small stock move together, so do big stocks, but not in the same way.
D E Shaw
1. We might be trading in stocks, bonds, options, futures, warrants, convertible bonds - a large number of different instruments. Our technique is to look at all of them, all at once. There's no one single trade. By way of contrast, the early approaches to quantative trading might involve buying one thing and selling short some related security
2. We have virtually no people here who study companies and decide whether the products that they make are good products or whether the CEO is a good CEO, or whether the market they're attacking is a good one.
3. Our particular niche involves understanding the mathematics of the market. The service we provide is that we make the markets more efficient and liquid.
4. Even with extermely low execution and clearing expenses, every time you buy something you push the price up a little bit and every time you sell , you push the price down a bit. In our case, this effect is unsually small because we've done a huge amount of research on minimizing the transaction costs and market impact.
5. The range of things that we trade on varies, from things that happen very quickly, all the way up to things that can last for years.
6. The key thing that distinguishes pure quants, which is what we are, from other type of investors, is whether human judgement is involved in finding opportunities.