My Life as a Quant

November 20, 2007

Amazon’s description of the book: In My Life as a Quant, Emanuel Derman traces his transformation from ambitious young scientist to managing director and head of the renowned Quantitative Strategies group at Goldman, Sachs & Co.

Here are a few good quotes from the book, regarding software development, working at Goldman Sachs, working with Fischer Black and financial models.

Software

  • Impossible for me to over look the difference that a simple and well designed piece of software can make to a business.
  • I always included a bit of code my models that kept a log of who used it and when, which provides documented proof of utility even it does attach a dollar value.
  • Perturbation theory: The approach by which you get the most critical feature done first, then each next step you tackle the next most important feature.

On working with Fischer Black

  • Stickler for precision.
  • Liked to think everything through for himself.
  • Terse, good natured conversational writing style using clear but casual unadorned English.
  • Devoted to clarity and simplicity.
  • Rather guess what follows relevant assumptions than derive precise conclusions from less-relevant assumptions.

On working for Goldman and Solomons.

  • At Goldman the enemies were the competing firms, at Solomons the enemies were competing colleagues.
  • Goldman was long term greedy rather than short term greedy. At Solomons I thought it was every man for himself and God against them all.
  • Goldman aimed to take the appropriate level of risk, not eliminate it. No risk, no return.

Models

  • Models are only models, toylike descriptions of idealised worlds

Slowly it began to dawn on me that what we faced was not so much risk as uncertainty. Risk is what you bear when you own, for example, 100 shares of Microsoft—you know exactly what those shares are worth because you can sell them in a second at something very close to the last traded price. There is no uncertainty about their current value, only the risk that their value will change in the next instant. But when you own an exotic illiquid option, uncertainty precedes its risk—you don’t even know exactly what the option is currently worth because you don’t know whether the model you are using is right or wrong. Or, more accurately, you know that the model you are using is both naïve and wrong—the only question is how naive and how wrong.

I think this is the right way to use mathematical models in finance. Models are only models, not the thing in itself.We cannot, therefore, expect them to be truly right. Models are better regarded as a collection of parallel thought universes you can explore. Each universe should be consistent, but the actual financial and human world, unlike the world of matter, is going to be infinitely more complex than any model we make of it.We are always trying to shoehorn the real world into one of
the models to see how useful an approximation it is.

You must always ask: Does the model give you a set of plausible variables to describe the world, and a set of relationships between them that permits its analysis and investigation? You’re always trying to make a limited approximation of reality, using variables that people can comprehend, so that you can say to yourself or your boss, for example, “I was short emerging-market volatility, so we lost money when the crisis came.” Good theories, like Black-Scholes, provide a laboratory of ideas in which you can work out the likely consequences of possible causes. They give you a common language with which to quantify and communicate your feelings about value.

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Four Hour Work Week

November 15, 2007

A basic summary of the Four Hour Work Week by Timothy Ferriss is to get rid of all the unimportant time wasting tasks in your day. Then try to tele-commute or start a simple business that is highly automated. And use the spare time to do things you really want to do.

Few random points and quotes I got from the book.

  • New rich, their currency is time and mobility.
  • DEAL
    • D: definition.
    • E: elimination.
    • A: automation.
    • L: liberation.
  • Dreamlining
    • Goals can not be ambiguous they need to be defined.
    • Have to be unrealistic.
    • Focus on activities that fill the vacuum when work is gone.
  • Buy all the things you want vs. do all the things you want.
  • Different is better when it is more efficient.
  • People tend to overestimate the competition; as a result people tend not to try.
    • Doing the unrealistic is easier than doing the realistic.
  • Doing something unimportant well does not make it important.
  • Requiring a lot of time does not make a task important.
  • What you do is infinitely more important than how you do it.
  • Parto’s law of 80/20, 80% of outputs from 20% of inputs.
    • 20% of sources / things / tasks  can be responsible for 80% of unhappiness.
    • Eliminate the 20% that creates 80% of your unhappiness.
  • Working nine to five is not the goal, simply the structure that most people use. Work then expands to take up the day.
    • Parkinson’s law, a task will swell in (perceived) importance and complexity in relation to the time allowed for its completion. Two possible solutions:
      • Limit tasks to the important to shorten work time.
      • Shorten work time to limit the tasks.
  • Three times a day ask:
    • Am I being productive.
    • Am I inventing things to do to avoid the important.
  • Limit to-dos to a few items each day, use a small piece of paper to limit the ability to list a large number of items.
  • Learn to propose solutions, “Can I make a suggestion” or “Let’s try ….. and then try something else if that does not work”.
  • Don’t respond to emergencies, then emergencies will not come to you. (if people know you will not respond, they will try to solve the problem them self).
  • More is not always better, sometimes it is 10x better to stop something than to finish it.
  • Learn to be difficult, a reputation for being assertive can help you get better treatment with out needing to ask.
  • Check your email twice a day 12noon and 4pm. Use an auto responder to tell people you do this.
    • When sending emails use the if ….. then or else do ….. format, so people do not need to respond for further clarification.
    • Or for example you get a lot of emails about customer problems, send out an email stating if it costs less than $100 to fix the problem you do not need approval to spend the $100 and solve the problem.
  • Puppy dog close, just take it home and return it if you want.
  • Group together similar tasks and batch process them or automate them
  • Virtual assistants
  • Never delegate something you can automate and never automate something you can eliminate.
  • Income auto pilot – start a business
    • Can’t cost more than $500 to test the concept.
    • Should lend it’s self to automation.
    • Can’t take more than a day a week to run.
    • Need to find a market and define your customers.
    • $50 – $200 product price, this tends to reduce the customer service needs.
    • Information products can be low cost, fast to make and hard for competitors to duplicate. The example used in the book is a DVD on how to install a security system. The DVD sold for $95, but had a much lower cost.
    • Checklist:
    1.  Market selection.
    2. Product brainstorm.
    3. Mircotesting.
    4. Roll out and automation.
  • Absence of the CEO, makes a company process driven rather than founder driven.
  • Biggest time saver, customer filtering. Fire the 20% of customer that take up 80% of your time with complaints, customer service etc.
  • Question (for example): what is the meaning of life. If you can’t act on it or define then forget it.

Top 13 mistakes of the new rich:

  1. Losing sight of dreams and falling into work for work’s sake
  2. Micromanaging and e-mailing to fill time.
  3. Handling problems your outsourcers or co-workers can handle.
  4. Helping outsourcers or co-workers with the same problem more than once, or with non-crisis problems.
  5. Chasing customers, particularly unqualified or international prospects, when you have sufficient cash flow to finance your non-financial pursuits.
  6. Answering e-mail that will not result in a sale or that can be answered by a FAQ or auto responder.
  7. Working where you live, sleep, or should relax. Separate your environments.
  8. Not performing a thorough 80/20 analysis every two to four weeks for your business and personal life.
  9. Striving for endless perfection rather than great or simply good enough.
  10. Blowing minutiae and small problems out of proportion as an excuse to work.
  11. Making non-time-sensitive issues urgent in order to justify work.
  12. Viewing one product, job, or project as the end-all and be-all of your existence
  13. Ignoring the social rewards of life.

Say It With Charts

November 14, 2007

The four main points of the work book for Say it With Charts, by Gene Zelazny are: 

  1. Simpler is better
  2. More is better
  3. Different is better
  4. Creativity is better

These are then illustrated with a number of examples. The main points I got from all the examples are: 

  • Think about the message you want to convey, and eliminate all material that distracts from that message.
  • It takes the same about of time to present five ideas on slide as it does to present five ideas on five slides.
  • Sometimes the solution can be as simple as switching the axes.
  • Sometimes just need to reduce the detail and highlight the most important element. Visualise the message not the mess.
  • Diagrams: Try to reflect the title in the design, for example the title includes “differences”, then use two boxes with the information and the world “vs.” between them.
  • Try to avoid having the user look back and forth, between different parts of the slide. Try use arrows or follow the natural left to right, top to down flow.
  • Waterfall charts: Best to show increases and decreases, can use bars shaped like arrows to show direction.
  • Simple is better: Reduce redundant labels where possible.
  • If the message is complex, then divide it into smaller thoughts and use a number of slides to get the story across.

Global Gender Gap Index 2007

November 13, 2007

Women in New Zealand are 5th closest to enjoying equality with men,  according to the “Global Gender Gap Index 2007” published by the World Economic Forum. New Zealand came 5th out of 128 countries.

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Alex Cartoon

November 12, 2007

Today’s Alex cartoon about life in The City.

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Getting Things Done

November 12, 2007

The key things I got from reading Getting Things Done by David Allen

  • Date everything – notes, to-dos, lists etc.
  • Document all open loops – projects, things to do, meetings, reviews etc.
  • For all your to-do items, if it can be done under two minutes then do it, otherwise make it a project.
  • Use buckets to categorise all the things you need to do.
    • Projects.
    • Project supporting material.
    • Calender for action items and information that will be needed on a certain date.
    • Next actions.
    • Waiting for list
    • Reference material.
    • Someday / maybe.
  • All to-do items need to be expressed in the next action to take. For example hire another staff member, should be recorded as write a job description or make a call to a recruitment agent.
  • Natural planning.
    • Define purpose and principles.
    • Outcome visioning.
    • Brainstorming.
    • Organising.
      • Identify significant pieces.
      • Sort by, components, sequences or priority then detail to the required level.
    • Identity the next action to take.
  • The best checklists are often done after you have gone through a process. For example always review your interview checklist after going through the hiring process.
  • Importance of a weekly review.
  • Importance of tracking items (or next actions) by context. For example:
    • Errands.
    • At computer.
    • At office.
    • At home.
    • Calls.
    • Agendas.
    • Read / review.
    • Waiting for.
  • Tickler file: series of folders numbered 1 to 31 for each day in the month. If you want a reminder about something on the 14th put it in the folder numbered 14. Then everyday empty the folder for today into your in tray. Then put the old folder to the back of the system, so now that folder is for the 14th of the next month.
  • It ok to put just a single piece of paper in a folder.
  • Reference file, just use a number of folders sorted alphabetically. Remember to purge old files that are no longer needed on a regular basis.

Key thing, always ask what the next action is and determine who is responsible for it.


Top 10 Links

November 8, 2007

Top 10 blog posts I read this week:

  1. Have a Company Voice: Post about how people like it when companies have personalities. It makes us feel like there are actual people on the other side of the communication.
  2. IOD – Overheard at the bar: List of tips for company directors from the October issue of Boardroom, the Institute of Directors’ monthly magazine.
  3. Markets in Everything: Cheat Offsetting: Building on the thriving carbon offset industry, an innovative British firm, Cheat Neutral, now offers cheat offsetting.
  4. Special situation and microcap links: Tools for finding cheap stocks in the UK.
  5. IAC/InterActiveCorp Splitting Into Five Companies: Brief post about IAC splitting into five companies.
  6. Interesting Items for Tuesday, November 06, 2007: Entergy (ETR) announced it will spin-off its unregulated nuclear plants.
  7. Xero results – first look: First look at Xero’s results.
  8. And the publishers of America looked upon Freakonomics and saw that it was good
  9. Uncluttered lunch tote
  10. Two Stocks with 20%-Plus Expected Returns: Tip from Morningstar.