Hit the books Louis!

By Randell Tiongson on March 18th, 2010

My good friend Louis is taking his post-graduate at a good university which is green (that’s why it’s good). When he told me his plans on going back to school, I told him that education is always a good idea. When he told me what he wanted to take up, I said “what?” and “why?” He is taking up a master’s degree course on Financial Engineering. Well, I said since you are young and you have the energy – go!

Louis and I have regular chats, over coffee or over the keyboard – in our latest chat, he was complaining about how difficult his exams are … stochastic matrices, markov chain, fractals, modern portfolio theory, CAPM, APT… etc. I told Louis a few things I know about his subjects; for instance, I said “modern portfolio theory is a theory of investment which tries to maximize return and minimize risk by carefully choosing different assets; or in other words, the concept of diversification in a mathematical formula.” Nose bleed alert!

After a few more nose bleed discussions, I told Louis… “wanna know a secret?” All those stuff doesn’t really work in today’s environment! Those investment theories will require very high IQs but will not mean squat in the real market. Theories assume that people’s behaviors are rational … the more you study the market’s history, the more you realize that rational behavior is always missing in the market. The more you try to understand what’s going on, the more you see things are fundamental… the more things go back to the basics like supply and demand. The market is a representation of people’s sentiments – and people’s sentiments are either overly optimistic or disastrously pessimistic.

So will I advise Louis to quit school? Never. Louis will need to learn all the nose bleed stuff for him to have a more intelligent view of things that are fundamental in nature. If you’re reading this Louis, go hit the books!

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4 thoughts on “Hit the books Louis!”

  • The math of diversification can be grasped easily by that famous “umbrellas or ice cream” problem, a copy of which I would be glad to email Louis.The big deal is that, if you diversify and invest in BOTH an umbrella business, AND an ice cream business, you are mathematically guaranteed to make at least X profit whether it rains (so people need umbrellas) or it’s sunny and hot (so people want ice cream), or it’s partly both rainy and sunny over a certain period.
    You could put all your eggs in one basket – say, invest all your money in JUST an ice cream business- and if the days are sunny yes you will make more profit with all your investment in an ice cream business than if you split your investment into both businesses; but if it’s rainy you lose all.
    Diversification is like riding on a smooth hi-way, a little slower than absolutely possible but you will make it to the end and you will not crash; not diversifying means you might travel faster, but in a non-diversification-type hi-way there may be holes and you might crash.
    If you are managing funds for people, you will want to trade-off some incremental MAXIMUM POSSIBLE profit, for an ASSURED somewhat lower but sure profit.
    The gist of most Financial concepts can be illustrated by simple examples. But to be more rigorous, yes, there are those formulae and graphs.Enjoy yourself in Financial Engineering, Louis! You will never regret getting that financial grounding early in your life. You probably have 40 years or so until you retire at 65, and you will be compounding your savings for all those 40 years ! To hell with the SSS (it is peanuts anyway), you will answer for your own Retirement.

  • As a non-financial guy, that indeed is a total nosebleed, Randell. LOL! Your layman’s version to financial gooble-d-gook is always a welcome relief than reading Louie’s books. Maybe you should just translate all his books for today’s (ir)rational world, eh? Nah! Just keep conducting those great seminars!

  • Would you please advise references, books, websites and others to tap onto these irrational stuffs? I don’t fully understand these measurements/indicators but it is interesting to study… I would just like to ask if there are short courses for these stuffs? thanks. As some authors point out these are not exact science as maybe compared to Mechanics, Physics, Machine design where we are trained to but of course there are points from these irrational thinkers that we can put into positive investment considerations… thank you again.

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Hit the books Louis!