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!