Ask HN: How come so many of you know about stocks/finance ?
Do a lot of you work in the field or have degrees in business??
Whenever there is a discussion on stocks, HFT, economy, a lot of seem to know about it (more then just a wikipedia search or passing interest...which I would say I have)
110 comments
[ 4.1 ms ] story [ 187 ms ] threadI have no formal finance experience, just a lot of hard-learned business and investment knowledge. It also helps that my wife has a degree in finance and runs the finance group for a tech company, so she and I can talk and discuss things from different angles.
Employees - well, if you're planning to make a career in some big company, you might as well invest in 401K, especially if they're offer matching. And then you usually get a choice between various funds. And obviously, you need to get educated about finance, because if you make wrong choices, you could get really fucked.
Entrepreneurs - obviously you need to be good at that when money valuations come into play for your startup. And here - same situation, if you're not educated about how that works, you're gonna get fucked.
And those are just some of the examples of situations you're going to run into where that knowledge is required.
Invest in a low-cost, index-based stock fund and similarly low-cost, diversified bond fund. Follow one the many simple formulas to decide what percentage should be in bonds vs stocks (usually based on years to retirement.)
What I wrote above will easily beat most of the more complicated plans out there especially after factoring in cost. You can of course get more complicated, but you usually only need to get more complicated if you have an awful lot of extra money which most people don't.
Any references?
I'd say a good 50-75% of the work is tricky quantitative programming. Read: prediction, analysis, concurrency, micro optimizations (today I shaved 10-20 seconds of a 15 minute program run time). Probably 10-15% of it fits what you would describe as "far out, complex coding". There is of course grunt work; tax calculations, making our FIX talk to their FIX, etc. There is a lot of frustration; I've had a number of ideas I liked, all of which failed horribly.
I'd say it's roughly equivalent to being an employee at a startup, except that there are only 3 employees, all of whom are within shouting distance.
The most fun is being able to watch the market, and have that epiphany where you all of a sudden have a trading system in mind that you want to try. You furiously code for the next 30 minutes, compile, debug, input parameters, hit enter--- and then have your dreams crushed to find "hmm... well if I traded that, we'd lose 98% in x years." :)
I'd say it's best described as a startup meets online poker. On the startup side, it's a small team, constantly pivoting based on perceived market demands for different investment vehicles, and lots more freedom to fail fast with little ideas. The poker side is where the whole luck factor comes in, dealing with huge swings due to flash crashes and political speeches.
Basically I knew a really smart guy (my boss) and he just happened to be launching this hedge fund just as I was finishing grad school.
I would love to hear more about your work (and yummyfajitas). I work for a company that manages 401(k) plans and haven't had much intellectual stimulation recently. Modeling isn't something we do to a large extent.
What programs/language do you do your modeling in? Where does your data come from for back testing?
Any more info about the frameworks, day to day, etc. would be very interesting.
I'm currently reading a book titled "Algorithmic Trading & DMA" which will hopefully give me a basis of how market systems actually function and I'm hoping to build up from there.
Data can come from numerous places depending on your licensing budget. For an initial analysis you can go to Yahoo! for daily prices; data reliability isn't great but you get what you pay for there. Bloomberg provides great data (assuming you guys have a Bloomberg tutorial), but make sure to read their T&C! They have very strict rules about taking data off machines, etc. Other sources are places like Tickdata.com and similar vendors whose sole purpose is to provide you with clean, reliable data.
As far as frameworks go, to be honest most of the code is created from scratch. My C# framework is around 50,000 lines plus the code for individual models. It still feels like it's only about 5% of what I want it to be. If I were to start over again, I'd probably go with R because so many computational finance people have contributed to it and its graphing/plotting/statistics features are amazing.
Are you in a position to change how your company approaches modeling? We're currently expanding into consulting and services as well. If you want to talk more about that, check my profile and send me an email. We could probably help you guys get started in the area or work with your team to develop custom models.
The book looks like it may be really good. Most of what I've learned about automated execution has been through the long road of trial and error. Most of those topics in the book are important, though it seems based on the ToC that the content may fizzle out just when it gets to the good stuff.
At that point, you really have no choice to learn stocks, since most other avenues don't lead to much return.
Even things like hedge funds, which are often popularly presented as impossible for mere mortals to understand are pretty simple conceptually. (Having said that, some of the specific hedges used can be complicated are require a high level of economic literacy to follow)
If someone drops in on a conversation between two programmers, he'll probably be lost in a sea of jargon, even though they could explain what they're talking about quite simply if they wanted to (it would take a little longer, but it could be done).
http://marketplace.publicradio.org/collections/coll_display....
“IF you really want to know why the financial system nearly collapsed in the fall of 2008, I can tell you in one simple sentence.”
“The financial system nearly collapsed,” he said, “because smart guys had started working on Wall Street.”
“I told you what happened. Smart guys started going to Wall Street.”
(...) That’s when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds.”
The "smart guys" have been working on Wall St. for decades. Maybe there weren't as many high-profile funds, but they were there. They were there (and blamed) when LTCM collapsed, they were there (and blamed) when the dot-com bubble came, and it should be no surprise that they are still here and being blamed for the current crisis.
The notion that smart people are to blame for the financial crisis is like saying tobacco farmers are to blame for lung cancer. The quants aren't the ones making the laws in congress that have torn down regulation for the last 30 years. They aren't the guys demanding huge increases in leverage (even in the case of LTCM, where a few of the high-profile quants did get excessive, it still wasn't their call). They aren't the guys who lowered interest rates or started the housing bubble. They're the guys who just see an opportunity to make money and they take it. If a guy cuts off your leg, throws you in the ocean, and you get eaten by sharks, are you really going to say that your death was the result of a vicious, man-eating shark?
The people to blame are the usual bunch. It's congress, the white house, and the executives-- most of whom are not the "smart guys" that are being blamed.
Quants are a scape goat for a bunch of people unwilling to accept that what happened is not easily traced back to a recent event, but rather requires a longer look back and a more nuanced answer. It's a lazy answer to effectively say, "Wall St. gave $70 trillion to a bunch of mathematicians who were just too darn smart for their own good, dontchaknow." Washington got hooked on Reagan-era deregulation, where each time they let the banks go a little further, they got a little more campaign funding, and around and around we go.
There are tons of bubbles and crashes in the history of stock markets. Each time people think things are different, and they're always wrong. This is no different than every other time: greed and corruption.
(Disclaimer: I work for a hedge fund.)
His point was that because the smart guys are on Wall St, they're not actually running the businesses and institutions that Wall St is investing in. So the companies that back all these financial assets are now being run by incompetent doofuses, while the people who used to make sure everything ran smoothly are now shuffling money from one dysfunctional company to another.
There's a lot of truth to this - Warren Buffett has been saying the same thing for about 15 years. It used to be that the top grads in each class would become professors, or entrepreneurs, or public servants, and would use their intelligence to invent tangible things that make people's lives better. Now the top grads usually go into finance, and they still invent things, but the things they invent are increasingly opaque ways to slice up a declining pool of real assets.
Assuming that you're a reasonably intelligent guy, you're actually good evidence for the point the article is making. If you didn't work at a hedge fund, perhaps you'd be working for Google, or performing basic research, or founding the companies of tomorrow. He's talking entirely about opportunity cost: the opportunity cost of having the smart people in the world allocating capital is that they aren't out in the world producing capital.
The issue I take with it is that the story pitched to the reader is:
1) Life gets expensive and Wall st. produces tons of millionaires.
2) Smart guys go to Wall St. with dreams of making enough money to become leisurely professors.
3) Extra derivatives are created by smart guys which then destroy the world.
This seems ridiculous on several levels. First, virtually no one goes into massive debt by getting a PhD in the sciences; scholarships, grants, and stipends are always there to support bright students. Second, people have been doing sophisticated derivatives for a very long time; most people have no idea what an option is, much less how to price one, and that dates back to the days of Ed Thorpe. Third, I really just cannot believe that having a system where idiots manage money with the help of other idiots is less prone to disaster than idiots managing money with the help of smart guys.
The one thing that the author does have right is that the financial incentives are out of whack. That comes back to the deregulation issue which I consider the cause.
As for myself, I am also doing a startup and a couple research projects in my spare time, as well as going back to get my PhD starting 2011, so I guess Warren can sleep a little better knowing I'm not going to be "wasting" my life forever. ;)
I agree that it's a lazy answer to blame mathematicians.
Hedge fund folks can be lazy, too. Morally lazy. Many are unwilling to employ intellectual rigor evaluating the morality of their own actions, or the actions of their industry en-masse -- inellectual rigor that they so effectively employ looking for trading opportunities.
The "I'm acting in an economically rational fashion with an invisible group of trading partners losing on the backend of my trade; this is capitalism, what's your beef?" attitude combined with willful ignorance when it comes to industry-wide ethics or morality actually does have a lot to do with what's happening in the market. The CFA Level 1 exam doesn't even have a "Duties to society/the market" concept in it. It's just not part of the industry.
Compare how hedge funds today act to JP Morgan in the early 20th century.
Hedge Funds: "We have billions of other people's money, and no market responsibility whatsoever. None. That's not what we do. What we do is arbitrage and thereby create goodness. Why do you not see the goodness we create by moving this money around in a way that makes us rich?"
JP Morgan: "Oh, shit, the economy is going down. I am sitting these MoFo head bankers down in a room until we get this fixed. And, I'll do it again in a few years if it happens again. DO NOT LEAVE THE ROOM. WE ALL MUST FIX THE MARKETS."
Being able to move the market just because 'someone else gave us leverage' does NOT remove one's own responsibility. Spreading out blame among industry partners for market crashes does not absolve one's own responsibility for participating in actions that might have made the crashes worse.*
Anyway, I encourage you to think more broadly and consider societal outcomes in your (possibly) high influence job. You mention nuance -- a more nuanced approach to your own industry's role might do you good, both career-wise and personally. As an example, your tobacco farmer analogy is specious: a poorish Virginia family weighing public health against survival is one thing, but the analogy would have us imagine these poor quant fund managers will be starving if they aren't allowed to play with their computer models and deploy billions using them -- this is the only skill they have! Society weeps. (And covets their jobs..)
Perhaps the best thing to do would be to imagine you'll have to answer to JPM in heaven someday for every trade; I wonder what complaints he might have for each of us. I may announce my WWJPMD bracelets on Zero Hedge soon; I'll keep you posted.
* I don't particularly blame hedge funds for the last few years -- that would be silly -- although it's also pretty hard to say that HFT had nothing to do with those little 'hiccups' a few weeks ago, just like it's pretty hard to say that unwinding debt leverage issues had nothing to do with the commodities death spiral in 2008.
My tobacco analogy was not trying to say that without tobacco the farmers would starve. Rather, it was about pointing out that quants are merely providing a service that people want. Quants aren't the evil lobbyists, or the ineffective regulators, or the guys peddling to kids. There is nothing illegal about what quants are doing, so anything else is morality, which again I'm not touching.
EDIT: My current position is only an internship for the summer as I finish up my MSFE degree.
I also traded at a options trading firm while in law school. I loved it.
I am a big believer that individual investors can't beat CAPM and shouldn't be picking stocks. I think the ideal portfolio is a mix of treasuries, equity and debt index funds, and angel investments.
First of all, hasn't CAPM been shown to be a nice, but not terribly accurate, picture of how the market works? Among other things, it assumes that asset returns are normally distributed random variables, it assumes that investors have homogeneous expectations about the return of an asset (aka everyone has the same info at the same time and observes the same risk and expected return of any particular asset), and it doesn't explain variance in stock returns. In other words, it doesn't accurately mirror reality.
Secondly, while I agree that most people shouldn't be picking stocks, my hair still bristles when I hear someone say that individual investors can't beat the market. True, little retail investors are probably at a disadvantage to the bigger, faster funds out there, but this hasn't stopped a handful of people from beating the market. <brag>I've averaged 28% annual returns over the past 12 years. Maybe you would say I'm just lucky though? </brag>
So most investors can't beat the market. I guess you could also look at the risks - betting a small amount (and finding out if you have the chops) could be a reasonable bet. Leaving large sums in the hands of someone else (as opposed to say an index fund) ... less good.
Telling us your returns means nothing without a way to compare to the market as a whole.
and
http://www.google.com/finance?chdnp=1&chdd=1&chds=1&...;
The model predicts that you can get higher returns by accepting greater variance on those returns. Even at moderate risk levels, it's easy to predict that some investors will happen to get the kind of returns you describe. Were your returns a result of your agency? Who can say.
Let's sidestep the issue of luck. I don't believe it is likely that your prior returns are a meaningful indicator of your future returns. But I could be wrong.
For a given asset, (Jensen's) Alpha is usually quite small compared to total return. How do you isolate the Alpha you identify?
Once you understand financial markets, you realise your startup is actually two products : one is the product that people buy, the other is the company as a product, which means the company as an investment opportunity. If you understand what capital markets want from companies, you can design that into your company to make it more saleable.
Also, any decent undergrad course worth attending should at least cover finance and economics, even if at 101 level. I don't believe any education in the modern world is complete until the person has an in-depth understanding of the importance of financial markets in our daily lives, even if you disagree with it.
That's why a market crash in the US throws the world into a financial depression: small businesses cannot get loans, governments and consumers lose confidence, jobs are lost, people starve.
Again, not to dismiss finance and capital markets, investment, etc. as non-useful. It's just that they are a very modern and recent invention, at best one particular tool, and only an abstract layer on top of the more "real" parts of human existance.
But as today's cities/nation states, at some comparable level of comfort and consumption, we cannot function without those markets. Hence why there are those of us who believe they are the foundation of modern society.
The dramatic improvements in lives came about at the time of the industrial revolution, which in itself was partially an engineering outbreak, but also an outbreak of the abilities to raise and organise capital that had been perfected by financing risky and long sea voyages, which, in themselves brought about dramatic lifts in quality of life. No finance, no 'new world', no USA.
I might add that 'capital markets' cover the entire span of financing, from angel investing to the big board in New York. The principles are just the same and the knowledge required is very similar.
You may dislike the capital markets, but you cannot deny that the rise in standard of living, technology and wealth is not linked to the invention of both structured lending, pooled risk/reward and ability to trade both equity and debt to other people. If you meld my thoughts with PG's discussion at http://paulgraham.com/gap.html you can see the rise in wealth and living standards happening in parallell along with the developments of structured and tradeable debt, invention of partial ownership and tradeable securities (share markets) and of pooled risk taking (insurance). I also recommend Niall Fergusons' 'Ascent of Money' for a good backdrop into how/why this is. http://www.amazon.com/Ascent-Money-Financial-History-World/d...
Again, you might dislike the role that markets have, but pretending they are some sort of bolt-on that could be disposed is very naive thinking.
Thanks for that Amazon link--looks interesting.
*http://en.wikipedia.org/wiki/The_Ascent_of_Money
edit: yes, some financial markets are indeed parasitic, this is often because someone got the public to guarantee for something. This has more to do with the political economy than financial markets per se.
We're in the process of rebuilding the back end right now, so there's not much to see on the front page aside from a social news site. If you click on an article's discussion page, you can see some to the semantic entity extraction that we're doing for each article, however.
To answer your question, when you build a site like that, you end up reading a lot of financial news, and you pick things up along the way. :)
One comment about your design: Maybe use a smaller font so I can see more than 3 stories above the fold.
The article submitter sometimes crashes, too. Feel free to ping me if you find any bugs, or have other suggestions. Jonathan@newsley.com
Any complex system that generates interesting behavior out of a set of not very complicated rules is delightful to hack. If there are rules that generate rules, it's even more fun.