"When you first hear some of Steve's (me) ideas, they sound crazy, but when you take the time to hear the logic behind them, they make perfect sense." - A Former Boss to a Pension Manager
I’ve had several old mercury fillings replaced and 2 root canals done over the past decade, all of which have been performed without anesthetic of any kind. No, I’m not a masochist, but rather a hyper-realist; one who enjoys an honest risk/reward analysis and welcomes a serious mental challenge. There are four things I always hated about visiting the dentist: 1) sound of the drill, 2) shrapnel that threatens to slide down my throat while my mouth is wedged open, 3) multiple, painful novocaine shots in the gums, and 4) numbness that leaves me drooling and unable to eat or talk normally for hours after the office visit is over. The first two can’t be solved and the last two are actually self-inflicted. Truth is, even with novocaine, getting cavities drilled out and fillings put in, is a painful endeavor. Ultimately, the question is whether the combination of novocaine shots + lingering numbness + reduced procedure-pain produces a more pleasant cumulative experience than no shots + no numbness + heightened procedure-pain. Since no one I know, including the dentists and endodontists themselves, had ever attempted to do without it, I had no idea just how painful it would be. Therefore, I was missing a key piece of the equation. After the dentist (and every assistant in the practice) attempted to talk me out of it, I elected to forge ahead and answer that question for myself. I won’t lie, it’s painful. Root canal, a surgical procedure performed directly on the tooth’s nerve, is even more so.
I’ve elected to do without the anesthetic numerous times now (and they still try to talk me out of it every time), so clearly I believe the cumulative experience sans novocaine is preferable. However, it’s not that straight forward. You see, the pain comes in shocking jolts that seem to pierce your very being, and it does so without any forewarning. It means you sit on edge as the dentist drills and drills, until suddenly, it feels as though someone has driven a needle into your tooth with a sledgehammer. There’s one additional element to consider though. You cannot move when the blow comes, otherwise that high speed drill could do some serious tangential damage. No matter how startling or painful that shock is, there must be no externally visible expression of my internal experience. Therein lies the greatest mental challenge I’ve ever faced. Not even the Pier to Peak Half Marathon can hold a candle to it. It’s important to note that I don’t clench my fists, hold my breath or tighten up in any way. I also don’t zone out or ignore the pain, otherwise I might be startled by the inevitable shock, causing my body to lurch dangerously. In fact, I zero in on the pain, seeing it for what it really is; a signal being delivered from the nerve ending to my brain. I contemplate its purpose, which is to warn my mind that there is a problem in the tooth that requires attention. Since it is already receiving that attention, the pain is simply is an artifact.
Some people refer to what I put myself through as "torture", but I disagree. While the intensity of the experience may be similar, it is the duration that differentiates it. What makes pain torturous is not knowing when or even if it will end. In my case, the instant the instrument is removed from the nerve, the pain disappears. The dentists and endodontists always remark how nice it would be if every patient could go without anesthetic, because I can provide real time feedback on the effectiveness of the procedure. I can feel when a crown isn't fitted properly or if the nerve hasn't been properly deadened. In other words, there is a tangible benefit to remaining lucid and objective throughout even the most painful moments.
The reason I share all of this with you is that it serves as a powerful metaphor for my investment style versus the norm. For an investment manager, losses are painful. According to the research, losses hurt twice as much as a commensurate gain feels good. However, losses are also an inevitable part of the job and how you deal with them says a lot about your ability to generate long term returns. Most PM's hold longs or shorts in outright positions, using "tight stops" to protect the downside. The problem is, even after the tight stop is hit, they often have no qualms about re-entering the same trade upon a similar setup or “better” entry levels, with yet another tight stop. Every time the stop loss is triggered, a loss is realized. Whatever risk allocation they initially make to that view/idea is somewhat disingenuous, because it must be multiplied by the number of times they will ultimately attempt to express it. I'd rather acknowledge the possibility of being wrong on the view up front; structuring a position that remains alive until something has fundamentally changed and the view itself is proven wrong. If I am proven wrong, I'd prefer the pain to be of a finite duration. To me, the idea of repeated tight stops being triggered would be torturous. A colleague once remarked that we all need "time outs" when losses are experienced, because they are painful and can keep you from seeing things clearly. Truth is, we don't all respond to pain in the same way. Some require a novocaine shot for a deep teeth cleaning, saddling them with the lingering affects for hours, while some of us can lucidly work through even the most excruciating pain without any lingering affects.
Investors are concerned about two key components of a track record; returns and the volatility of those returns. In 1966, William Sharpe made a slight adjustment to Arthur Roy’s earlier formula, creating what is now known as the Sharpe Ratio. It is a simple formula which expresses the relationship between returns and volatility as a ratio. I like the concept, but it has a limitation. It assumes that returns are normally distributed. For most funds and indexes, upside and downside volatility is roughly equal (i.e. returns are normally distributed), and so the Sharpe Ratio works quite well. Naturally, the reason I take issue with it is that my 10 year track record has a skew to it, where my upside volatility is 50% greater than the downside. (By comparison, during the same period, the Dow Jones Index had downside volatility that was roughly 70% greater than the upside.) Brian Rom developed a simple solution to this problem in 1983, called the Sortino Ratio, whereby it only penalizes poor performance, not positive outliers. For most funds and indexes, the Sortino Ratio is roughly the same or slightly lower than the Sharpe. In the case of my track record, the Sortino is nearly double. If only Mr. Rom had been born sooner.
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For nearly thirty years, Stephen Duneier has applied cognitive science to investment and business management. The result has been the turnaround of numerous institutional trading businesses, career best returns for experienced portfolio managers who have adopted his methods, the development of a $1.25 billion dollar hedge fund and 20.3% average annualized returns as a global macro portfolio manager.
Mr. Duneier teaches graduate courses on Decision Analysis in the College of Engineering, as well as Behavioral Investing, at the University of California. His new book, AlphaBrain, is due to be published in early 2017 (Wiley & Sons).
Through Bija Advisors' coaching, workshops and publications, he helps the world's most successful and experienced investment managers improve performance by applying proven, proprietary decision-making methods to their own processes.
Stephen Duneier was formerly Global Head of Currency Option Trading at Bank of America, Managing Director in charge of Emerging Markets at AIG International and founding partner of award winning hedge funds, Grant Capital Partners and Bija Capital Management. As a speaker, Stephen has delivered informative and inspirational talks to audiences around the world for more than 20 years on topics including global macro economic themes, how cognitive science can improve performance and the keys to living a more deliberate life. Each is delivered via highly entertaining stories that inevitably lead to further conversation, and ultimately, better results.
His artwork has been featured in international publications and on television programs around the world, is represented by the renowned gallery, Sullivan Goss and earned him more than 60,000 followers across social media. As Commissioner of the League of Professional Educators, Duneier is using cognitive science to alter the landscape of American K-12 education. He received his master's degree in finance and economics from New York University's Stern School of Business.
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