Monday, March 29, 2010

On optionality, Bob Rubin, value investments and probabilities

This post seeks to address issues on investing methods and decision frameworks, for the benefit of my friends, Pang and Ko.

I get some thoughts from Bob/Robert. E. Rubin's "In an uncertain world". Bob was the guy running Goldman sachs risk arbitrage team, to being the Treasury of Secretary and lastly Citigroup's advisor. His book touched on situations, probabilities and outcomes through his experiences.

Having a wide range of options in any period is crucial as options have value. Investing is about probabilities, magnitude of losses/returns and the resultant expected losses/ returns. By keeping options open till decision time, one is increasing the probability, increasing expected value (Like volatility increases option value).

Moreover, life is not straightforward with expected losses that may reverse to gains and/or vice versa. Magnitude of the swings may also be over/underestimated, most of the time losses under and gains overestimated due to mental bias in analysis. The extra option (with little or no cost) may help to skew return profile in one's favor.

Applying these to learning and to some part of life, optionality also means flexibility. To maintain a broad mindset, not follow blindly and to continually perform research to find one's best fit. For example, value investing does not purely mean low PER/PBR, not touching tech stocks and charts. Similarly, if one embraces value investing while ignoring quantitative or behavioral trends, one may never realize whats good or flawed with that school of thought and that there may exist certain useful components to understand psychology or investing patterns to complement core activities. Its akin to learning the successes but not the mistakes.

The idea is not to pigeon hole oneself and have a mental ceiling to what can/cannot be done. Let curiosity do its work, learn more and challenge ideas. You will be surprised at what you thought you were good in and what you truly excel in.


Pang said...

Thanks for the insights.

Jansen said...

Very helpful for a fledgling like myself!


Theirs good value somewhere.

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