Philosophy Time

You'll get two posts today, because our world headquarters was overwhelmed by admin yesterday. Between the lawyers, the accountants, and the prime broker, we had lots of paper flying. I can't wait to get this part out of the way so we can make clients some money. We probably ought to tell a little more about how we plan to accomplish that...

Our philosophy is that the markets exist where simple math meets human behavior. On one side, you've got a very rational, logical, orderly world (somebody cue Supertramp!) with well-defined rules and a striking absense of exceptions. On the other side, you've got complete chaos, with emotions running wild, people trying to follow a herd, not realizing that they are the herd, and poor decisions being made faster than we can laugh at them. This is our world. We put ourselves squarely at the intersection of rationality and irrationality. It's why we've always made money. If you are where the calm and the storm meet, you can channel and guide the resulting energy into positive returns.

As an simple example, if investors are taking a stock all over the map during volatile times, we can't control where the stock will ultimately wind up. But we can predict with a high degree of accuracy the points it will hit along its wild ride. By setting up bumpers at a select few of those points, we are able to channel a good portion of the return into our clients' pockets. We also set up brick walls just in case we are wrong. This way, our worst case for being 100% wrong isn't very bad, but our best case for being 100% right is very good. If we get it right half the time (or even less than half), we will still collect outsized returns with fairly low risk. So our hedges do an awful lot for us, in protecting investor money and adding to the returns. It's more complex than that of course, but the basic philosophy is surprisingly simple. We just have a bigger tool kit than most other people.

So bring on the chaotic mob and let them run into the orderly math. It's our job to make sure we wrap the math around the mob tightly enough. Sort of like not being able to stop Michael Jordan, but only hoping to contain him. We are the containment experts of the market.