The Investment Ecosystem website now includes information on consulting and training services in addition to the range of content that is available. In all things, this operation is dedicated to helping professionals and organizations succeed through insights that bolster the continuous improvement process.
BloombergGPT
With the introduction of ChatGPT a few months ago, artificial intelligence has become real in a way that it wasn’t before. Those with expertise in large language models are being bombarded by investment firms scrambling to get up the learning curve. People are posting the answers to investment questions asked of ChatGPT on their Twitter and LinkedIn accounts.
Into this scrum comes BloombergGPT. A paper from the firm introduces its “large language model for finance,” arguing that “the complexity and terminology of the financial domain warrant a domain-specific system.” It is not a finance-only application and, according to the tests conducted, it does very well on general questions in addition to investment ones. That said, the machine learning training approach is different “in that it includes a significant amount of curated and prepared data from reliable sources” from inside the investment world.
An interesting example sheds light on the importance of domain focus: A layoff at a company would be viewed as a negative-sentiment event when based on general information, but could be considered positive by research analysts and result in gains rather than losses in the company’s stock.
The implications of this introduction are vast, supporting the notion that most every investment job will morph over the next decade, as such tools become more and more powerful. (On one front, hopefully the machines will be more diligent about reading prospectuses than humans have been.) The competitive environment will change as well; large organizations like Bloomberg with deep pools of data and expertise have a clear advantage now in this territory, and others will have to wrestle with the implications.
Cognitive diversity
A common response from investment organizations when they are asked about diversity is that they most care about cognitive diversity, since that’s what leads to better decisions. The problem is that only a few seem to be able to back up the belief with examples of what that means — or any real evidence that such diversity actually exists in practice at their organizations.
Neurodiversity was the subject of three articles in a special report from Pensions & Investments. They cover the business case for bringing neurodivergent individuals on board, who are “often well-suited for the finance industry,” as well as how to create an environment in which they can thrive. Plus, a number of organizations that are trying to make strides in this area share their experiences. (However, a number of the related challenges regarding organizational norms, culture, and processes were not explored in depth.)
Additional perspective on the topic comes from Temple Grandin in her book Visual Thinking, which makes a persuasive case for the benefits of integrating different kinds of thinkers to improve decision making.
A whole bunch of risks
Thinking about all of the different investment risks can be daunting for those learning the business, lay members of investment committees, and even professionals. As the industry has evolved and new instruments and strategies have flourished, there seem to be new risks all the time — or maybe we just become reacquainted with ones we have taken our eyes off of.
Scott Chaput and Timothy Crack have put together a new list, “150 Risks in Finance” (there are actually more than that listed). The subtitle is “An Alphabetical List of Definitions and Examples, Accompanied by 75 Exercises for University Instructors to Assign to their Students,” but it’s not just for kids. See how many you can name — or think about which ones have hurt you the most in the past (or surmise which ones are lurking).
Flashback
“The Evolution of an Investor,” by Michael Lewis, was published in 2007. The article is fascinating in many respects, including its detailing of the sales culture that still pervades parts of the investment business and the rise of passive investing — and the success of quasi-passive DFA. That firm is the focus of the article. It straddles passive philosophy and active implementation, resulting in some cognitive dissonance that’s captured by Lewis. Also of interest is the description of a DFA seminar for advisors, part of its exacting approval process. According to the investor profiled in the article: “It was a propaganda session. It was beyond A.A. It was Leni Riefenstahl, but the right way.”
Other reads
“How the Biggest Fraud in German History Unravelled,” Ben Taub, New Yorker. A story as old as the hills in one sense, but full of jaw-dropping details.
Wirecard’s rising stock price was regarded as a sign that the business was dependable, that its critics were clueless or corrupt.
“Mental Liquidity,” Morgan Housel, Collaborative Fund. “It’s the ability to quickly abandon previous beliefs when the world changes or when you come across new information.”
“The Case for Non-Predictive Decision Making,” Rob Campbell, Mawer.
In our view, market participants systematically underestimate the importance of vulnerabilities while correspondingly overestimating the importance of triggers.
“How should we regulate ESG research?” Craig Coben and Petra Dismorr, Financial Times. Subtitle: “Are the firms brokers? Raters? Or a secret third thing?”
“Falling Investor Satisfaction Points to a ‘Systemic Problem’ in Wealth Management,” Holly Deaton, RIA Intel.
Advisor satisfaction continues to track overall market performance, and this points to a systemic problem in our industry: advisor value propositions grounded in investment performance.
“Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms,” Samuel Hartzmark and Kelly Shue, SSRN.
Thus, sustainable investing that directs capital away from brown firms and toward green firms may be counterproductive, in that it makes brown firms more brown without making green firms more green. We further show that brown firms face very weak incentives to become more green.
“A Short 100-Question Diligence Checklist,” Byrne Hobart, The Diff. A good starting point for company analysis.
“What’s Troubling Private Equity Executives, According to Their Personal Coaches,” Michael Thrasher, Institutional Investor.
When everything is up and to the right, everyone feels optimistic and gets along. As clouds roll in, these high achievers tighten up and tend to become defensive and argumentative.
“What Can a Book Published in 1912 Teach Us About Investor Psychology?” Joe Wiggins, Behavioural Investment. One thing it can teach: Human tendencies are hard to change.
“Personality Differences and Investment Decision-Making,” Zhengyang Jiang, NBER. What personality factors make a difference in how individuals invest?
“The c factor and group effectiveness,” Mark Rzepczynski, Disciplined Systematic Global Macro Views.
An investment committee can work more effectively if there is more open communication, increased willingness to listen to other opinions, and bringing in more diversity. Yes, this may sound obvious, yet it is often hard in practice. Regardless of the investment firm, there will always be group dynamics even if it is in the form of research meetings; consequently, every firm should work on improving group dynamics and intelligence.
Identification
“The world will ask who you are, and if you do not know, the world will tell you.” — Carl Jung. (Or replace “world” with “markets.”)
Risk-mitigating strategies
Once you get past the full-page disclosure (in bold) that fronts “Risk Mitigating Strategies (RMS) Framework” from Meketa, there are a number of good exhibits regarding RMS. The first one is shown above. There have been many like it from others that show a more simple allocation on the left, in order to propose various alternatives to add to diversify the risk. This image shows that even with several of those alternatives blended in, economic growth predominates.
Therefore, the paper discusses other RMS, using three trios of concepts. First, sharp drawdowns, extended drawdowns, and bull and flat markets (although one could argue that some “extended drawdowns” referenced weren’t that extended; what would a real longer one bring?). Then, first responders, second responders, and diversifiers in a portfolio. Finally, the use and behavior of correlation, structural, and explicit hedges in each environment.
Postings
A December posting for paid subscribers, “Dimensions of Learning for Investment Professionals,” has now been made available to all. Differentiated ideas from Alix Pasquet about what kinds of training and experience are value added.
“Forbearance (Regarding Performance) is in the Eye of the Beholder,” looks at a recent article in the Financial Analysts Journal regarding how long it takes institutional asset owners to fire asset managers based upon performance. (Not long enough.)
All of the content published by The Investment Ecosystem is available in the archives.
Thanks for reading. Many happy total returns.
Published: April 10, 2023
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