Let’s be clear about investing.
Clarity is vital before attempting to generate any useful investment insight. Throughout my long career in Equities and Quant, I have seen too many examples of analysis based on ill-defined terms that attempt to answer an ill-defined question. They’re rubbish.
This is the first in a series of articles to help get clarity about various aspects of the investment process of a professional investor. We start with definitions.
And we start at London Quant Group.
London Quant Group
I belong to London Quant Group, which is affectionately known as LQG. As you might be able to guess, LQG is a group of quants based in London.
The quants are mathematically-minded folk who work in and around Financial Services. In fact, think of any role you might find in Financial Services, add Quantitative to it, and you get the role of people at LQG – Quantitative Director, Quantitative Portfolio Manager, Quantitative Trader, Quantitative Analyst, Quantitative Risk Manager, Quantitative Developer, Quantitative Sales. You get the picture.
LQG is true-to-label. It is well-defined.
At a recent LQG evening seminar, the speaker spent much time at the beginning of his session talking about the importance of definitions.
It struck a chord with me and with many of my LQG colleagues.
The speaker was Yves Choueifaty from Tobam, and his topic was Debunking Investment Myths. The talk was promoted as:
The foundations of the modern investment services industry are supposedly well known, well understood and reliable… Or are they? In some aspects they may be considered deeply flawed – at least in the way that they are understood and used by various market participants. In this talk Yves Choueifaty will review 7 examples of general understandings that are really misunderstandings and sometimes critical misunderstandings – they are myths to be exposed and debunked.
Whilst I won’t go into the 7 myths here, their common element was having a definition that was poor, misunderstood, or both.
The Bourbaki Spirit
Yves and his colleagues at Tobam are very focussed on eliminating poor definitions, and go so far as invoking the Bourbaki Spirit.
No, I hadn’t heard of it either.
According to their website, Tobam describes the Bourbaki Spirit thus.
In the 1930s a group of French mathematicians came together to reformulate modern mathematics from a perfectly rigorous, self-contained point of view. The group used the pseudonym Nicolas Bourbaki.
Here at TOBAM, we believe in what we call ‘the Bourbaki spirit’. We share Bourbaki’s refusal of concepts that are not precisely defined. We dedicate a significant amount of time focusing on definitions, which we view as a prerequisite to conducting sound and original research work.
This means we avoid using conventional wisdom when it uses unclear definitions.
Their starting point for everything is about getting clear definitions.
It’s like everyone speaks a different language
Another chance meeting also prompted this article.
At a recent social event I met a friend of a distant relative for the first time. Inevitably, the conversation drifted into What do you do?
As someone who works in Regulatory Risk at a US Investment Bank in London, it was merely a breath before they were bemoaning the frustration throughout their organisation of agreeing definitions across countries, between departments and within teams. They noted:
It’s like everyone speaks a different language
I have certainly found that.
It is one of the first things I look for when consulting to a fund manager about their investment process. The language of the team can be so telling.
I won’t go too deep here, as this is the topic of our next article. However, the takeaway is the more aligned the language of the team, the more consistent the investment process.
As you might have picked up, we are very keen on using clear definitions as we regard definitions as the tools for clarity.
We believe every term needs to be defined, as we are about to do for the word term.
[definition] Term is a word or phrase used to describe a thing or to express a concept, especially in a particular kind of language or branch of study.
We let you know it is a definition by labelling it [definition].
We subsequently use capital letters to indicate that the Term has been defined. Notice the capital T in the word Term.
Depending on circumstances we will sometimes format it with bold font.
Confidence that 1=1. We poke a bit of fun at ourselves, courtesy of http://www.smbc-comics.com.
Whilst every Term needs to be defined, we don’t go as far as Tobam and invoke the Bourbaki Spirit.
We personally only define some Terms, as in many cases, a dictionary definition will do.
In other cases, a standard investment definition from something like Investopedia can be sufficient, or at least a useful starting point.
We only define a Term where it requires specific clarification. This is generally because the generic definition:
- has different meanings in different contexts
- is misunderstood or misapplied by its users
- is too loose for our purposes
You will see further examples of Terms being defined in future articles.
Before you go, a quick confession. Apart from using it as an example in this article, we didn’t need to define Term, as we accept it’s dictionary definition. So you may see that we subsequently revert to the word term, rather than the definition Term. We hope you are OK with this sleight of hand.