Today is day 1 of Quantisan, the company

> The reasonable man adapts himself to the world: the unreasonable one > persists in trying to adapt the world to himself. Therefore all > progress depends on the unreasonable man. G. B. Shaw, *Maxims for > Revolutionists* While cramming for the CFA level 1 exam the past 3 weeks, I can't let go of the fact that I'm leaving my work out cold on the table. This sense of urgency feels like every minute that I delay my trading system development projects, bits of them will fall apart. This weekend I finished reading through my Schweser study notes from cover to cover, to cover to cover, and repeat that 3 more times for a total of 5 books. It's certainly useful and interesting material. But I can't see the value of cramming for 3 more months to memorize everything in even more excruciating detail. No term will be without a definition in my head and no problem will be without a solution on my BA II Plus calculator. Just so I can say that I passed my level 1 exam on my resume. What the curriculum offers is information, but what we need more in this world is wisdom. I stand by my belief that [credibility is as important as experience and skills][]. However, that doesn't mean that I need to head for the path most traveled. Why can't I be unreasonable and push my limit to do what I've always been set out to do. Credibility can be gained from attaching professional designations to your name, but it can also be gained from simply achieving results in the real world. So this morning, before going to work, I took the first baby step in turning this little hobby of mine into a real business. I registered a business entity with our government. After 10 years of [trading][], 5 years [blogging about the market][], and 3 years in [trading system development][], today is day 1 of Quantisan Systems! And this -- is how my business got officially started. My plan towards [unreasonable goals][] in a world of reasons is finally set in motion.

Posted 14 March 2011 in journal.

Just because it's math does not mean it's not without its caveats

I am more than half way through my first speed run of the CFA level 1 material. This chapter discusses portfolio management. In particular, I just read the Markovitz Efficient Frontier. What strikes me most about this chapter is that these mathematical material are presented so matter-of-factly. Recalling in chapter 1, Ethics, the idea of prudence and due diligence was evident. This was exemplified later in the Financial Statement chapter. Methods of drafting balance sheet, income statement, and cash flow statement were presented in excrutiating details before a discussion about ways to analyze them. Just so we can understand the mechanics of it to spot bias, pitfalls, misrepresentation, and outright frauds. In fact, a good portion of the section were reserved for discussing the caveats in financial statement analysis. As boring as it was to sit through the accounting details, that was good prudence and good due diligence. Fast forward to this discussion on Modern Portfolio Theory (MPT), it is simply explained in the text that expected risk of a portfolio with individual asset correlations less than 1 will be less than its weighted average risk. Where are the billboard-sized warnings and neon-red danger signs? Perhaps criticisms of MPT will be discussed later or perhaps I simply missed it with my \~200 pages/day scanning pace (in which case, just ignore me). But if I don't see a caveat lector on MPT in bold, underlined, and boxed fonts later, then I am surely going to be very disappointed. This is a big deal because of the historic events of 2008. In which we witnessed the havoc caused by countless funds that blindedly rely on MPT's validity (i.e. diversification of risks on the naive basis of constant correlations and normally distributed returns), and other risk models, go under. There can be no worse mistake than underestimating your risk in trading. Let me repeat that, there can be no worse mistake than underestimating your risk in trading. Careless use of MPT (not MPT, per se) leads to exactly that. The problem is that people take these financial theories to heart too much without reading the fine prints. Just because it is presented in mathematical formulas does not mean a theory is law. The least the CFA text can do is to broaden financial prudence from not only dissecting financial statements but to encompass other important intellectual matter related to the job too. I am appalled by the fact that thousands of CFA level 1 hopefuls might actually believe that you can always reduce portfolio risk and identify an efficient asset mix from mere correlations and standard deviations (which in and of themselves are flawed in the real world), with no strings attached. "Science is the belief in the ignorance of the experts", Richard Feynman.

Open sesame with three more letters

I apologize in advance if I occasionally disappear in the next 15 weeks. My study guide for a professional exam in financial analysis arrived last Friday. I spent most of this weekend studying as I need to squeeze in 300 hours of studying time between now and the exam in June. Topics of the exam range from professional standards to investment analysis to asset management. This is a major commitment as 300 hours in 3 months is no joke. Fortunately, I am familiar with a majority of the material. Unfortunately, most of the details I have forgotten already as level 1 of this exam covers the very basic. For example, I haven't heard terms like price elasticity and marginal cost in 10 years. The quant section, at least, I am finding it to be a breeze as I finished skimming through the 400 pages of material in a few hours and realized that I don't need to spend anymore time on statistics or technical analysis to answer the practice questions. Having said that, I do not take this exam lightly and will have to put most other work on hold. This is a difficult decision because having spent hours and hours in the past few months over our trading system, it is coming to shape. In fact, I just tape-out a major component of it last Friday. Studying with this curriculum would provide me with a big picture perspective of financial analysis. Still, I would rather spend the time to study pertinent works like Security Analysis by Graham and Dodd, or Time Series Analysis by Hamilton, or Structure and Interpretation of Computer Programs by Abelson et al. (aff.), some classics on my shelf that I still couldn't fully appreciate yet. Better yet, I want to finish my trading system prototype as soon as possible because I've learned so much in bringing these systems (having gone through several incarnations already) to life than anything else I have done previously. However, it is also because of my desire to do this for the long term that I need to take the time to garner some industry recognition. As superfluous as doing an exam might seem for my outside-of-the-box approach to the market (mostly out of necessity as I have neither the bank roll nor brain cells to directly compete with the sharks), the fact is, to be successful in this industry, I need experience, skills, and credibility. The latter of which is something I lack. Neither Graham, Hamilton, nor Adelson can provide me with credibility that these three letters can -- CFA.