Jan

4

Recent evidence and posts to this site suggest there may be ’stars’ who obtain consistent out performance. We believe that some of these “stars” obtain their success from rigorous quantitative approaches. There may be other explanations for other investors. Since risk is such an important and enduring focus of this group the following may serve as a basis for some new directions of thought on the subject.

The term “power elite” was coined by C. Wright Mills (and later used by Noam Chomsky) to describe a conspiracy-type theory of how the direction of the US economy and polity is driven. The elite who make up this power structure are neither monolithic nor constant in the US, nonetheless they exist and confer and it is from amongst their number that many leadership roles are filled. The newly wealthy, powerful and brilliant are invited to join the circles.

In matters of this earth the working assumption of the “power elite” is that everything of consequence is knowable. The perception of risk, therefore is a form of admitted ignorance. Consequently the realization of risk is optional and avoidable if ignorance can be overcome. If we proceed from this assumption then the experience of risk, as opposed to the initial assessment of risk, possibly can be reduced to zero if you pick your spots. Zero risk might be achieved through hard research. But the preferable and quickest method of the “power elite” is to buy information and/or obtain quid pro quo — giving the appearance of doing a lot of research may be just cover. Once the essential knowledge is obtained positions in the market can be taken with confidence. The only risk remaining, which is statistical, is the noise associated with how the market will react to the order flow and the ultimate announcement of the development that is being exploited. All this works until, from time to time, the rules of the market change requiring the innovation of new methods and new sources.

The ability of any one person or group within the “power elite” to consistently succeed over time and across changing rule regimes is not guaranteed. It takes work. The cunning of competitors, hubris, fatigue, and possibly legal enforcement may do in the previously successful.

If this model operates selectively within markets then it suggests that risk is optional for some classes of investors because they are able to exploit unique sources of information which transform risk into reward directly. These are people who count but don’t count.


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