During his recent interview with Tobias, Chris Cole of Artemis provided a great anology of what happens when great ideas in investing become dominant, saying:
I’m a single guy. I go out and I see a cute girl. I ask for her phone number. That’s taking a risk. Maybe she gives me her number and we go on a nice dinner date together. Maybe she says, no thank you, and that’s okay.
Now imagine if I systematically took that risk and kept asking her for her number again and again and again. That’s called ‘stalking’ and it’s not a good thing. That’s bad right. So systematically applying risk in a non-thoughtful way. You take a good idea and you turn something into something very very dangerous.
Unfortunately I think in this world of financial engineering we’ve become so enthralled with harvesting risk premium that we lose common sense. Good ideas, when they become dominant become destabilizing. Finance is littered with it. I mean everything from portfolio insurance to mortgage-backed securities. The list goes on and on and on.
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