Cliff Asness: Staying the Course Through Adversity

In this interview with the Finserve Podcast, Cliff Asness reflects on the challenges of investment strategies. Initially, he believed the hard part was creating a profitable, diversified process. Back tests seemed promising but weren’t always reliable.

Despite adjustments, real-life results were often less impressive. Over 30 years, they’ve used half the back test’s success as a rough indicator. Enduring tough periods tested their resolve. Success wasn’t just about having a good process but sticking to it during adversity. Asness emphasizes the importance of perseverance and self-doubt during tough times, suggesting it’s the true test of success in any endeavor, not just quantitative trading.

Here’s an excerpt from the interview:

Asness: I just thought of this as another observation because I do believe it.

When I started my career I would have told you the hard part is creating an investment process that on average makes money and is pretty diversifying to other things.

And again I’m not going to take it past that on this podcast. I would have looked at back tests of that of that, back tests are just like you make up a rule for trading and you go look how has it worked over the last one to one billion years.

Um billion would be a lot, wasn’t a lot of quant trading back then. If you showed me that back test I would have said the challenge is this real? Is it going to repeat?

Are we going to make this money in the future? And mostly that has occurred. It’s not been as good but we never assumed things would be as good.

If you back test a strategy I think you’re very foolish if you think in real life it will be as good as your back tests.

At some point you tried 12 things and you took the one that worked best which means you’re overestimating how good you are.

But for 30 years we’ve used half as good as a back test as kind of a very rough justice, did this work out well? And it has. It’s been way harder to live with than I would have realized.

You go through two three-year periods that have been really tough. You go through 10-year periods that are good. You enjoy those.

But you do not enjoy those as much as you hate the three-year periods that are not good. I think that’s just human nature. And I do think for most investors, I’m not saying it’s easy to come up with a good process, but I think it is the easier part versus being able to stick to that process when it is not working.

That is a challenge. It’s a challenge I think we’ve handled particularly well and come out better for it each time, but I think that’s kind of an interesting lesson that probably applies more broadly than just to my narrow example of quantitative trading.

Being good at something is vital, but once you’re pretty sure you’re good at it the whole world and maybe even yourself will doubt it when whatever you’re doing is going through a tough period.

So that’s the time I think that determines success versus failure more than than any other.

You can watch the entire discussion here: