My career in academic research has not been involved with active management of securities. I've tried to understand risk-and-return relationships; also the pricing of derivative securities.
Sentiment: NEGATIVE
My research interests since then have shifted strongly towards the economic and regulatory problems of the financial services industry, and especially of the securities and options exchanges.
There's a tendency to look at investments in isolation. Investors focus on the risk of individual securities.
Active management leads to lots of poor investor behavior. It sends people chasing after whoever has the hot hand at the moment.
What turned me on then, and turns me on even today - and when the time comes from me to retire from management I think I'd still be interested in it - is that everything that happens in the world affects the price of securities.
You go to any MBA program, and you will be taught the theory of the firm, that the purpose of the firm is the maximization of return on invested capital. I always thought this was a kind of lunacy.
A financial institution has the task of taking risks, and if it's a well run institution - say, Goldman Sachs - it tries to cover the potential losses to itself, but only to itself.
Today, the forces of competition, technology, and globalization have converged to spur innovation and to transform the way business is done in the securities industry.
During my undergraduate training at UCLA, I was studying finance and securities; my particular interest was with mutual funds. Wanting to get into a high position at some of the companies that were doing that, I knew that law would be useful.
The ability to select stocks, manage them over time and know when to sell them is incredibly difficult, even for professional fund managers.
When they are employed wisely, derivatives make the world simpler because they give their buyers an ability to manage and transfer risk.
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