Saturday, August 17, 2019

Wisdom Of The Week

In fairness, these optionality-obsessed professionals often wind up happier than the other type I’ve become accustomed to seeing in my office: the lottery ticket buyers. These individuals are just one payday away from securing the resources they need to begin their work toward their true ambition, be it political, civic, or familial. They believe that one Silicon Valley startup or one stint at a hedge fund will allow them to begin their true journey.

While the serial option and lottery ticket buyers seem like different creatures, they are, in fact, close cousins. Both types postpone their dreams and undertake choices that they think will enable their dreams. But they fail to understand that all of these intervening choices will change them fundamentally—and they are, in fact, the sum total of those choices.

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By emphasizing optionality, these students ignore the most important life lesson from finance: the pursuit of alpha. Alpha is the macho finance shorthand for an exemplary life. It is the excess return earned beyond the return required given risks assumed. It is finance nirvana.

But what do we know about alpha? In short, it is very hard to attain in a sustainable way and the only path to alpha is hard work and a disciplined dedication to a core set of beliefs. Given the ambiguity over the correct risk-adjusted benchmark, one never even knows if one has attained alpha. It is the golden ring just beyond your reach—and, one must enjoy the pursuit of alpha, given its fleeting and distant nature. Ultimately, finding a pursuit that can sustain that illusion of alpha is all we can ask for in a life’s work.

So, give up on optionality and lottery tickets and go for alpha. Our elite graduates need to understand that they’ve already been winners in the lottery of life—and they certainly don’t need any more safety nets.

Mihir A. Desai, The Trouble with Optionality

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