Markku Kurtti – Diversification is a Negatively Priced Lunch (S7E7)
Corey Hoffstein welcomes Markku Krävätti to delve into Markku's background in finance and his insights on the compounding process. They discuss the Kelly criterion, drawdown risk, and stock diversification, exploring the debate on what constitutes sufficient diversification in stock portfolios. Markku shares valuable lessons for active stock pickers, analyzing the performance of the largest stocks and their growth rates. The conversation examines geometric growth, expected drawdowns, and empirical testing, comparing leveraged and all-equity portfolios. They address the equity risk premium puzzle and the implications of theoretical models on real-world investing. The episode concludes with a summary of key research findings and takeaways.
In this episode I chat with Markku Kurtti, author of the blog Outcast Beta.
Markku is classically trained as an electrical engineer and works on receiver algorithms for mobile phones. A passion for investing, however, lead him to pursue an MS in Finance and an interview with Ed Thorp compelled him to devote his time to better understanding compounding processes.
This obsession has driven him to develop a number of analytical and numerical models that provide differentiated insights into topics such as “why do most individual stocks historically underperform cash,” “how many stocks should an active manager actually hold,” and “how does the uncertainty of uncertainty help explain the equity risk premium puzzle?”
With Markku’s work, I’m reminded of the phrase: all models are wrong, but some models are useful. His outsider’s take provides some unique insights into the benefits, and opportunity costs, of diversification.
I hope you enjoy my conversation with Markku Kurtti.
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Transcript
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