"I'll tell you about a few more people."
"The first one, James Simmons.
Mathematician, who founded Chern-Simons Theory together with Shiing-Shen Chern, is a top-level figure in the fields of differential geometry and topology.
He remained in academia until he was forty years old and received Veblen Prize, which is one of the highest honors in the field of geometry.
Later, he left academia and founded the Renaissance Technologies company.
Almost none of his researchers graduated from business schools--
They're all mathematicians, physicists, statisticians, computer scientists, even astrophysicists and speech recognition experts.
They do not study Financial Report, do not visit Listed Company, and do not read K-line Chart.
There is only one thing they do - to find statistical abnormal patterns from massive historical data, and then use these patterns to establish transactions Model."
Su Wantang handed him the empty cup, and Zhao Chen took it and filled it up.
"Renaissance's Medallion Fund, from 1988 to 2018, had an average annualized return of approximately 39% over the past thirty years.
After deducting management fees, the net return received by investors is 39%.
The average annualized return of S&P 500 during the same period was approximately 10%.
Simons was the world's highest-paid Hedge Fund manager for a long time, but he himself knew nothing about finance--
He doesn't read Financial Report, doesn't analyze the industry, and doesn't even care about the stocks held by his fund.
He only cares about data. There's a saying in his fund - 'We don't trade stocks, we trade statistical models.'"
"A mathematician used differential geometry thinking to dismantle market data and created Wall Street, the fund with the highest return rate in history."
Shen Zhiyi repeated this sentence, as if to confirm whether he heard it correctly.
"Yes. The second one, Emmanuel German.
Theoretical physicist, Ph. D. in physics from Columbia University, research direction is String Theory.
He has worked in academia for several years and published many papers, but has never received tenure.
Later, he left academia and joined Goldman Sachs. When he first arrived at Goldman Sachs, he knew nothing about finance--
I don't know what price-to-earnings ratio is, I don't know what duration is, and I don't know what credit default swaps are.
But he can model.
He brought the modeling methods of physics into the quantitative strategy team of Goldman Sachs, and later wrote the book "My Life as a Quant".
He said something in the book--
'The biggest difference between physicists and financiers is that physicists start from First Principles and build Model, while financiers start from historical data and fit the curve.
The market is not a physical experiment, but if you can break down the underlying mechanisms of the market into variables that can be modeled, you can be closer to the truth than those who only look at Financial Report.'"
Zhao Chen put down the tea cup and tapped his fingers lightly on the edge of the stone bench.
"The third one, Fisher Black.
Ph. D. in Physics. After completing half of his Ph. D. in Physics at Harvard, he switched to finance.
Together with Myron Scholes, he published the famous Options pricing formula,
It is the Black-Scholes Model that all Derivatives traders are using today.
The derivation process of this formula is completely based on the method of physics -
Use stochastic differential equations to describe the random walk of stock prices, and use partial differential equations to solve the theoretical price of Options.
Before Black and Scholes, Options pricing relied on traders' intuition and experience.
After them, Options pricing becomes a mathematical problem that can be calculated precisely.
Scholes won the Nobel Prize in Economics for this formula, but Black died before winning.
This formula has allowed global Derivatives Market to grow from zero to today's scale of hundreds of billions of US Dollar--
And its underlying logic is isomorphic in mathematical structure to the heat conduction equation."
"The heat conduction equation."
Shen Zhiyi said these two words in his mouth again,
"The equations of physics, used in financial markets."
"Yes. The fourth one, David Shaw.
Computer scientist, PhD in computer science from Columbia University.
He founded D. E. Shaw Hedge Fund in 1988, recruiting all computer scientists and computational physicists.
What his researchers do is use computers to simulate market behavior and use algorithms to extract trading signals from high-frequency data.
The annualized return rate of his fund once exceeded 20% in the 1990s.
Later, he recruited a young man named Jeff Jeff Bezos. Jeff Bezos worked at D. E. Shaw for several years before leaving to found Amazon.
Jeff Bezos Things I learned at D. E. Shaw--
Use data to drive decisions and use algorithms to optimize processes - he later brought him into the Amazon operating system.
Amazon has transformed from an online bookstore into the world's largest cloud computing company. The underlying logic is the same as D. E. Shaw's trading system."
Zhao Chen picked up the teapot and refilled himself the last cup.
"What do these people have in common? None of them graduated from business school.
They know nothing about finance.
Simmons doesn't understand Financial Report, Deman doesn't know the P/E ratio, Black has never taken a finance class, and Xiao has no trading experience.
But they brought physics, mathematics and computer science thinking to financial markets --
Use First Principles to disassemble the problem, use mathematics Model to describe the system, and use statistical methods to verify the hypothesis.
What these people do is not to 'analyze stocks', but to 'model the market'.
They study the market as a complex physical system, rather than treating the market as a casino that requires gaming by experience and intuition."
He picked up the tea cup and took a sip, then looked away from the light of the fountain in the distance and fell on the faces of Su Wantang and Shen Zhiyi.
"You just asked me why I brought you to the casino today and why I told you the story of Thorp.
Thorp, Simmons, Deman, Black, Shaw--the underlying logic of what these people do is the same as what I do.
The market is not a casino, but the market has a probability structure.
Whoever can dismantle the probability structure of the market deeper will be able to obtain positive expected value.
After obtaining positive expected value, manage the position according to Kelly Criterion and let time and compound interest work for you.
What I am doing on Era Vanguard is not predicting the future, but breaking down public data into variables that can be mathematically verified.
Nvidia's CUDA developer ecosystem, Tesla's Capacity Ramp-Up curve, GME's Short Selling proportional structure - these are all variables that can be quantified.
After breaking them down to the lowest level, you will find that there is a gap between the pricing given by the market and the real probability.
The process of filling this gap is the source of excess returns."
Su Wantang put the empty tea cup on the stone bench and turned his head to look at him.
She understood - today from Boca Chica's rocket factory to Las Vegas's gambling table, Zhao Chen was not taking them to play,
It is explaining his investment methodology over the years in a more systematic way.
This methodology is highly consistent with Elon Musk's logic for making rockets--
Break down the complex system into variables that can be independently verified, and then build a repeatable Model on each variable.
Shen Zhiyi took out the chip he just won at the gambling table from his pocket, put it in his palm and took a look.
Then she put the chips back into her pocket and stood up.
"Those people you just mentioned - Thorp, Simons, Deman - they all switched careers from academia to financial markets.
They knew nothing about finance when they changed careers, but they knew everything about 'how to model'.
When you came out of Zhengfa University, you didn't know anything about investing."
"Yes. I don't know anything either. But I studied law.
The underlying logic of the law is to break down complex facts into elements that can be verified by evidence, and then establish a logical chain between the elements.
This way of thinking is the same at the bottom level as the First Principles of physicists, the axiomatic derivation of mathematicians, and the algorithm design of computer scientists.
I used the dismantling ability of my legal training in investment.
So when I looked at Nvidia, my first reaction was not 'Will this ticket go up?'
It's 'What elements does this company's core competitiveness consist of, and what is the relationship between these elements?
Which ones have been priced by the market and which ones have not yet been priced."
Zhao Chen stood up and put Zisha Pot into a soft cloth bag.
"Let's go. We have to go to Antelope Canyon tomorrow. Which one of you will drive?"
Su Wantang stood up, put the tea cup that Zhao Chen had finished drinking on the stone bench into his bag, and zipped it up.
"I'll drive. You drink tea in the back seat."