Christopher Cole – Small Bets, Huge Payoffs

**Patrick O'Shaughnessy** (0:00)
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Hello and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_2** (0:59)
Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (1:21)
My guest this week is Chris Cole, founder and managing partner at Artemis Capital Management. Chris' specialty is in long volatility strategies, setting up portfolios which will benefit from significant change in markets. We discuss how a series of small bets can lead to disproportionately large non-linear payoffs in both life and markets. Having read some of Chris' work, I knew that his thinking would bring a fresh perspective to the show.
As metaphors for Chris' philosophy, we discuss what kind of watch he wears, Dennis Rodman and movies. You can find show notes for this episode at investorfieldguide.com forward slash Cole. And now please enjoy this conversation with Chris Cole.
Let's see how far down the rabbit hole we can go together today. Maybe a fun way to start would be for you to tell us what a ticker is.

**Christopher Cole** (2:17)
It is a watch that actually counts time to your, it counts time backwards to your death.
So, it's, in many ways, some people might find that idea very morbid, but actually I find it quite life-affirming because it says you only have a finite amount of linear time in your life. This watch is oftentimes letting you know you better use that to the best possible way.

**Patrick O'Shaughnessy** (2:46)
So, I ask because we're going to talk a lot about exposure to what you call, we'll call volatility and convexity, which sound like kind of scary terms, but really it's exposure to change. You know, what happens to you or your business or your portfolio when the status quo goes away and things change considerably. And I think a neat way of understanding how that works, how convexity works, is to talk about a couple examples from life outside of investing.
So maybe you could touch on what some things that we do as human beings, good and bad, that give us positive or negative exposure to change and convexity.

**Christopher Cole** (3:26)
So let's go back to the ticker idea. That's really interesting. I mean, for a long time, I wanted a watch that counted time to my theoretical death, as morbid as that might be. And actually there was, these guys actually kickstarted one. So I was on the list to get it. But I like to think of human life almost like an option.
We have nonlinear payoffs, but we're linearly exposed to time.
So an option is a financial instrument that you have long convexity, you're long this myriad of different possibilities, but there's a limited amount of time that the payouts can occur in. And as you get closer and closer to the expiration of that option, there is a decay factor. It's much like a human life. So we experience time in a linear fashion, but we experience emotion, happiness nonlinearly. So I think a lot of times life, which can be analogous to markets, is about how do you take this linear concept of time and extrapolate it into nonlinear satisfaction in your daily life. And then from that, there's actually the idea of long convexity trading as a market strategy that does the same idea in markets.

**Patrick O'Shaughnessy** (4:45)
So what would be like a couple, let's say, daily practices or things that we do that would give us positive exposure to, let's say, positive nonlinear outcomes and maybe some that have negative exposure, like maybe eating junk food or something like that?