The Grant Williams Podcast Ep. 124 - Dave Dredge

**Grant Williams** (0:10)
Before we get going, here's the bit where I remind you that nothing we discuss should be considered as investment advice. This conversation is for informational and hopefully entertainment purposes only. So, while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets.
You're about to listen to a special preview edition of The Grant Williams Podcast, featuring my friend David Dredge of Convex Strategies in Singapore. The subject at hand is volatility, a field in which Dave is one of the world's leading experts. And every time he joins me on the podcast, our conversations are incredibly thought provoking, something which is attested to by the emails I receive in their aftermath. Every episode of The Grant Williams Podcast, including The End Game, The Super Terrific Happy Hour, The Narrative Game, This Week In Doom, Shifts Happen, Kaos Theory and The Hundred Year Pivot is available to Copper and Silver Tier subscribers at my website grantwilliams.com. Copper Tier subscribers get access to all the podcasts, while members of The Silver Tier get both the podcasts and my monthly newsletter Things That Make You Go Hmmm. So if you enjoy what you hear on the show, and if you'd like more high quality content like it, then make your way over to grantwilliams.com and join our exciting community today. And now, on with the show.
Dave Dredge, I have seen you in person recently, briefly, and now I get to see the virtual you again. I will say, as much as I enjoy the virtual you, the one in person is better, more cuddly, more fun. So we'll have to make do with the virtual one for now. How are you?

**Dave Dredge** (1:55)
I'm great. What a treat to have you come join us at London for our annual Volatility Investor Conference. What a treat.

**Grant Williams** (2:02)
I presume you're back in Singapore, so no tube strikes there.

**Dave Dredge** (2:06)
No, in Singapore, I'm sure if the tube drivers were on strike, I don't even know if there are two drivers down, but there would be full automation the next day and they'd be all out of a job.

**Grant Williams** (2:15)
Exactly right.

**Dave Dredge** (2:16)
So it's not happening here, but in London, what chaos. And you talk about being prepared for chaos.

**Grant Williams** (2:22)
It is the perfect metaphor because I came to the conference, woke up that morning, went to the station to come in without even realizing that there was a tube strike on. So that just shows you a complete unexpected negative outcome for me. Tail risk was massive. I got there on time, thankfully.
But it did curtail my time with you because I had to leave early to make sure I got home in time.

**Dave Dredge** (2:41)
It made it a very complicated week, I'll tell you. And I'll give you one story amongst many that I have just from the chaos that week, but one of a mutual friend. I had arranged to meet Bill White for a drink one of the evenings while I was down.
He had a tube strike and he still made it, taking an hour and 45 minute bus ride in from his place to meet me and then to turn around after having a couple of beers, turn around and take an hour and 45 minute bus ride back home again.

**Grant Williams** (3:10)
There's so much to talk about as always. And your recent letters are just more excellent work. Every time we talk, I tell everybody that they need to log into Convex Strategies and read all your work, because it's just, it's so thought provoking. I always have to read them twice straight away, because I'm like, okay, I need to make another run of this. So we're going to try and, I want to try and dig into some of the points you made in there. And I want to kick off with something that's run through the last couple, I guess, this idea of the total portfolio approach.
And obviously it's something that speaks loudly to you guys, but I want you to, because I think there are plenty of people out there that either aren't familiar with the acronym or maybe they don't quite get the linkage between TPA and some of the research pieces that are being published by some of the bulge-backet investment banks. So why don't you start with that? TPA, what is it, how does it change things, and why is it a good idea and what potential problems does it have?

**Dave Dredge** (4:05)
Well, as some people say, it's old wine in a new bottle. It's putting a name to what really everybody should always have been doing, right? You should be managing the components of the portfolio for the totality of the whole. The importance of everything that you're adding to the portfolio should be measured by its contribution to the portfolio. There's no logic in looking at things on a standard loan basis. The simple description that I've been giving for decades is banks proving that they're incredibly brilliant because they came up with this great idea so that people didn't get rid of all the deposits. They decided to put loans and deposits together and report net interest margin, as opposed to saying, oh, the deposits cost money, let's get rid of them. We're losing money every year on these damn things. This was a concept around what is now being called total portfolio approach, is let's look at the contribution to the whole. Then obviously, that gets into much more advanced levels of diversification. What is the contribution of negatively correlating strategies, risk mitigating strategies to the whole? It's obviously what we've been advocating forever. Hey, let's go out and explicitly mitigate risk. The good old race car analogy. Let's put better brakes on the car so you could drive faster.