At a Glance
Christopher Cole (Founder and Managing Partner of Artemis Capital Management) is a long-time volatility strategy expert. This episode focuses on how to achieve non-linear outsized returns through a series of small bets, thereby constructing a portfolio that benefits from dramatic changes. The most weighty judgment in the entire episode: Cole argues that central bank intervention has not eliminated risk but has pushed intermediate risks toward extreme tails—"They have taken returns from the future and brought them to the present; they have pushed tail risks from the present into the future." This "false stability" may ultimately threaten democracy itself.
Theme 1: Nonlinear Thinking — Trading Finite Linear Time for Infinite Possibilities
Cole argues that human life is essentially an "option" — linear time is finite, but emotions and returns are nonlinear.
- Mechanism Breakdown: The "countdown watch" (Ticker) Cole wears is the core metaphor of his philosophy — the watch counts backward to the theoretical time of death. He believes that humans experience time linearly, but the experience of happiness and achievement is nonlinear. The common challenge in both life and markets is: how to use finite linear time in exchange for nonlinear satisfaction.
- Life Analogy: Cole uses "approaching someone" as the simplest example — you only lose a bit of face (a small linear loss), yet you may gain a lifelong partner (a huge nonlinear gain). Similarly, meditation, exercise, and learning new knowledge are all practices of "using small linear efforts in exchange for large long-term nonlinear returns."
- Data Support: Cole cites Warren Buffett as an example — Buffett is worth $66 billion but is nearly 90 years old. He asks everyone: "Would you trade your life for Buffett's?" Almost no one agrees. The conclusion: your time and health are worth billions, and how to maximize them is the core issue.
Theme 2: Convexity in Markets — Why Most Strategies Are "Short Convexity"
Cole argues that the vast majority of investment strategies (including value investing) are inherently "short convexity" — they generate profits most of the time but suffer disproportionately large losses during extreme events.
- Classification Framework: Cole categorizes global investment strategies into two types:
- Short Convexity: Positive returns most of the time, but occasionally experiences exponential crashes (e.g., value investing in 2008, credit strategies)
- Long Convexity: Small losses or neutral results most of the time, but occasionally yields huge nonlinear gains (e.g., long volatility strategies)
- Data Point: Cole notes that approximately 97% of most portfolios are short convexity, with only 2-3% being long convexity. The 2008 financial crisis made many realize this "in a painful way."
- The Paradox of Value Investing: Cole believes value investing itself is short convexity — it is not immune during market crises. Ironically, however, value investing precisely requires crises — because crises create behavioral biases that allow the value premium to be extracted. Therefore, combining long convexity strategies with value investing is "extremely powerful."
- Insights from a Legendary Macro Investor: Cole cites an anonymous legendary macro investor from Market Wizards — "He is wrong eight or nine times out of ten, but the one or two times he is right not only make up for all the mistakes but also leave a surplus." This proves that the best macro investors are not those with high prediction accuracy, but those who know how to use low-cost structures to bet on change.
Theme 3: Central Banks' "False Stability" — Suppressing Small Volatility Inevitably Leads to Catastrophe
Cole uses the "prisoner's dilemma" analogy to argue that by suppressing intermediate volatility, central banks are creating greater tail risks, the consequences of which may extend beyond the market to society and politics.
- Historical Chain of Analogies:
- Nuclear Arms Race: Cole cites the book Command and Control — in 1962, a B-52 bomber crashed in North Carolina, and the two nuclear bombs it carried failed to detonate only due to a fragile safety device. Had they exploded, radioactive fallout would have covered New York and Washington, potentially triggering World War III. "The nuclear arms race created false stability, but beneath it lay enormous volatility potential."
- Forest Fires: The seeds of giant sequoia trees require sensing a forest fire to be released. The U.S. Forest Service once attempted to fully suppress fires, only to result in larger, more intense wildfires. Now they have shifted to "controlled burns."
- Marriage Counseling: Marriage counselors say that couples most likely to divorce are those who never argue — "they have already given up on each other."
- Current Market Mechanism: Cole argues that starting with Draghi's "Whatever it takes" speech in 2012, central banks began reacting to market conditions rather than economic conditions. This created a "mom and dad market" — any small decline triggers stimulus. But "you cannot destroy risk." All they have done is:
- Take returns from the future and bring them to the present
- Push current tail risks into the future
- Extreme Deduction: Cole worries that democratic institutions themselves may not withstand this distortion. "If you read Devil Take the Hindmost and the works of Niall Ferguson... without the hyperinflation of the Weimar Republic, there would have been no Hitler." He believes current economic policies are creating similar social tensions.
- Falsification Condition: When asked what could prove him wrong, Cole replied: "Can they forever engineer an environment where there will never be another 20% decline?" He argues that to achieve the same bond convexity gains as in 2008, German Bunds would need to fall from 4.5% to -3% or -5%. "Historical experience shows this has never happened... I give my probability of being wrong less than 1%."
Theme 4: Dennis Rodman and Portfolio Optimization – The Value of the "Rebounder"
Cole uses Basketball Hall of Famer Dennis Rodman as a core analogy to argue for the nonlinear enhancement of long-convexity assets in a portfolio.
- Rodman’s stats:
- He is the lowest-scoring inductee in the Basketball Hall of Fame—"could barely score from five feet out"
- Yet he grabbed roughly 30% of defensive rebounds and 17% of offensive rebounds—"he was six standard deviations away from the mean in rebounding, a statistical gap no other player has ever achieved in any other metric"
- Ironically, Rodman effectively made it "four-on-five" on offense—opponents didn’t need to guard him
- Nevertheless, he had one of the highest "value over replacement" ratings—turning good teams into great ones, and mediocre teams into good ones
- Portfolio analogy: Cole argues that long-convexity assets (long volatility strategies, systematic CTAs, contrarian macro strategies) act like Dennis Rodman in a portfolio:
- They "rebound"—when traditional assets like value stocks or fixed income "miss," they pick up the bounce
- They generate nonlinear returns through correlation interactions
- In 2008, when traditional diversification failed, these assets performed exceptionally well
- Data support: A simple 50/50 combination of the CBOE Long Volatility Hedge Fund Index (of which Artemis is a member) and the S&P 500 has outperformed the average hedge fund by 90% since 2005. "And that’s without any additional alpha from value or momentum stocks."
Theme 5: How to Actually Build Long Convexity Positions — From Institutions to Individuals
Cole distinguishes between "tail risk" and "long volatility" strategies and provides practical construction methods.
- Core Strategy: Sell first-leg volatility to generate positive carry, and buy second-leg volatility to obtain convexity. For example: sell exposure to a 5% decline, and buy extremely non-linear exposure to a 10-30% decline. This significantly reduces the cost of insurance.
- Tail Risk vs. Long Volatility:
- Tail Risk: A true insurance strategy that protects against endogenous and exogenous risks (e.g., 2008, natural disasters). However, the cost is extremely high — "Since 2012, the average tail risk fund has declined by 40-50%. A 50% decline requires a 100% gain just to break even."
- Long Volatility: An active management strategy primarily targeting endogenous risks. It minimizes holding costs by selling expensive volatility and recycling proceeds into convexity, and exposure can be adjusted based on market conditions.
- The Dilemma for Retail Investors: Cole acknowledges that for the average investor with only $20,000, "this is terrible" — there is a lack of retail products. Viable alternatives include:
- Systematic CTAs (available in retail versions, offering negative correlation and convexity)
- Contrarian macro strategies
- Physical gold (not paper gold like GLD) — "Gold is a right-tail convexity asset"
- Technology as a Counterargument: When asked whether technological growth could justify a "soft landing," Cole argues that technology itself is exacerbating the problem — "A large portion of the population will lose jobs due to technologies like autonomous driving, while policymakers are using old tools to deal with a new game." Tech companies use low-interest debt to issue bonds for share buybacks rather than investing in factories and hiring workers — "Stock buybacks have already exceeded the operating profits of the S&P 500."
Mentioned Positions
| Position |
Guest Stance |
Key Data |
| Physical Gold |
Bullish (as a right-tail convexity asset) |
Recommends holding physical gold rather than GLD |
| CBOE Long Volatility Hedge Fund Index |
Bullish (as a portfolio component) |
A 50/50 combination with the S&P 500 has outperformed the average hedge fund by 90% since 2005 |
| Systematic CTA |
Bullish (as a retail-accessible long convexity alternative) |
Provides negative correlation and convexity |
| Contrarian Macro Strategy |
Bullish (as a defensive portfolio component) |
Falls under the category of long convexity, negatively correlated managers |
Judgments Worth Remembering
1. "Human life is an option — linear time is finite, but emotions and returns are nonlinear." (Cole) — The countdown watch is the core metaphor: finite time should be used to pursue high-convexity opportunities, not linear consumption.
2. "They took returns from the future and brought them to the present; they pushed tail risks from the present into the future." (Cole) — Central banks cannot eliminate risk; they can only shift the temporal distribution of risk.
3. "The best macro investors are wrong eight or nine times out of ten — but the one or two times they are right not only make up for all the mistakes but also leave a surplus." (Cole, quoting an anonymous legendary macro investor) — The key is not prediction accuracy, but betting on change with a low-cost structure.
4. "Dennis Rodman was six standard deviations from the mean in rebounding — a statistical difference that Michael Jordan never achieved even in scoring." (Cole) — Long-convexity assets play the role of "rebounders" in a portfolio: when traditional assets "miss," they pick up the rebound, creating nonlinear returns.
5. "Tail risk funds have averaged a decline of 40-50% since 2012 — a 50% drop requires a 100% gain to break even." (Cole) — It is crucial to distinguish between "tail risk" (high-cost insurance) and "long-term volatility" (actively managed, low-cost convexity).
6. "Without the hyperinflation of the Weimar Republic, there would have been no Hitler." (Cole) — The social consequences of current economic policies may extend beyond the market, and democratic institutions themselves could face threats.
7. "Stock buybacks have exceeded the operating profits of the S&P 500." (Cole) — Tech companies issue debt at low rates to buy back stock rather than invest in productive assets; policy tools are out of sync with current economic realities.
8. "I give my probability of being wrong less than 1%." (Cole on whether central banks can permanently engineer a volatility-free environment) — Yet Cole also acknowledges: "I am never 100% certain I am right. The smartest people are never 100% certain about anything."