Podcast Summary: E189: Inside the Goldman Sachs Prop Desk: Lessons from a Top Trader w/Nancy Davis

Podcast Information:

• Title: How I Invest with David Weisburd
• Host: David Weisburd
• Guest: Nancy Davis
• Episode: E189
• Release Date: July 21, 2025
• Description: This episode delves into Nancy Davis's tenure at Goldman Sachs' proprietary trading desk, her unique investment strategies, risk management philosophies, and her perspectives on current and future market conditions.

1. Nancy Davis’ Experience at Goldman Sachs' Proprietary Desk

Overview of the Role: Nancy Davis begins by recounting her time on Goldman Sachs' proprietary trading desk, previously known as "Risk Arbitrage" in the 1990s. She describes the environment as both exhilarating and privileged.

Key Points:

• Autonomous Trading: The proprietary desk operated independently, solely managing Goldman’s capital without client interactions. They traded externally, similar to a hedge fund.
• Mentorship and Team Quality: Nancy emphasizes the exceptional mentorship and high-caliber colleagues she worked with, which greatly enriched her professional experience.

Notable Quote:

“I loved every second of my time there and I felt so privileged to be part of that team. We did not touch anything to do with clients, so all we did was invest Goldman's capital.”
— Nancy Davis [00:19]

2. Investment Strategies and Risk Management

Unique Approach: Nancy elaborates on the firm’s distinctive investment approach, contrasting it with traditional methods.

Key Points:

• Use of Options: The desk utilized nonlinear derivatives, specifically options, treating investments akin to debit card transactions where the maximum loss is predefined.
• Risk Management Philosophy: Instead of employing stop-loss orders, which are reactive, Nancy’s team focused on sizing investments based on potential losses from the outset and prioritized profit-taking when investments were successful.
• Advantages Over Traditional Methods: This proactive approach ensures that losses are capped upfront, avoiding the pitfalls of timing errors inherent in stop-loss strategies.

Notable Quotes:

“When you buy an option, very simply you pay the premium upfront. So that's my metaphor or analogy to being a debit card. You know, you fully pay for it and you can never lose more than that amount of stop loss at the beginning.”
— Nancy Davis [02:09]

“With our risk management style, we're always buying low and selling high because we're profit taking.”
— Nancy Davis [03:00]

3. Psychological Aspects of Trading

Managing Emotions and Expectations: The conversation touches upon the psychological challenges traders face, especially regarding loss aversion and the temptation to deviate from disciplined strategies.

Key Points:

• Ego and Feedback: Nancy discusses the importance of being coachable and receptive to feedback to overcome inherent ego defenses.
• Predictable Risk Management: By knowing the maximum potential loss upfront, traders can maintain psychological stability, avoiding the "death spiral" of escalating losses or premature profit-taking.

Notable Quote:

“Our philosophy is very unusual, right? We're probably the only firm that you've talked to that the options are the portfolio, right? Is that true, David?”
— Nancy Davis [04:57]

4. Notable Trades and Market Insights

Major Trades Executed: Nancy shares insights into some of the significant trades she executed while at Goldman Sachs, highlighting the innovative strategies employed.

Key Points:

• Expressing Directional Views: Beyond capturing implied volatility differences, her team expressed directional exposures using options, enhancing profitability through asymmetric payoffs.
• Example of Silicon Valley Bank: She reflects on a major trade involving Silicon Valley Bank, acknowledging hindsight lessons on profit-taking and rolling strategies.
• Market Liquidity Challenges: Nancy references the March 2020 oil market crash, emphasizing the importance of liquidity and execution capabilities during extreme market conditions.

Notable Quote:

“We would just roll our option strikes and reset the convexity and it's a way of actually locking in our profits.”
— Nancy Davis [07:06]

5. Views on Inflation and Market Conditions

Stagflation Concerns: Nancy provides her analysis on the current inflation landscape and its implications for the markets.

Key Points:

• Inflation Market Pricing: She observes that the market currently prices CPI inflation around 2.3-2.4%, aligning closely with the Federal Reserve's targets, despite higher realized rates during events like the COVID shock.
• Term Premiums and Yield Curve: Nancy notes the unprecedented inversion of the yield curve from 2022 to 2025, suggesting potential opportunities arising from these abnormal conditions.
• Implications for Credit Markets: She warns of the adverse effects of stagflation on credit markets, historically the worst-performing asset class in such environments.

Notable Quote:

“The inflation curve is downward sloping meaning the market is pricing in that CPI is going to fall in the future.”
— Nancy Davis [08:55]

6. Lessons Learned from Goldman Sachs

Risk Management Excellence: Nancy attributes much of her professional growth to the rigorous risk management and intellectual environment at Goldman Sachs.

Key Points:

• Flat Organizational Structure: Emphasizing a meritocratic culture that fosters learning and innovation.
• Intellectual Firepower: Being surrounded by some of the smartest minds in finance significantly shaped her investment philosophies and strategies.
• Continuous Improvement: The environment encouraged self-awareness and adaptability, crucial for navigating complex market dynamics.

Notable Quote:

“I think it was also just an incredible place to work because I had so much intellectual firepower and culture around me.”
— Nancy Davis [11:27]

7. The Importance of Mentorship and Being Coachable

Embracing Feedback: Nancy discusses the critical role of mentorship and maintaining a coachable attitude in her career progression.

Key Points:

• Lifelong Learning: She identifies as a perpetual learner, always open to feedback and self-improvement.
• Humility in Leadership: Running her own firm required her to continuously seek and integrate feedback, fostering growth and resilience.
• Overcoming Ego Barriers: Recognizing and mitigating ego-driven resistance to feedback is essential for personal and professional development.

Notable Quote:

“Our goal though is to know when I make a mistake and not do it again. Right. And always be learning.”
— Nancy Davis [14:45]

8. Contrarian Market Views for 2025

Stagflation as a Contrarian Bet: Nancy outlines her most contrarian view for the remainder of 2025, focusing on the potential emergence of stagflation.

Key Points:

• Market Euphoria vs. Reality: Despite high equity valuations, she warns of the unpriced risks associated with stagflation.
• Options as a Hedge: Nancy suggests that long volatility (Ivol) strategies can mitigate the adverse effects of unexpected market downturns.
• Opportunity Amidst Risk: The lack of current concern for inflation and volatility presents a unique buying opportunity for disciplined investors.

Notable Quote:

“I think stagflation is one of the risks that Ivol can help potentially mitigate.”
— Nancy Davis [16:26]

9. About Quadratic and Further Information

Transparency and Accessibility: Nancy concludes by highlighting her firm's commitment to transparency and openness, encouraging listeners to engage and learn more.

Key Points:

• ETFs and Transparency: Quadratic offers ETFs that function like managed accounts, providing full visibility into holdings and positions.
• Educational Resources: The firm's website hosts comprehensive materials, including prospectuses and white papers, catering to financial professionals seeking deeper insights.
• Open Communication: Nancy invites listeners to reach out for more information, emphasizing her and her firm’s accessibility.

Notable Quote:

“We're an open book. I'm happy to talk to people. I'm very accessible.”
— Nancy Davis [18:26]

Conclusion: In this enlightening episode, Nancy Davis shares her extensive experience from Goldman Sachs' proprietary trading desk, shedding light on innovative investment strategies centered around options and proactive risk management. Her insights into market dynamics, particularly regarding inflation and potential stagflation, offer valuable perspectives for institutional investors. Additionally, Nancy underscores the importance of mentorship, continuous learning, and maintaining a coachable mindset in achieving professional excellence. For those interested in her firm Quadratic and its transparent investment products, further information is readily available on their website.