I have been saving this piece from the Brisbane Times – my lack of alacrity in looking at it and commenting on comes down to simply not know what to say since it operates from a point of view that is totally foreign to my own.
In the past week, bitcoin took a dramatic tumble after its historic 1 400-per cent rally. The digital currency rebounded hours later, but it left bitcoin investors reeling with fears that the bubble had finally burst.
While data scientists, software developers and financial engineers are busy at work on more complex algorithmic trading platforms to better predict – and optimise – this volatility, they may be looking in the wrong place. Software code and computer science might provide part of the answers but the rest can be found through a surprising source: the humanities
The philosophical difference I have stems from my belief that there is nothing to explain and any explanation that is proffered is merely a post hoc rationalisation that is subject to the need for a narrative of some sort. I understand the need for explanation, or understanding of the physical world is derived form a need to understand how things work; at least among some us, most would prefer to remain in the dark. In trading there is a misunderstanding of the nexus between understanding and being profitable and this has been the source of generations of disappointment for traders. As an example of this lack of link between understanding or attempting to understand and returns consider the following chart which compares the yearly performance of global macro funds as reported to Barclays Hedge and the S&P 500 Total Return Index.
Macros funds are generally composed of the best and the brightest, they seek investment opportunities across both markets and countries – nothing is off limits. As such these firms are packed to the gunnels with PhD’s of various disciplines eagerly searching out trading opportunities. The problem is they are crap at it and they cannot manage to beat a simple return index most of the time. This inability to make money looks even worse when you look at the value of $1 invested into a basket of these funds versus $1 simply invested in the index.
Understanding is irrelevant to profitability – I am cognisant of the belief that the more you know the more implicit control you think you have but one of the most useful beliefs in trading is to accept that you have no control. Surrender to this lack of control removes the need for understanding – once this occurs markets and price are reduced to their simplest elements. As as analogy consider surfing, if I asked a surfer to explain to me the mathematics of wave formation they would most likely not have a hope but that doesn’t mean they cannot surf, it just means there is no need to for them to understand. What they do know is that some waves are big, some are small and all waves end, some with you being banged into the ocean floor. The central part of their system revolves around how to be in the right place for a wave, how to ride it when it occurs and the patience to understand that really big waves might not occur all that often.