David Harding on Trend Following and Spreadsheets

Famed trend follower David Harding:

Taking a distant perspective, the trend following systems, which we developed in the 1980s, have just continued working. They didn’t work smoothly, but they continued to make money, so some level of success—providing you were not over-leveraged and you stuck to it—some level of success was eventually guaranteed, wasn’t it? Because if you keep making money, in the end the world’s going to find you. It’s not very quick, because it’s not very smooth, it’s not this high short ratio thing; its virtue is in trends forming in very high capacity. That’s its great virtue, because if you put a lot of money in it, it’s a very profound thing. It’s much more profound than many hedge fund strategies because it’s talking about the very exploitable effect in the price movements of whole asset classes. People talk about anomalies; it’s not like some small anomaly. It’s about the whole way the whole world works. It’s a theory about the way the world works, which is different from the theory that everybody in the financial world has about how the world works.

I did, I became very open. Of course Winton was relatively unsuccessful in the early 2000s. I actually went in when it was relatively unsuccessful. It became quite successful as a company, but several of our competitors, like Aspect, became much, much bigger and more successful because they had much more successful institutional sales, so I decided I might as well be hung as a sheep for a sheep is a lamb. And I started showing all the results that I hadn’t shown in 1993, so I started showing “this how it works.” Excuse me, but fuck it, this is my work. If I can’t make money, I’ll just show you it.

Yes, just following trends really. The trends changed slowly. The trends in the market, the slide in 2008, didn’t come out of the blue. It was a true bear market, a classic bear market, the kind of bear market that creates the need for the term bear market.

Had you computerized by that time, were you off the spreadsheets by this point?

A spreadsheet is a computer. This spreadsheet was just living somewhere inside a whole set of other computer programs. There’s probably a spreadsheet in NASA somewhere, one that was written in 1959 that’s still living in there somewhere. It’s just become part of a bigger thing.

It’s what Warren Buffett calls handicapping. That’s what he calls what he does, handicapping, which means setting the odds, so that’s what an investor has to do, they have to work out what the odds are.

The other thing, the book, it’s very important to realize that this is not a physical science, it’s social science, albeit it’s a bit of a wolf in sheep’s clothing, because it’s a social science which uses very rigorous and detailed mathematics. The thing about physical science is reality is what it is and it doesn’t change when you investigate it, whereas there are rules and laws that you’re seeking to tease out, whereas there aren’t any rules or laws in financial markets. There are no immutable eternal truths at all. That’s certainly nothing original I’m saying here. You can watch any presentation by James Simons and it’s the first thing he says, so it is obvious, but I suppose it needs more than one person to say it.

A lot of the scientists and mathematicians who have gone into financial markets are not sophisticated enough to grasp fully this point. They sort of felt that there are physical laws. In fact, the efficient market theory is the idea of a physical law. The mainstream have fallen into precisely the trap that I’m saying there’s no excuse for falling into. If you’re going into business that’s the first thing you should try not to fall into, is believing that you’re going into physics because you can use maths productively to improve your ability to make inferences, but it isn’t physics. It’s not.

Blunt. Direct. Learn from him.


Source: Securities and Exchange Commission Historical Society, Interview with David Harding. Conducted on June 18, 2013 by Ken Durr.