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“So my biggest challenge in trading was me…”

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Dear Michael,

As you wrote to me in your first mail, I will test you. You asked me about my biggest trading challenge.

As an undergraduate business student specializing in finance, I had to focus on the classic academic finance theory right from the beginning, which teaches us that capital markets are efficient and that it is therefore the smartest to invest globally diversified on a buy & hold basis.

At some point I heard about Smart Beta – ETF and got more involved with the academic theory behind it: Factor Investing.

At first, I focused on Value, which is probably the best-known investment style or risk factor. Warren Buffet is known to be the high priest of a global value investing religion, even known to people who are actually not involved in finance.

Of course, when studying all the risk factors, I also came across momentum at some point. My study of this anomaly, as supporters of the efficiency market hypothesis would call it, threw all of my beliefs, acquired during my studies, overboard in one fell swoop.

I realized that I had been wrong all along, been a blind disciple, and had fallen victim to herding. And I thought I was incredibly rational and smart. “Invest passively, that’s scientific and the best you can do! Market timing and asset picking is for idiots, who don’t get it.” I had always advised others with a certain arrogance, based on the fact that all the clever academics with PhDs would say so.

If somebody had told me at that time how he beats the market with trend following, ie market timing, I would have laughed at him and did not take him seriously.

So my biggest challenge in trading was me – my arrogance and the conservativism bias.

Best regards from Munich, Germany

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