Human beings have a strange habit of trusting other humans, even when the trust isn’t warranted. Everywhere in mainstream media, statistics are used and misused to convey an agenda. All too often, people ignore the agenda and buy into this engineered information.
To be successful, both in life and in trading, a person must move beyond this behavior. You need to be a skeptic. You can’t put blind faith into a system that doesn’t make its agenda clear. You probably shouldn’t trust it even if the agenda does seem clear. This is just as true when considering pollsters like Frank Luntz as it is when listening to the sales pitches of discretionary traders on Wall Street.
In today’s episode Michael Covel discusses the biases we have as human beings that lead us to poor investing decisions. Most notably, it is a bias that prevents us from trusting algorithmic trading, even when a human alternative is demonstrably worse. Through entertaining and insightful clips, Michael demonstrates why algorithms deserve our trust: their accountability and their ability to be back tested through different market conditions.
The episode is full of interesting sound clips and passages from bright minds such as Penn Jillette, Leda Braga, Daniel Dennett, Lasse Pedersen, and David Harding.
In this episode of Trend Following Radio:
The use and misuse of statistics
Using skepticism to your advantage
The advantages of algorithmic trading
Leda Braga on why ‘Black Box’ isn’t a fair term
Daniel Dennett’s simplifications of algorithms and computing
Trend following as simple agnostic rules that can easily be passed to a computer
Efficient market theory failure during surprises
“You want to be a contrarian. You want to be on the other side of the coin. Don’t be with everyone. Stand to the side. That’s where the opportunity is…” – Michael Covel
Just as shamans have been consulted throughout time to provide the desperate and gullible with prophecies, so too are financial shamans (often masquerading as experts) are looked to for comforting myths about market direction.
Of course, we can and should prepare for the many possible market eventualities by looking at the data and trading trends, but to expect anyone to be able to provide absolute predictions for the future is absurd. The truth is that we do not know for sure, and anyone that tells you they do know might as well be gazing into a crystal ball.
Today’s episode looks at the various attitudes and beliefs concerning the falsehood of market predictability. Michael Covel runs the commentary, drawing a narrative thread through various excerpts from some of the most prominent economic and financial thinkers.
In this episode of Trend Following Radio:
Recognizing when you are being misled by the experts
What to look for in trend analysis and what to be wary of
Considering bubbles and other unpredictable global factors in the markets
Finding an objective approach to investing based on quantifiable information
Considering timeless human investment psychology elements
Making investment decisions without being blinded by rigid economic processes or political ideologies
“It’s mind numbing to study financial history, because it is so repetitive: we do the exact same things over and over. We have followed this pattern in every major bubble, starting with the coin mania in the Roman empire.” – John Galbraith
A fund manager (and client) writes me from Brazil:
Hi Michael. you ever heard about Leda Braga? She is a Brazilian trend follower with more than $1B USD in assets. She runs BlueCrest and Man has been allocating in her fund for a long time now. Interesting that she is a women, Brazilian, a trend follower and few people know her.
Very quiet firm…more:
Braga, whose $8 billion BlueTrend Fund is a momentum-based, trend-following fund, stands alone as the world’s top female portfolio manager in terms of assets under management. Although she prefers to fly under the radar, fellow hedge-fund managers swoon over her knowledge of FX/interest-rate hybrids, equity derivatives and interest-rate exotics, offering praise composed of equal parts shock and awe. As one multibillion-dollar hedgie puts it: “I met her at a Tokyo conference, and if there were ever a quant strategy I would invest in, it’s hers. She’s constantly stressing the need to upgrade and refine trading systems, that you can’t just walk away and expect them to perform with markets shifting so quickly. She’s a dynamo.” Braga heads BlueTrend’s quant strategies. She’s also the president of BlueCrest Capital.
Braga, 42, attended Imperial College in the U.K., where she earned a Ph.D. in engineering and worked for three years after graduation as a lecturer and a research-project manager. She is reportedly the largest staff equity holder in parent company BlueCrest, after legendary cofounders Bill Reeves and Michael Platt. Chances are this might have something to do with the massive returns she has bagged since her fund’s inception in 2004, not to mention her flawless handling of the subprime crisis, which has flummoxed many of her competitors. “Last year, the BlueTrend fund returned approximately 28 percent, net of fees, and this year it was up about 13 percent on the same basis by the end of July,” notes BlueCrest CFO Andrew Dodd.
A former JPMorgan colleague of Reeves and Platt, who quit their jobs as proprietary traders in 2000 to found BlueCrest, Braga worked for nearly seven years as a vice president and quant analyst on the bank’s London derivatives-research team before joining the spin-off and derivatives risk-management firm Cygnifi Derivatives Services in 2000. BlueCrest snared her in October 2001, deciding its successful maiden voyage into fixed-income and currency markets should be encored with some black-box strategies. Braga’s fund launched in 2002. A year later, Man Group snapped up a minority stake in BlueCrest, and the rest is trading history.
Despite all the fanfare, Braga is strikingly modest. Attempting to reach her, Trader Monthly received an e-mail in which she beseeched her assistant to ward us off. “Aaaarghhh!” she lamented. “Only the misinformed can possibly be interested in me.” Genius, it seems, doesn’t always take to the spotlight.