Nicholas Mitsakos

Don’t Panic

Great opportunities occasionally have no explanation.

Data, discipline, and rigor may generate Investment signals without a satisfactory explanation. Do it anyway.

A successful investment hypothesis does not need an explanation of why a specific investing or trading edge exists. It is enough to know that it is relevant and statistically significant. Sometimes it is impossible to comprehend why a pattern or an investing edge exists because there are too many dimensions, influences, and factors too complex to understand. Exactly why something is occurring is too challenging to grasp. This doesn’t matter. What is important is that we know it exists with reasonable confidence.

It is crucial to let the data tell the story. Removing human bias is essential. The need to explain or justify everything with some hypothesis regarding causal factors, or some explanation as to why it is happening, can be a distraction from valuable and profitable opportunities.

Intuition Versus Data

Intuitive investment ideas may seem compelling, and certainly, some are. But more often these ideas are time-consuming, inefficient – and generate inferior results.

Data and verification are a more effective approach, and this approach has been proven to generate more compelling investment opportunities. Understanding why is beside the point, the critical factor is that the opportunities happen frequently enough, and the opportunity is economically attractive. Good data exists to verify the opportunity, it can be tested and replicated, and the idea can be implemented effectively with sufficient liquidity and market availability. More often, this is a superior investment strategy.

Randomness Versus Opportunity

Statistical anomalies can sometimes be mistaken for understanding cause and effect. More disastrously, this leads investment strategies down random pathways with uncertain, usually terrible, results.

Data analysis, rigorous testing, and verifiable results make the distinction between a random outcome or “lucky guess” and the identification of a true investment signal producing statistically significant results. It can be repeated.

Economic analysis, business, intuition, and market perspective are beside the point. Rarely is there sufficient understanding of cause and effect versus randomness to make this understanding useful. Data, testing, and verification is the point.

As Nassim Taleb said, “the more I listen to economists and their predictions, the more I know they have no idea what they’re talking about.”

Robust data enables better predictions, sufficient accuracy, and statistical significance. In other words, a more profitable investment strategy. Understanding why this occurs, or how it fits into the grand scheme of the economy of financial markets, is unimportant.

Discipline and Rigor

A critical error in quantitative analysis is that if a signal is nonintuitive, it is ignored. Developing a reasonable hypothesis to explain investment opportunities that emerge from a rigorous analysis of robust data misses significant opportunities. The causes for certain phenomena may never be fully captured, but if statistical strength exists, investment success can follow.

Trust the model.

Or as Douglas Adams said in the Hitchhikers Guide to the Galaxy, “Don’t panic.”

The importance of discipline cannot be emphasized enough. Discipline is the key, and the ability to consistently follow algorithmic systems defines success. Discipline is challenging even to the most capable and focused. It is tempting to override systems because of discretionary insights or the most fundamental human error – the desire to control.

Sometimes, humans simply believe that intuitive insight will somehow outperform rigorous systems. It rarely does.

Successful implementation means trusting the quality and integrity of the system and research.  Successful investment occurs when seeds are sown, not crops harvested. Interfering as seeds grow is worse. Not overwriting systems leads to greater success if the appropriate work is done beforehand. The focus should always be on planting the seeds properly.

Assume No Knowledge

Great thinking requires diverse thinking and an ability to question everything. As Socrates said, “assume no knowledge.” It also means don’t be stuck simply because you think something is right or it may have worked previously, but new data and information may challenge this assumption – and new thinking is required.

Colleagues matter. Diverse thinking from great talent brings inspiration, and innovation, and extends the limits to what everyone can achieve. Different approaches often bring better results.

Diverse thinking, diverse data, new approaches, and a willingness to be wrong and start over typically bring superior results.

The Edge

Perfection is the enemy of success. Ideal entry and exit points are impossible, along with the aspiration to win most of the time. The slight edge (just over a 50% success rate) repeated consistently brings astronomical returns.

Combining unique small opportunities and consistently exploiting this edge is a more realistic and successful investing strategy than hunting for perfection (or something close to it). While one is never right 100% of the time, a consistent edge can be extremely advantageous.

As James Simons of Renaissance Technologies says, we are right 50.75% of the time, but we are 100% right 50.7% of the time. One can make billions that way.”

 

Share This