Many people have problems with hedge funds and big investment conglomerates. They rake in billions of dollars and live like rock stars.
People hate them so much they protest constantly, occupying this and occupying that.
But, I don’t have a problem with them. In fact, the chants of sympathy for the poor and working class and hand-wringing over income inequality are typically a cover for the protesters who are simply jealous of the big financiers. Had they stumbled onto these opportunities, they would be in the same penthouse, driving the same Porsche.
The whole philosophy of using machine learning and artificial intelligence in investing is that machines can make trades quickly and without being burdened by emotions.
It’s the last bit that I’ll talk about today. Emotions — like fear and greed — skew the decision-making processes of the investor, causing him or her to but too high or sell to low based purely on feelings. A good example: you would probably pay more for food if you’re hungry than if you just had a big dinner.
Therefore — and this conclusion is inescapable — machines that do not have emotions can trade better.
Except, this logic is totally wrong. Well, not wrong. But it forgets the most important variable. The market and the economy runs on emotions. Even if every investor was an emotion-less cyborg, the rest of the economy, which underlies all stocks and commodities, runs on desires and emotions.
A successful investment system can not possibly rule out emotions. In fact, the most successful investment system would totally understand emotions, but not ruled by them. This system would understand how desire for something quickly turns to the desire to not lose something — fear. Likewise, it would be able to sense when the momentum of fear turns into a buying opportunity. It could sense that the greed in the real estate market was becoming too frothy, or that the fear of a recession was starting to bottom out.
In short, the best investment system understands emotions. It just isn’t ruled by them.
Conservatives, who tend to favor the market, often make the case that they’re better investors and their policies are better for the economy. Liberals say they’re better investors because they are more globally aware than conservatives. They say they distribute wealth and that’s good for the economy.
So, who is right?
To become the complete investor, you have to shrug off all ideologies. When you trade or invest, ideologies can cloud your judgment.
I remember a guy who used to come in a local watering hole with a tattoo on his forearm in a shaky font that read, “Born to Lose.”
I always thought it was a rather depressing statement and to etch it on your skin is a real statement. Because the guy was big and known to use a pole stick to squelch a lot of questions, I decided not to press him on the deeper meaning of the tattoo. But it made me think…
Are we destined to be losers?
Are we hardwired to do stupid things–like get ugly tattoos and buy stocks in hyped-up companies?
I don’t have the answer to those questions, but Carl Richards at Behavior Gap certainly thinks we have some psychic tattoos on our investment souls that make us born to lose money. Continue reading →
Recently I discovered Texas Hold’em Poker on Facebook. I never really enjoyed playing poker very much, but to my surprise it is pretty interesting. Why? Because the more I play poker the more I realize how it is like trading.
Image courtesy Joe King
As I play, I immediately relate many things I have read about trading to what is happening in the game. It seems that many the information in books about trading is totally applicable to poker.
The market is run by emotions. It’s also ruined by them.
Despite what the financial world wants to think–and especially wants us to think–most financial decisions, from the casual investor to the commodities trader at Goldman Sachs, are emotional trades. It’s a gut feeling, or instinct, that prompts the trades.
And, in a way, that’s OK. After all, if most people invest with emotions, that should put you right in the pack of the trading action. It’s when investors become blinded by their emotions that things go awry. They fall behind the pack. They bet too much. They sit on the sidelines too long. They hold when they should fold, and fold when they should hold.
To avoid this, you need to know which emotions are most likely to mislead your investment actions Here are the seven most deadly emotions for investors.
As Automated Trading become more and more popular, it’s interesting to hear people’s ideas and opinions on the matter. Some people think that they have to be perfect in order to be useful. Or, they think that they have to make money on every trade to create value for it’s owner. Or, the Automated Trading systems must correctly determine the direction of the market on a consistent basis.
That kind of thinking is silly when you take a moment to consider it. What trader makes money on every trade? Is it possible to have more losing trades than winning trades and still make money? Absolutely. If your winning trades make more money on an average per trade basis, then it is possible to have more losing trades and still make a profit.