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Hi Guys,
I received a very interesting email today from Michael Berman at RAPA cap intro (these guys offer a similar service to us in the managed space).
I found the content of the email fascinating and thought you might also appreciate it.
~~~~
Most of us are ******s - Soochow
Dear Nick,
One of the investment insights that continues to amaze me at its complexity is how investors like to win regularly, even when in the long run it doesn't work out to be profitable. When I started managing money for a long short hedge fund back in 2002 the message I gave my investors was that our return profile would be asymmetrical. I said don't expect regular positive months with consistent 1.5% returns, rather become accustomed to periods of irregular performance followed by large outsized gains. I still stand by these sentiments as I don't believe anyone trading the capital markets is able to predict with certainty what the market will do: in 10minutes, 1hr, 1day, 1month or 1yr.
Over the last 2 years I have spent a considerable amount of time meeting and observing traders and investors in the retail FX space; a sector of the market I previously was not actively involved in. I am much more an index futures, stock and fixed income man. What I soon realized in the FX market, was that many trading rookies had found a way to "game" the industry. Before I step on some toes, I must add that I don't wish to denigrate your craft or your ethics, so if I ruffle your feathers it is only my opinion.
There are certain trading strategies that traders with no edge (here I am including 99% of the traders deploying this strategy) are able to implement and trade successfully for a considerable period of time before things go bad. Here I am referring to martingale, grid or dollar cost averaging systems. What is amazing about these strategies is that depending on the market conditions and a few lucky breaks here and there it isn't difficult to get a track record with a beautiful upward sloping equity curve that appears like the holy grail. Wrapped around these returns comes the familiar shpiel that the system uses a sophisticated proprietary algorithm and sexy computer technology. Trust me when I tell you this is b.s. the only holy grail that these types of traders and system promoters have found is the achilles heel of investors which is what makes us ******s.
soochow.png
In an experiment called the Soochow Gambling Task (SGT) behavioural scientists found that when faced with dynamic decision making, the frequency of gain versus loss was more powerful than the final outcome. In the table above Deck A & B have negative expectancy but win much more frequently than decks C & D which have few winners but a positive expectancy. It is decks A & B that wins the vote from the illogical investor that has this psychological bias towards making things seemingly more pleasant.
There are some really profound lessons to be learned from this experiment. Salesman looking for a quick sale and an easy buck to manage are easily steered down the path of promoting these martingale strategies. The reason is simple, most days they make money - no worries mate. I have already written far longer than I anticipated so now is not the time to prove how most of these strategies are destined for failure. Of course if you can predict the future of the FX markets I take back what I just said.
Regards,
Michael Berman, Ph.D.
CEO & Co-Founder
I received a very interesting email today from Michael Berman at RAPA cap intro (these guys offer a similar service to us in the managed space).
I found the content of the email fascinating and thought you might also appreciate it.
~~~~
Most of us are ******s - Soochow
Dear Nick,
One of the investment insights that continues to amaze me at its complexity is how investors like to win regularly, even when in the long run it doesn't work out to be profitable. When I started managing money for a long short hedge fund back in 2002 the message I gave my investors was that our return profile would be asymmetrical. I said don't expect regular positive months with consistent 1.5% returns, rather become accustomed to periods of irregular performance followed by large outsized gains. I still stand by these sentiments as I don't believe anyone trading the capital markets is able to predict with certainty what the market will do: in 10minutes, 1hr, 1day, 1month or 1yr.
Over the last 2 years I have spent a considerable amount of time meeting and observing traders and investors in the retail FX space; a sector of the market I previously was not actively involved in. I am much more an index futures, stock and fixed income man. What I soon realized in the FX market, was that many trading rookies had found a way to "game" the industry. Before I step on some toes, I must add that I don't wish to denigrate your craft or your ethics, so if I ruffle your feathers it is only my opinion.
There are certain trading strategies that traders with no edge (here I am including 99% of the traders deploying this strategy) are able to implement and trade successfully for a considerable period of time before things go bad. Here I am referring to martingale, grid or dollar cost averaging systems. What is amazing about these strategies is that depending on the market conditions and a few lucky breaks here and there it isn't difficult to get a track record with a beautiful upward sloping equity curve that appears like the holy grail. Wrapped around these returns comes the familiar shpiel that the system uses a sophisticated proprietary algorithm and sexy computer technology. Trust me when I tell you this is b.s. the only holy grail that these types of traders and system promoters have found is the achilles heel of investors which is what makes us ******s.
soochow.png
In an experiment called the Soochow Gambling Task (SGT) behavioural scientists found that when faced with dynamic decision making, the frequency of gain versus loss was more powerful than the final outcome. In the table above Deck A & B have negative expectancy but win much more frequently than decks C & D which have few winners but a positive expectancy. It is decks A & B that wins the vote from the illogical investor that has this psychological bias towards making things seemingly more pleasant.
There are some really profound lessons to be learned from this experiment. Salesman looking for a quick sale and an easy buck to manage are easily steered down the path of promoting these martingale strategies. The reason is simple, most days they make money - no worries mate. I have already written far longer than I anticipated so now is not the time to prove how most of these strategies are destined for failure. Of course if you can predict the future of the FX markets I take back what I just said.
Regards,
Michael Berman, Ph.D.
CEO & Co-Founder
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