Posted on

A Trader’s Dance of Death to the end of the Rainbow.

A search of Amazon UK produces just 12 books containing the word “random”, appropriately located in the “Science and Nature” section. “Randomness” produces a more satisfactory 520 results.  “Complex Adaptive Systems” produces 407 results. ArtTfEc9[1]

But now for the real fun. Gambling: 19,574 results.  Trading systems 2,292. Trading 30,806. Speculation 4,607.

Turning to Google, “systematic trading” produces close to 6 million results.  “Gambling systems” comes up with over 13 million results.

According to Wikipedia, gambling is the wagering of money or something of value (referred to as “the stakes”) on an event with an uncertain outcome with the primary intent of winning money or material goods.  Gambling is usually associated with the idea of getting rick quickly.

Investments on the other hand “are generally not considered gambling when they meet the following criteria:

  • Economic utility
  • Positive expected returns (at least in the long term)
  • Underlying value independent of the risk being undertaken”

Investment and gambling meet very neatly in the now vastly overcrowded field of trading systems.

Conventional investment is itself fraught with risk and uncertainty.  Randomness and chance may just be overcome if you look for real assets which produce income or have some intrinsic value.  Real property is not riskless but at least in the short term gambling-addiction[1](geologically speaking) it does not disappear.  Unless stolen by invaders or a communist government.  Equity participation in a broad range of businesses over a wide geographical area should prove a reasonable choice barring a nuclear holocaust. Ditto high grade debt instruments.  Wide diversification is about all you can do and it is not difficult these days, given the burgeoning supply of stock market index trackers.

And then you have trading and trading systems.  And the get rich quick scams and scammers.  The division between investment and gambling becomes much less clear.  Even as a non-mathematician, there is much value to be had in reading the more accessible books on such topics as randomness and chaos.  And to at least gain some basic concept of statistical distributions.

Such study is most unlikely however to turn you into a successful gambler (is there such a thing?); and that is what most traders are, systematic or otherwise.  But if your efforts convince you of the long-term futility of such activities you will indeed have made a valuable discovery.

We are all looking to get rich quick. We are all looking for something for nothing. But few of us will succeed and even fewer will be able to retain the short-lived gains.

I light-heartedly tweeted to Jack Scwhager: “Where are your Wizards now?”  Bluntly speaking it would appear that Wizards are those who by natural ability, hard wok and perhaps a little luck come across some little exploited structural opportunity in markets and then milk it for all it is worth while the phenomenon lasts.

NM Rothschild made a fortune after Waterloo from insider dealing.  Many hedge funds have done the same ever since, despite the fact it is now illegal.  David Harding, bright and hardworking Wizard behind Winton, exploited trend following over decades but 51Ws2ZlzzmL._SY344_BO1,204,203,200_[1]now concedes its glory days are over – too many people are crowding out the trade.  The high frequency traders and arbitrageurs look to have done themselves a terminal injury by overcrowding as well.  Once such people made vast fortunes front running, spoofing, arbitraging; low volatility and greatly increased competition may be bringing the Midas factor down to a more pedestrian level.

And other Wizards may have had more than a little luck, particularly those who take vast macro bets based on their analysis (fundamental or otherwise) of financial markets.  For a few, the luck lasts.  The rest either crash and burn or dwindle as they become unable to find opportunities in increasingly open and competitive markets.

Ironically, public interest blossoms (no, explodes) when it is all but too late to profit.  Untold thousands of internet sites offer courses in algorithmic trading, astrological stock forecasting, technical analysis and much else.

A number of such people are obvious con artists.  A number are talented mathematicians or computer scientists who would better benefit society and themselves by applying their undoubted skills to a more achievable object than speculation.

Gerolamo Cardano was able to win at games of chance since he was one of the first to understand the modern mathematical discipline of probability.  9780486797939[1]Harding and countless others spotted trend following early enough to made huge gains and attract an institutional following.

If you do not or can not spot some angle which no one else has spotted then do not pass go.  Take off your gambling kit and refuse to join others in the futile dance of financial death to the non existent end of the rainbow.

Leave a Reply