Blog VLG Capital

Investment: human versus automated system?

While students of Benjamin Graham and readers of Berkshire Hathaway investor letters continue to argue with bank analysts about the fundamental valuation of businesses in the market, digging into quarterly reports and macroeconomic statistics, others delve into statistics and mathematics by analyzing price series and trading volumes, strictly defining the rules. automated investment algorithms. The proponent of classical portfolio theory and the "discretionary" approach to asset management continues to demonize an approach to investment based entirely on mathematics and statistics. At the same time, the "quanta" continue to write code, bringing the speed of execution of transactions automated by the system to a fraction of a second, ignoring the attacks of the investment community, which, from their point of view, makes unreasonable subjective investment decisions.

Which of the camps should you join in order to realize your investment objectives? On the scales is an analyst who knows more about the investment object than the financial director of the company itself and a physicist-programmer who acts as an architect of a decision-making system based on positive mathematical expectation and statistics. Perhaps it is worth listening to both. To achieve a significant stabilization of the investment characteristics of a portfolio, you can take the rules for portfolio composition and basic risk management practices, as well as supplement them with a systematic approach that excludes the influence of human and psychological factors. The investment approach, based on clear rules, allows you to analyze how such a portfolio behaved at different periods in the past. A daily comparison of the expected and actual results of transactions allows the manager to detect errors in the process at an early stage and make the necessary adjustments.

Not everyone manages to deviate from his usual rules in the profession. However, combining quantitative analysis and trading automation tools with fundamental logic, and sometimes intuition, allows you to achieve the very advantage in the market that is sought by all professionals and many investors.

Quoting Paul Tudor Jones: "There is no man better than a machine, and there is no machine better than a man with a machine."