[THREAD]
Academics and financial institutions praise complexity.
More complex models. More complex theories.
Unfortunately the real world doesn't reward complexity.
It rewards simplicity.
So, it pays to keep things simple in markets.
Here's how: macro-ops.com/ruthless-reduc…
Academics and financial institutions praise complexity.
More complex models. More complex theories.
Unfortunately the real world doesn't reward complexity.
It rewards simplicity.
So, it pays to keep things simple in markets.
Here's how: macro-ops.com/ruthless-reduc…
1/ Ruthless Reductionism
Reduce your investing/trading plan to a few key variables.
These key variables drive your strategy's returns anyways (thanks, Pareto).
The more complex your plan/strategy, the more ways it can go wrong.
Markets reward robustness, not fancy models
Reduce your investing/trading plan to a few key variables.
These key variables drive your strategy's returns anyways (thanks, Pareto).
The more complex your plan/strategy, the more ways it can go wrong.
Markets reward robustness, not fancy models
2/ What Does Reductionism Look Like?
Reductionism will look different for each trader/investor.
Investors:
- Less-complicated DCF models
- 1 or 2 main drivers of the thesis
- Clear biz risks
Traders:
- Fewer indicators
- Less lines drawn on a chart
- Fewer trades
Reductionism will look different for each trader/investor.
Investors:
- Less-complicated DCF models
- 1 or 2 main drivers of the thesis
- Clear biz risks
Traders:
- Fewer indicators
- Less lines drawn on a chart
- Fewer trades
3/ The Power of Occam's Razor
Definition: Given two hypotheses, the simpler one prevails
Why is that?
- Hypotheses are interpretations (guesses)
- Simpler guesses are more testable
- The more complex the guess, the more it failed in a simpler (I.e., "better") form.
Definition: Given two hypotheses, the simpler one prevails
Why is that?
- Hypotheses are interpretations (guesses)
- Simpler guesses are more testable
- The more complex the guess, the more it failed in a simpler (I.e., "better") form.
4/ Markets Value Testing Speed
We know simpler is better because it means we're closer to a better explanation.
But why do we like simpler? Because we can test faster.
Simple trading strategy fails?
Move on.
1 of your 2 drivers fails in your thesis?
Sell and move on.
We know simpler is better because it means we're closer to a better explanation.
But why do we like simpler? Because we can test faster.
Simple trading strategy fails?
Move on.
1 of your 2 drivers fails in your thesis?
Sell and move on.
5/ The Academic's Model For Testing Hypotheses
Like we mentioned, academics/finance pros revel in complexity.
The more variables and theories the better.
Why? Harder chance of proving it wrong (read: ego)
Here's what their model looks like:
Like we mentioned, academics/finance pros revel in complexity.
The more variables and theories the better.
Why? Harder chance of proving it wrong (read: ego)
Here's what their model looks like:
6/ Applying Reductionism & Occam's Razor To Testing
Notice the above model. It doesn't include any reductionism.
Nor does it praise the simplistic power of Occam's Razor.
You need BOTH to win in markets.
Here's what the model would look like adding those two features:
Notice the above model. It doesn't include any reductionism.
Nor does it praise the simplistic power of Occam's Razor.
You need BOTH to win in markets.
Here's what the model would look like adding those two features:
7/ Wrapping Up
There's two blocks of focus in life and markets:
1. Theory
2. Practice
Spend more time in theory and less in practice and you get complexity, theory and losses.
Spend more time in practice and you learn, adapt and become profitable.
collective.securechkout.com
There's two blocks of focus in life and markets:
1. Theory
2. Practice
Spend more time in theory and less in practice and you get complexity, theory and losses.
Spend more time in practice and you learn, adapt and become profitable.
collective.securechkout.com
