I was out for a run this morning… as I am most mornings… and I nearly hit myself in the head with a branch as I was running through a trail in the woods. If you’ve ever been out on a trail run, a hike, a mountain bike ride, etc. You know the feeling when a branch seems to suddenly be in your face and there is barely anything you can do to keep it from hitting and hurting. Usually though you can dodge it. You may not know it is coming, but as soon as you recognize it being there your decision/reaction time prevents the branch from giving you a black eye, bloody nose, or just an annoying tap on the face.
The knowledge of what to react to and how to react is human nature – so long as you keep your head up.
What about the practices that are becoming the norm for stock trading and even starting to encroach on real estate and early stage investing. The practices of quantitative trading. Where algorithms and computers are doing the work – machines are the ones that are running down the path instead of humans. There is certainly a benefit in reaction time – those machines can react so much faster than us humans can – but that is less important than knowing what to react to or how to react. It is even less relevant considering those machines have no ability to keep their head up and see these things coming.
There are all sorts of recent examples of computer’s inability to react appropriately… Goldman – computer based trading glitch cost $100m, exchanges correcting mistaken trades made by computers, the recent nasdaq glitch, the examples continue forward and there are many of the past as well. Imagine if we let the quantitative computers run with our programming from the housing bubble – what kind of trouble would we be in today if there was NO human intervention and CDO/CMBS trading persisted as if what we thought was the right way to trade was all there was to know?
Investing, trading, and pretty much anything else in life will have curve balls and unexpected circumstances. I don’t think we need a bunch of statistical data to prove that – although there are books like the Black Swan that are written around the need to examine statistics differently. I think the more relevant analogy to unexpected circumstances is what happens when you go for a run through the woods – you may have been in the woods before, you may have even been on that specific trail before, but you can never know when a branch will be there to smack you in the face – so you should always keep your head up.