One of my favorite articles is "Blowing Up" by Malcolm Gladwell. It contrasts the investment styles of Victor Niederhoffer, who is known as the father of statistical arbitrage, with Nassim Taleb author of The Black Swan and Fooled by Randomness.
This article gets to the heart of many investment strategies. Do you want to wager on reversion to the mean, or do you want to wager on "unexpected" outcomes?
Niederhoffer's leveraged mean reversion strategy produced consistently strong returns, until one very bad day or two, where he lost almost everything. Taleb is on the other side of that trade. Using no leverage, he will consistently lose a small amount money, until a very good day or two, which will pay off immensely. Taleb stated that the crash of 1987 earned him " **** you money".
It may seem obvious that one would like to be on the side of the winner. However, the psychology of investing is complicated. Ask yourself this question: Can you withstand being on the wrong side of the market every day for years?
This article gets to the heart of many investment strategies. Do you want to wager on reversion to the mean, or do you want to wager on "unexpected" outcomes?
Niederhoffer's leveraged mean reversion strategy produced consistently strong returns, until one very bad day or two, where he lost almost everything. Taleb is on the other side of that trade. Using no leverage, he will consistently lose a small amount money, until a very good day or two, which will pay off immensely. Taleb stated that the crash of 1987 earned him " **** you money".
It may seem obvious that one would like to be on the side of the winner. However, the psychology of investing is complicated. Ask yourself this question: Can you withstand being on the wrong side of the market every day for years?
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