Pattern matching beats narrative reasoning
blog.scottstevenson.net
blog.scottstevenson.net
>Pattern matching, on the other hand, can drive you to make moves like an advanced chess engine. Moves that others find alien and incomprehensible.
Sure. Index funds is a viral story which has a lot of rigorous data behind it. As for the advanced chess engine of intuition... ever heard of Fooled By Randomness?
To be honest i cant be bothered is the real reason I don’t play but maybe it’s the winning move?
It's like arguing with God: he's got better info that you.
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It's great that people think these are real.
Their brokerage dark pools their trades and front runs them.
Frequently they get pump-and-dumped based on some bullshit they read on Reddit.
These people lose money relative to index funds, so even putting money in index funds will let you take advantage of them.
Passive investing works great when it's a minority of the market.
But it obviously does not work, as the majority of inflows become passive.
There is no case in history where: "Keep buying X, regardless of the price of X" has ever turned out well. We come up with new stories every generation around why it can work. Price matters, and as soon as you introduce a mass of buyers who don't care about price, it distorts markets massively.
Michael Burry has a pretty good article that shows how $1 invested into an S&P500 fund gets amplified into $5 of price pressure through perverse feedback loops.
Also: Active managers have no interest in pricing the market for you. They want to make money. Why would they bother pricing the market when they can siphon money off of passives instead? Passives are like a rock-paper-scissors player that always plays Rock. It becomes incredibly easy for funds to frontrun and take advantage of them, and one day they will be left with the bag.
For now, I am in passive. But I will be the first one out when the narrative starts to crack.
Sorry, there is no silver bullet in investing. We keep inventing them and saying "this time it's different". It's not true.
This is false on so many levels. First of all illegibility also soothes. Many people prefer the “illegibility” of natural landscapes in the great outdoors over cold corporate offices with straight lines.
Second illegible systems are less predictable and harder to analyze. For example why do we have to build airliners in orderly ways using clean surfaces and simple shapes? Why not messy geometry and chaotic inconsistency? Because the math then becomes to hard to model and predict. Non linear chaotic systems are hard to predict using our quantitative modelling techniques.
In fact our modern engineering is built on top of quantitative modeling using applied mathematics and the only things we can really model are ordered and simple systems. Engineering is equivalent to prediction and it is our best form of prediction in the sense that you can get on a metal tube called an airplane and get hurled across the ocean and feel relatively safe because our predictive powers are so high that we know you’re incredibly safe.
Order is preferred and it is not bias. It’s because order has intrinsic advantages with analysis.
Performance is a different story. It may be the case that chaotic systems can lead to better results but we simply don’t have the tools to predict or understand how these systems work.
We are however hitting a new era Of engineering where we use blackbox neural nets to analyze illegible systems. It has downsides in the sense we can never truly fully understand the analysis nor can we fully trust it, but such an analysis is now possible to an extent. It also suffers from the fact that we need massive amounts of trial and error attempts to even get the data that enables building these models.
Eventually making trades started to feel like throwing a basketball. My brain started to develop a deep intuition for technical and fundamental signals, and how they combine to make a “swish”.That's your analytical brain registering a signal from your intuition in a complex situation in which you have gained fluency.
Intuition drains many portfolios. But intuition that is informed by a lot of hard work and analysis has built many portfolios. Intuition doesn't always mean "no work", "guessing" or hopeful "manifesting".
> “Marijuana is about to be legalized in Canada. This is a rare opportunity to invest at the ground floor of a new industry.”
> “I’m going to invest in a cobalt mining company because they won a contract with Tesla.”
So the author made some bad investments and now looks to "pattern matching" as his next scheme? How about just some basic research and fundamental analysis? Marijuana is a commodity and blackmarket goods that become legal drop in price historically. Doesn't seem like a good investment with 10 seconds of thought put into it.
Tesla may have a huge market cap but they have pretty paltry sales, also doesn't seem like a good investment after a moment of reflection.
I think I could believe that ensembles of simply stories could be powerful. After all, ensembles of decision trees are still a thing.
Where I think pattern matching is essential is in debugging. Software is the easy one to explain, but problem-solving in life in general, too.
An experienced dev who's operated some systems can see odd behavior and be like "ah, feels like a race condition between X and Y" far faster than anyone could construct the narrative of that root cause from first principles.
But good luck doing that for a several decades in the financial markets... Maybe you don't go broke, but... there's a a whole lot of dumb strategies that can work better than average for a while, and it's actually pretty hard to do so devastatingly bad that you question your ability if you think you're the pattern-matching investor genius.
And the shot at index funds are silly. The beauty of index funds is that they raised the floor and stability for the average middle-income+ person investing for their future vs speculating to try to get a big edge. While bleeding less to overpaid advisors. That's real value, regardless of if some people do better or if you believe that you can consistently do better.
This post was one of the most strange I have read on the front page. I clicked the link hoping to read some research about pattern matching in some scientific or technical field.
Investors literally can’t stop talking about “pattern recognition,” because it’s comforting to think that the past can predict the future if you’re clever enough. But the best investors are pattern breakers, not matchers.
I know it’s a bit much to ask but from the top of your head what would you recommend to someone who wants to catch up on the current discourse and who is only really familiar with ancient philosophy and maybe a bit of Zizek?
>Pattern matching, on the other hand, can drive you to make moves like an advanced chess engine. Moves that others find alien and incomprehensible.
Wow, this guy has found a way to consistently beat the market, he must be a billionaire at this point surely?
I think people underestimate how much easier it is to win when you're dealing with smaller amounts vs. being a billion dollar fund.