Category Archives: Expertise

Expertise, Trend following, Truth

Universities: poisoning the well of knowledge

For full disclosure, I do have a university degree, but I’ve worked hard ever since to recover from it.

In my book, “Mastering Uncertainty in Commodities Trading,” the key insight I had during my trading apprenticeship was about discovery that the holy grail of market speculation is within: “this game was not so much about mastering the markets or statistics or even the charts as much as it was about mastering oneself. In speculation, markets are the external reality, but what decides the game’s outcome is the inner process that determines one’s actions.“

Our actions depend on the way we perceive that external reality and how we understand its changes. But the problem of how we know things goes beyond the domain of investing; it is central to everything we do in life. The big word for this is epistemology – the “science” of how we know. It is one of the core mysteries of life which, the more we question it, the farther we drift away from the certitudes we embraced in our teenage years.

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Asset management, Behavioral finance, Commodity price, Commodity risk, Expertise, Hedging, Market research, Market trends, Risk management, Stock market, Trading, Trend following

Do trend followers move markets? (they do).

A few months ago, when reviewing our trades on US Treasury futures, I was so delighted, I drafted a bragging article titled “How we knew yields would collapse?” summarizing the results of our trading. That performance was entirely generated by my I-System model, first built in 1999. I still find myself awestruck that this works… We generated profitable trades through both the bear and the bull market in bonds, literally without needing to know a single thing about the market fundamentals. The trades were strictly based on the knowledge framework built into the system more than 20 years ago (by the way, our strategies are still generating excellent signals in those same markets). Continue reading →

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Commodity price, Commodity risk, Complexity, Economics, Expertise, Hedging, Market psychology, Market research, Market trends, Oil market, Risk management, Trend following

Market fundamentals, forecasting and the groupthink effect

Last month I had the privilege of meeting with Jaran Rystad of Rystad Energy to discuss strategic cooperation between our companies. On the occasion, he gave me a rather detailed presentation of his firm’s energy intelligence database. I must say, in my 20+ years trading in commodities markets this is by far the most impressive product of its kind I’ve ever seen. Even from the software engineering point of view, I was very impressed. For full disclosure, nobody asked nor encouraged me to write this. Much as you’d recommend a restaurant where you ate well or a doctor you respect, I wholeheartedly recommend Rystad Energy as a provider of energy market intelligence as a matter of giving credit where credit is due.

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Monaco, June 2019 – with Jarand Rystad

However, even with top notch data on economic supply and demand fundamentals, divining the future remains difficult and unlikely. John von Neumann rightly said that forecasting was “the most complex, interactive, and highly nonlinear problem that had ever been conceived of.” Continue reading →

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Asset management, Behavioral finance, Commodity price, Complexity, Economics, Expertise, Hedging, Market psychology, Psychology, Stock market, Trading, Trend following

The illusion of expertise in financial markets

Participants in financial markets have to deal with uncertainty on a daily basis. Their need to research and understand markets has given rise to a massive industry delivering security prices, reports and expert analyses to traders and investors seeking to make sense of the markets and predict how they might unfold in the future.

The need to understand stuff is innate to our psychology: when something happens, we almost reflexively want to know why it happened. But the compulsion to pair an effect with its cause sometimes gets us jumping to conclusions. If such conclusions turn out to be mistaken or irrelevant, they could prove useless – or something worse. Consider two recent titles from the ZeroHedge blog, published 89 minutes apart: Continue reading →

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Asset management, Commodity risk, Complexity, Economics, Expertise, Hedging, Market research, Policy, Risk management

Economic forecasting is exercise in futility

“Economists can’t forecast for a toffee… They have missed every recession in the last four decades. And it isn’t just growth that economists can’t forecast; it’s also inflation, bond yields, unemployment, stock market price targets and pretty much everything else.” – James Montier

Forecasting commodity prices and economic indicators is demonstrably an exercise in futility. Our markets and economies are complex systems and as such, their future unfolding is impossible to predict with any degree of certainty. Concretely, let’s take a look at how the leading economic analysts did at predicting oil prices, GDP growth, unemployment and stock market indices. Continue reading →

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Expertise, Psychology, Something completely different

In the beginner’s mind, there are many possibilities…

“State a moral case to a ploughman and a professor. The former will decide it as well, and often better than the latter, because he has not been led astray by artificial rules.” Thomas Jefferson wrote this in 1787, but his words remain relevant. Advanced education often narrows our perspective, obstructing our ability to fully evaluate new information or to adapt well to life’s changing circumstances. What we think we know may keep us from grasping new things we need to understand. Zen masters of old likened our capacity to understand to a water bowl: its purpose may be to hold water, but it is only useful to the extent that it is empty. Here’s a real-life example of this metaphor…

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