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Investing Isn’t Physics

Last update on: Jun 18 2020

This is a wide-ranging article that makes some important points. One point of it is to show that a trading strategy using moving averages, especially when coupled with leverage, can significantly increase returns while lowering volatility. The other point is that many investors waste a lot of time by seeking precision in their investment tools. Unfortunately, investing isn’t like physics. In the markets, we never have the same exact inputs so we never have the exact same results. You need to develop a strategy that’s “good enough” and follow it even when it doesn’t appear to be working.

The broader point here is that by chasing optimization and trying to find precision in field where there is none (investing) you may end up doing more harm than good. Why? Because if you have found an indicator that actually has value (which is very rare to begin with), obsessively tinkering with it runs the risk of canceling out any benefit. For if various permutations of that indicator go through cycles, you are merely chasing your tail in switching to the one that’s “working,” buying high and selling low, again and again.

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