GIGO investing

When kiddo was much younger, we went through all of the typical chaos that comes with potty training. And like most parents, I was convinced we were doing it wrong. It couldn’t be that complicated.

Naive me took this question to our pediatrician, asking her for her advice on the best strategy to get things taken care of.

I’ll never forget her response. “You know how there are a million suggestions online about how to do this? There are a million ways because none of them actually work.”

She was right. And investors would do well to learn the same lesson.

I’ve been spending a lot of time of late catching up with former coworkers and friends. I’ve genuinely enjoyed it. I’ve been lucky enough to cross paths with a lot of amazing, wonderful people over the years. It is a great to stay in touch.

One such reconnection provided me with a glimpse behind the scenes of a quant fund. Quants, to keep it simple, use computer models to process data and statistics to evaluate and trade securities. The algos, so to speak.

Everyone has their own secret sauce algo, be it a weighting of a particular number or the way the numbers are crunched inside the program.

I can type this here, because my friend was looking for honest feedback: I was amazed at some of the ingredients that go into this stew. And “amazed” is my attempt to be polite. It didn’t quite go so far as factoring moon cycles into the investment equation, but there were a couple of variables that basically came close. Guided by the stars, indeed.

And unfortunately, it is likely all balderdash. As my profound pediatrician notes, the reason there are so many secret formulas out there is that none of them actually work. Sure, some work better than others. But if there was a straightforward method to potty training, we’d all use it, and there would not be thousands of alternative ways taking up bandwidth online.

Similarly, if there was a secret formula for making money via investing everyone would copy it and we’d all just live on our own islands sailing our own boats and enjoying our billions. The proof that none of these formulas work as hoped is that there are so many people out there constantly inventing new ones.

The people who really get rich are the ones who sell them to you. And the money comes out of your pocket, not just from investment gains.

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At least the quants are using numbers and data and real statistics. The ones you really have to be careful of are the peddlers of soft science. The ones that claim to have insight into the market based on moods and feels, who see patterns in either the stars or the charts, or who make up their own data as they go along.

Beware of garbage in/garbage out issues. The quants, for all their problems, are mostly using real numbers generated by real sources, be it the Fed or the companies themselves. You can’t go into the magic box that is doing the calculations and double historical revenue growth to make the output more what you hope it would be.

But amazingly, there are a lot of gurus out there who in effect do just that. They assign arbitrary ratings that can’t help but be influenced by their preconceived notions going in. They see things in charts that confirm what they had assumed. The output is reassuring. It works until it doesn’t. This style tends be very bad at recognizing pendulums and waves.

I would like to humbly suggest that if any of them did have all of the answers, there wouldn’t be millions of different versions of them out there. And if the formula had been perfected, the one who perfected it would probably be living comfortably on that island, and not spending countless hours doing the hard work of trying to sell it to others.

I’m reminded of the famous "Gas ‘n’ Sip” scene from Say Anything, where our heartbroken protagonist Lloyd Dobler is getting romance advice from a bunch of guys hanging out together at a gas station. Lloyd is taken in at first, but eventually realizes the truth…

The guys respond in unison that they are at the gas station by choice.

Lloyd didn’t buy it. Neither should you.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

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