The Limitations of Complexity
October 9th
Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the models. Beware of geeks bearing formulas.
Investment strategies, shrouded in complex jargon, can be very alluring. Their intricate formulas promise precision and certainty, but these models are built on assumptions—assumptions that might not stand in the face of current or future market unpredictability.
These models, no matter how comprehensive, are only as strong as the premises they rest upon. It's not the complexity of a formula that should draw an investor, but the strength and validity of its foundational assumptions. A model is a tool, not a prophecy. It can guide, but it should not dictate investment decisions.
Probing the strength of these foundations, questioning their validity becomes essential. It's not about discarding these models entirely, but about understanding their limitations. They serve as tools, but only when applied with a critical understanding of their limitations.
Investing isn't about deciphering the most elaborate formula, but comprehending the principles behind it. The understanding of fundamental financial principles is what makes an investor successful—not the ability to decode complex formulas.
Copyright © 2023 by Scott Sansovich