I believe investing and gambling are distinctly different activities, therefore I generally shy away from making comparisons between the two.
However, in this case I believe a gambling comparison may be helpful in explaining the advantages that can be gained by investing in what are called quantitative investing strategies.
If you have ever been to Las Vegas and seen the billion-dollar casino buildings, it becomes clear that the house has the advantage. Casino games, by design, put players at a statistical disadvantage. Worse yet, they are also designed to exploit psychological traps, further pushing the odds against players and forcing them into destructive decision-making patterns.
Despite the statistical odds of casino games being against the players, there have been many gamblers who have consistently won in casinos.
Gamblers who have managed to consistently win, have done so by using the same mathematical and systematic approach applied in quantitative investing strategies. Successful gamblers develop a detailed understanding of the psychological traps and the statistical probabilities of the game they play, then create detailed rules that systemize their decision-making process.
Systematic decision-making eliminates the need for the gambler to make discretionary decisions, which can be negatively biased by the emotions that arise from risk taking. The rules created to systematize the playing of the casino game are designed to ensure each action taken by the player maximizes the odds of a successful outcome, thereby getting the odds as close to even as possible.
The odds can never be fully in the gamblers favor, to make winning possible the rules the gambler follows are also designed to manage risk by systematically changing the size of the bets depending on how close to even the odds are for the gambler. This way, when the odds are more favorable the bet sizes are increased along with the potential winnings and when the odds are less favorable, bet sizes are decreased and so are the potential losses.
The gamblers only role in playing the game is to follow the carefully designed system without exception and place bets according to the defined rules. By applying the rules consistently, many people have been successful winning money playing casino games, despite the statistical odds being against them.
Quantitative investing strategies work using the same principles described in the gambling analogy. Strategies are designed within a rigid framework of rules that can be quantified to systematize investment decisions and always seek the highest probability of a successful outcome. Quantitative investing strategies eliminate the single largest point of failure for any investor, emotional decision-making.
Finally, quantitative investing strategies do not use investment expertise to try and predict the direction of markets or individual securities, but instead to design carefully crafted, evidence-based investment rules that are repeatable and can therefore be applied consistently over long periods of time.
