Adrian Reid explains the spectrum of investing approaches—from ultra-high-frequency institutional trading to long-term buy-and-hold—and argues for rule-based (technical) trading systems that individuals can learn and test. He contrasts fundamental research (hard for individuals to perform and validate) with technical, price-based rules that can be backtested; he describes running a backtest across all U.S. stocks from 1950 to present to evaluate a strategy’s 70-year performance. The emphasis is on systematizing entry/exit rules and validating them with historical data.
Chapters
Any sort of investing. There's a spectrum, right? At one end there's.
The big Wall street funds that have huge supercomputers and they trade thousands of times a day, ultra high frequency. At the other end there's buy a good stock and hold it forever. And in between there's a whole bunch of different ways of doing it, right? As individuals, we can't do this high frequency thing, just can't compete. We can do the ultra long term buy and hold forever. But the trouble is we don't have typically access to the research, access to the management team, access to the company. We can't interview the CEO, all of those things. We can't form those really high conviction, deeply researched positions that maybe someone like Warren Buffet can, We can delude ourselves that we can. Oh yeah, I did research, I googled it. But like we don't know. But back to the, back to the question of what is trading? It's actively buying and selling stocks, crypto commodities.
Using a set of rules to get you in and get you out of the market, hopefully with a profit over time. Now there's different ways of trading. You can do fundamental research which is understanding the company and understanding the marketplace and the competition, all of that. That's the thing that is pretty hard, that's pretty hard for an individual to do. And even if you do do it, it's really hard to know if you're any good at it because you can't test it in the past, you can only do it now. And then in 10 years time, say, hey, did I make any money in the last 10 years? It's like, I'm not willing to leave that to chance. But technical trading, which is what I do, is where you have rules based on the price movement of the, of the thing that you're trading. You know, you can, you see the stock market charts, right? And you see the little candlestick bars and the price goes up and down and you can put indicators and moving averages and that sort of thing on there. That's what I'm talking about. And the reason that's good is, is because you can actually, as an individual, you can do it, you can learn it. But what most people do is they get their chart and they draw some indicators and they, they look at it and they go, okay, well I think this is going to happen. So I buy.
And that doesn't work either because what we think is going to happen is all driven by our emotion. So I want to take it one step further, suggest again that you need a system, Right. A set of rules. And if you trade by a set of rules, you have some exact conditions that get you in and exact conditions to get you out. And the cool thing then is that you can, you can take those rules and you can test them on past data. So the other day I took one of my sets of rules and I tested it on all stocks that have ever been listed in the United States between 1950 and today.
And I test scan, I basically did a backtest, we call it a backtest, where I put those rules into the software and took all of that data every single day, every single stock, found all the buys and sells, assembled the portfolio and showed me how that portfolio would perform over time.
That's super exciting. Right? And you know, let me, let me ask you this. If I gave you a strategy and you did that, you back tested it and that strategy lost money for the last 70 years.
Would you think that's a good strategy? Would you follow that going forward? Cost not right. That'd be dumb. But if I gave you a strategy and could show you that it worked over the last 70 years, consistently, not every day, not every month, but you know, the trend of that strategy was up the whole time. Yeah, I had some dips and whatever, but generally it made money, would you think that might be a good strategy?
Yeah. Right. Most people follow rules that never worked in the past, and so they're never going to work in the future. And then they wonder why they lose money. But if I test it the right way on the historical data and it did work, there's a much better chance that you will make money in the future.
