People who argue against quantitative trading strategies do so on the basis of emotion. Usually, you will hear an argument that goes something like this: If you take all the emotion out of investing, it becomes a cold and soulless enterprise. You need to be connected to and passionate about the markets and the companies you invest in. And that you should only put your money in companies that share your beliefs and worldviews, and then you will be successful. There are a few problems with this line of thinking, however, and they are outlined below:

1) Mutual Funds Use Quantitative Trading Strategies

Many people invest in this or that mutual fund without giving it a second thought. It’s just a place to drop money and earn a return. A distinct minority of people bother to check to see what specific companies the mutual fund itself is investing in, or what their philosophies are, or if they’re all “in alignment” with your own personal beliefs. Because of this, it seems a bit of a double standard to demand it of quantitative trading strategies. Double standards are almost always indicative of some other agenda, and seldom exist by accident.

2) Who Said Quantitative Trading Strategies Can’t Do That!

Let’s say you were very serious about finding companies you were passionate about, and that you’re one of the distinct minorities who actually does check to see what companies your mutual fund invests in to be sure they’re investing only in companies whose beliefs and values mirror your own. Great! Quantitative investment strategies can be made to do that. There’s no reason you can’t identify specific companies you want to invest in, then let an automated system handle your trades. Your returns might not be as good, since you’re intentionally limiting your choices, but the same basic principles apply.

3) Using logic and Automation to Invest Does Not Equal A Lack of Passion

By all means, be passionate. Live life to the fullest and enjoy every second. You can do that and still rely on automation to handle your trades. The two are disconnected. They simply have nothing to do with each other, or at least, they don’t have to if you choose to set it up that way. Quant investing and algo trading systems don’t make you a soulless robot any more than a pace maker makes you a cyborg. Sometimes, when people’s emotions get in the way, they make bad decisions. Automated quant trading systems seek to eliminate that.

The bottom line is, the next time someone rants about the evils of quantitative trading AKA. automated trading systems, pay attention to what they’re saying, yes, but also pay attention to what they’re not saying. To the things they’re implying. There’s usually a fly in the ointment or a flaw in their logic. It doesn’t make them bad people, it just means they don’t fully understand.

Chris Vermeulen