It’s hard to be in finance and not be number nerds. But at the end of the day, is math alone enough to make you competitive? Josh Brown at the Reformed Broker hit the nail on the head:

All professional investors worth speaking of have these basic foundations, this understanding of the math involved in stock selection and allocation.  Whether they reach the best conclusions or actually put these mathematical understandings to rigorous use is not the same thing – the world is filled with intelligent people who are lazy.

I bring this up because I put up a throwaway post the other day called Math is Not an Edge and everyone got really mad about it.  Especially Robert Seawright, one of my fave financial bloggers, who disagrees.  He says that math is, in fact, an edge.

Let me give you three reasons I still believe I am right:

1.  Back in the day, investors would flip through their Value Line booklets and pore over SEC filings for the very basic details about company fundamentals that are now freely available on hundreds of different financial websites and apps.  You cannot argue that this is edge-producing math.  You could say that the interpretation of how this data will affect a stock’s future price is your edge, but that is NOT MATH, it is ANALYSIS.  Not the same thing.

2. The main reason so many of you have argued with me is based on a misunderstanding – I am not saying the math doesn’t matter, I am saying math is not an edge in and if itself because it is the starting point and the commonality between most experienced investors is that they all understand it.  Again, it is the foundation.

3.  You know who was really good at math?  This f^&%$#$ idiot.  Probably better at math than you are. Again, he has the foundation in that he knows all the calculations and ratios that everyone else knows.  But that was not his edge.

So I say again, once we all agree on the math – then it’s time to tell me something I don’t know.

Yep, Brown gets it right again, but we’re left conflicted when his logic gets extended to managed futures. On one hand, particularly in trend following, mathematically driven trading- where you don’t have to worry about a boneheaded CEO or a botched acquisition – does provide an edge. There’s no human element – just numbers. It takes the emotion out of commodity trading, where your signals guide the trading, and the final arbiter of the trade is math. At the risk of sounding like former President Clinton, it’s arithmetic, and we’re more than happy to stand by it. It won’t give you a win every day of the week, and past performance is not necessarily indicative of future results, but as we’ve written before, these programs have served us well in the long-term.

However, at the same time, it’s fair to say it’s not JUST math that gives the space an edge. The ability to calculate Bollinger bands or have dynamic position sizing based on a volatility formula doesn’t give CTAs an edge. It is a tool. It’s how you use the tool which provides the edge. Just like handing over Albert Pujol’s bat or Rafael Nadal’s racket wouldn’t give you and edge in hitting a major league fastball or returning Roger Federer’s serve – simply using the math everyone else uses doesn’t give you an edge.

Bottom line? Mathematically driven strategies have advantages, but the brains behind the algorithmic arrangements are the edge.