Do Labels Matter?

Wine – Drink of the Gods!

No other beverage in the history of the world has been more popular than wine. Its significance in our culture can’t be overstated – from the Ancient Greek literature, where it had a prominent place, all the way to the modern world. There is nothing better than an expensive bottle of wine – it spills into your mouth, tickles your senses, and tastes wonderful…. Or so they make you believe.

You see, there is a group of people called Sommelier, professional wine tasters. It’s their job to distinguish between good and bad wines and it’s typically believed that the best wines are the most expensive ones. However, many experiments over the years have demonstrated one simple fact – if you blindfold a Sommelier and ask her to distinguish between really expensive wine and a reasonably priced (but still good) one, she can hardly ever successfully do so.

That is not to say that Sommeliers are not good professionals. As mentioned, their job is to distinguish between good and bad wines, hence their inability (when blindfolded) to recognize the expensive wine doesn’t mean they fail in their job. What it means though is that the label of the wine and its price tag are not necessarily an indicator of the wine’s true quality.

This brings us to this week’s episode of the Systematic Investor podcast series, where Robert Carver made a return and posed a fundamental and yet very simple question – do market labels matter? You see, for years we have propagated on the podcast that a Trend Follower should treat all the markets they trade equally. This begs the question – if you treat all your markets equally, does it matter if you know that your system is trading the SP500 or the Eurobond future? And could it be the case that knowing the names of these markets only propagates tinkering with the system and “optimizing” its parameters according to each different market?

It's a fair question…

This fundamental discussion was raised by Rob in this week’s podcast episode, where he went as far as suggesting that Trend Followers may simply number the markets they trade (as Market 1, Market 2, Market 3, etc) and thus remain completely oblivious to what and where their system is taking exposure.

There are some very good reasons in favor of this (arguably extreme) decision, Rob noted. The most important of these is minimizing the risk of designing a Trend Following system that treats individual markets differently. However, with all that being said, Rob also confessed that there are also some 2% corner/extreme cases that do require the Trend Follower to actually know what they are trading.

Interested to find out what these special cases are? Go ahead and tune into this week’s episode of the Systematic Investor podcast series. As usual, we promise that your time will be very well spent!