This brings me to what I consider to be the most difficult problem in all of finance. No, I am not talking about the stock market. I consider that problem unsolvable for a variety of reasons. The most difficult problem in finance is yourself. The Gordian Knot is your mind. As Benjamin Graham, the famous value investor, once said:
Don’t get me wrong, pure analytical approaches to investing have worked well for many, especially in the past. You only need to look at the investment records of Ed Thorp, Jim Simons, D.E. Shaw, and Cliff Asness, among many others, to see this. However, while superior intellect might seem like a solution to the problem of investing, it is far from it. For every Jim Simons success, there is a Long Term Capital Management failure. Today, those who have tried using machine learning are having trouble outperforming the market. A room full of PhDs can’t necessarily beat buy and hold.