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  • superbmindset superbmindset Jun 15, 2011 12:21 AM Flag

    Can the tea leaves be read?

    so the market saw its largest gain since March 21st of this year (the day I signed off)!  I "mistakenly" wrote March 28th instead of the 21st on my previous  post, or did I?  we witnessed this price rise I spoke about almost a week after I mentioned it!

    Let us assume it was not a fluke and I really did read the tea leaves, predicting the highest one day rise (the prediction being early by just two days).

    the question arising now is: was this due to luck or skill?

    The skill/ability of reading tea leaves has been a bone of contention among stock market players since the beginnings of time.  How true is this?

    although by referring to the predictability of stock market movements as reading tea leaves, it appears one is attempting to degrade the importance of it.  however, there is some basis for this hypothesis, and it is not all just theoretical.

    For example, there is a well-known anecdote about opinions of experts being sought concerning the coordinates of a ship that had sunk. Although views were varied, it turned out that the answers, when averaged out, were within 1% of the actual coordinates of the sunken ship!

    Clearly, whether one believes in the predictability of stock markets will affect one's investing behavior. An implication of this is that the market price action is random, a basis for the Random Walk theory. This surely means that fund managers don't add any value (and nor does the small investor himself, for that matter), and one would do best by just buying and holding an index fund. But clearly there are people who have prospered by applying market timing to their investment strategy.  

    Everybody hopes to be able to do that but few manage to succeed consistently in the market over the years. My view is that the market is very bad at pricing in the effect of likely outcomes such that it is easy (for those that can) to make money by trading on such mispricings.

    point being, if the majority of market participants were good at timing market movements we would effectively have an efficient market, which would eliminate any potential bargains!

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    • so why did economists get it so wrong?  

      the opinions of experts being sought concerning the coordinates of a ship that had "sunk" were varied, and it turned out that the answers, when averaged out, were off by almost 600% of the actual coordinates of the "sunken" ship!

      Everybody  hopes to be able to forecast reliably but few manage to succeed consistently in the market over the years. 

      and Again, my view is that the market is very bad at pricing in the effect of likely outcomes such that it is easy (for those that can) to make money by trading on such mispricings.

      Over the years, I have learned to respect the market and how it often defies one's strongest belief: that the market is forecastable.  Well it's not!  This is because the market, just like the economy,  is dynamic and made up of humans, not equations; if everyone believes the economy will add x amount of jobs then surely the next economist will feed off of the previous economist's forecast and adjust his numbers accordingly...the cascade effect.  the impact of this effect is overlooked when  it should really be overly factored in.

      but unemployment is one thing, the impact on actual business fundamentals is another. Contrarians would argue that when the economic indicators are negative one should go against them, because investors tend to under-price the market on what they consider "lagging" indicators...

      So what's next?  Brian says the market is flattening until the end of the year, to me that means the market is either going much higher or much lower!  Will explain on my next post titled "when you miss out on a bull run ps I heart Brian".  

 
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