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Author: tamhas Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 70663  
Subject: Re: I love this board Date: 12/8/2012 10:47 AM
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So while its good to get the chatter going, were not as great as we all think unfortunately.

I just finished Nate Silver's book, The Signal and the Noise" (only one chapter is on politics) and one of his concluding remarks is that we are generally not as good at making predictions ... which is what one is doing when investing ... as we think we are. His chapter on the the market tends to come to the conclusion that no method or scheme yet known has real predictive advantage over the market. In particular, many schemes are based on fitting a model to historical data, but he makes the point that this isn't prediction and illustrates why such models are unlikely to work consistently.

He has a nice example in which he observes that for a certain period and up day was followed by an up day or the reverse, 56% of the time and so proposes a scheme in which money is put into an index fund and left there until there is a down day when it is taken out until there is another up day. If one follows this for the 10 years following, one does, in fact, make quite a bit of money ... if one excludes transaction costs. If one includes transaction costs (albeit at a rate more like working through a broker than an on-line discount service), then one actually loses money. Moreover, one makes a significant fraction of the same amount just by buying at the start and leaving it there. Also, if one applies the same strategy to a more recent 10 year period, one actually loses money, even not including transaction costs because during that 10 year period reversals were more common than remaining the same. With transaction costs, one lost almost everything.

In the end, he concludes that the market is similar to earthquake prediction, i.e., we know something about the broad picture, but not enough to predict specifics.

I presume your figures about winners were taken from the year portfolios. That may not be entirely fair since I think some people put fairly wild shot guesses in there in the hope that they hit really big. One would hope that most of us wouldn't actually bet our whole portfolio that way. And, of course, there have been some pretty spectacular winners ... a couple of those can do a lot to sweeten a pot where the rest doesn't do much. Also, of course, one doesn't get to sell stocks that are not meeting expectations, but rather are stuck for the whole year. It might be a better evaluation of the board to look at the stocks we actually discuss in a non-trivial way, although there are many where there is a mixed discussion so it would be hard to say whether there was any consensus. MAKO comes to mind!
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