The chart below shows performance of US sectors and capitalizations over the trailing 12, 6, and 1 month(s). Performance updated through 7/11/2013.
In Financial Advisor, Barry Ritholtz of The Big Picture blog gets asked about his market outlook. He answers with his view on prediction, which I would very much endorse.
Let’s start out with a basic question: What’s your outlook on the markets and the economy?
Let me begin with an answer you will hate: My opinion as to the future state of the economy or where the market might be going will be of no value to your readers. Indeed, as my blog readers will tell you, I doubt anyone’s perspectives on these issues are of any value whatsoever.
Here’s why: First, we have learned that you Humans are not very good at making these sorts of predictions about the future. The data overwhelmingly shows that you are, as a species, quite awful at it.
Second, given the plethora of conflicting conjectures in the financial firmament, how can any reader determine which author to believe and which to ignore? You can find an opinion to confirm any prior view, which is a typical way many investors make erroneous decisions. (Hey, that agrees with my perspective, I’ll read THAT!)
And third, relevant to the above, studies have shown that the most confident, specific and detailed forecasts about the future are: a) most likely to be believed by readers and TV viewers; and b) least likely to be correct. (So you have that going for you, which is nice.)
Last, across the spectrum of possible opinions, forecasts and outlooks, someone is going to be correct—how can you ever tell if it was the result of repeatable skill or merely random chance?
Kudos to Mr. Ritholtz for telling it like it is.
There is no way to know what is going to happen in the future. Prediction is neither useful or necessary.
Later in the article, Mr. Ritholtz makes the point that most investors do not know even what is going on right now. That is where relative strength can be a useful technique. Relative strength can identify what is strong, and trend following is a practical way to implement it, by owning what is strong as long as it remains strong. Long-term mean reversion methodologies will work too, of course. In other words, you don’t need to predict the future as long as you can assume that trends and reversion to the mean will continue to occur as they always have.
Posted by: Mike Moody