It just occurred to me today that if you think of stock market fluctuations being in the same vein as weather patterns — varying at the micro level, somewhat gradual and predictable at a short-term level and almost totally unpredictable the further out you go in time — it puts a different perspective on a lot of things. Trying to determine future price movements based on a large aggregation of historical data might be akin to trying to predict future weather by looking at when it last rained, which seems silly as there’s zero precision to this even if there were some kind of general cycling. Daytrading might be a little like trying to figure out whether the temperature would be a degree higher or lower at any given moment, or the precise windspeed or direction. In both, there are elements of feedback at play that can damp down or bubble up at any moment. And there’s the same lack of catastrophe scenario analysis. Look at the way Hurricane Katrina was predicted, its heading well known, and yet people did not evacuate in time; could the same be said for the collapse of the US mortgage market and its subsequence knock-on effects?
Maybe this is all a bit tenuous, but it certainly gives me more of an ability to be sanguine about my investing when I can view short-term market fluctuations in the same way I might view weather, as mostly random.
On a note related more to the last entry — I wonder if there’s any evidence of investors who’ve had no systematic method of stock picking doing well over long periods of time. In one year time frames, darts have often easily outperformed professionals, but does there always have to an analytical, articulated methodology of stock picking? I still wonder if anyone would admit that they used an intuitive or hunch-based method or if, in the process of success, any method like this would be retroactively explained by some convenient, well-fit “system”.
