OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
@Lsbcal's request, I am starting this thread with a post I made in another thread plus a little amplification. It was a response to a post of his where he seemed to assert that a belief in the random nature of the markets was a sort of religion.
---Quote (Originally by OldShooter)---
Hmm ... that may be key to the discussion. I think the near-random behavior of the markets is settled science, not even close to being religion.
It is fundamental to Modern Portfolio Theory, which has been around for sixty+ years and got Markowitz his Nobel prize. (It makes no sense to calculate variance for a variable that is not random.)
S&P's semiannual Manager Persistence Report Card results, which consistently show a lack of persistence, are completely consistent with a random market.
There is also ample witness testimony: https://www.bogleheads.org/wiki/Taylor_Larimore's_market_timing_quotes
Is there serious academic research or statistical evidence to disprove any of this? (Anecdotes don't count.) I would love to see it, because it might give me a way to beat Mr. Market.
---End Quote---
Additions:
Nobel prize winner Eugene Fama and his research partner Kenneth French studied thousands of asset managers and were unable to find any evidence that their results were anything other than random. Short video here: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx Their published paper on this ran to 46 pages of mathematics IIRC -- more than I could handle but YMMV.
Common Objection: "I know a guy." or "What about this guy?" ... who successfully forecast the 2008 crash and several subsequent market gyrations.
The market is "noisy" and there are thousands of people making forecasts. When something happens in the market, it is inevitable that some of these forecasts will have been correct. It is also inevitable that some forecasters will be correct several times. There are about 10,000 mutual funds in the US; if we set 10,000 monkeys to flipping coins, after the 8th toss about 40 of them will have flipped ten heads in a row. Others will have had near-perfect records, but the overall average will be what the random nature of coin-flipping predicts: about 50%. Focusing on the luckiest monkeys is misleading when attempting to understand the game.
*I say "near-random" because the market were completely random (classical Gaussian distribution) the deviations would be centered on zero and there would be no point in investing because the markets would never change. Actually the distribution is centered a few percent to the right/positive, resulting in what we have seen in a hundred years of market history: a slow, steady trend interrupted frequently by random excursions. That's why buying and holding a diversified portfolio works. The buy and hold investor basically believes in and rides the trend, ignoring the noisy excursions.
Finally, I don't claim that any of this is original with me. I was trained as an engineer and scientist, so I go looking for data any time I have a question or want to understand something. I am reporting here on what I found. What I did not find was any data that refutes the randomness assertion.
---Quote (Originally by OldShooter)---
Hmm ... that may be key to the discussion. I think the near-random behavior of the markets is settled science, not even close to being religion.
It is fundamental to Modern Portfolio Theory, which has been around for sixty+ years and got Markowitz his Nobel prize. (It makes no sense to calculate variance for a variable that is not random.)
S&P's semiannual Manager Persistence Report Card results, which consistently show a lack of persistence, are completely consistent with a random market.
There is also ample witness testimony: https://www.bogleheads.org/wiki/Taylor_Larimore's_market_timing_quotes
Is there serious academic research or statistical evidence to disprove any of this? (Anecdotes don't count.) I would love to see it, because it might give me a way to beat Mr. Market.
---End Quote---
Additions:
Nobel prize winner Eugene Fama and his research partner Kenneth French studied thousands of asset managers and were unable to find any evidence that their results were anything other than random. Short video here: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx Their published paper on this ran to 46 pages of mathematics IIRC -- more than I could handle but YMMV.
Common Objection: "I know a guy." or "What about this guy?" ... who successfully forecast the 2008 crash and several subsequent market gyrations.
The market is "noisy" and there are thousands of people making forecasts. When something happens in the market, it is inevitable that some of these forecasts will have been correct. It is also inevitable that some forecasters will be correct several times. There are about 10,000 mutual funds in the US; if we set 10,000 monkeys to flipping coins, after the 8th toss about 40 of them will have flipped ten heads in a row. Others will have had near-perfect records, but the overall average will be what the random nature of coin-flipping predicts: about 50%. Focusing on the luckiest monkeys is misleading when attempting to understand the game.
*I say "near-random" because the market were completely random (classical Gaussian distribution) the deviations would be centered on zero and there would be no point in investing because the markets would never change. Actually the distribution is centered a few percent to the right/positive, resulting in what we have seen in a hundred years of market history: a slow, steady trend interrupted frequently by random excursions. That's why buying and holding a diversified portfolio works. The buy and hold investor basically believes in and rides the trend, ignoring the noisy excursions.
Finally, I don't claim that any of this is original with me. I was trained as an engineer and scientist, so I go looking for data any time I have a question or want to understand something. I am reporting here on what I found. What I did not find was any data that refutes the randomness assertion.