The Wisdom and Nonsense in Prediction Markets and Forecasting
Top 5 of the Week of October 31
In our Top 5 this week we check out Cullen Roche’s view on the myth behind passive investing, care of his blog Pragmatic Capitalism. Adam Mann from the Nature website discusses the power of prediction markets. And CIO of Ritholtz Wealth Management, Barry Ritholtz, writing for Bloomberg weighs in on the odds of another recession coming.
The Irrelevant Investor Michael Batnick discloses why technical analysis of markets gets bad press. And Vintage Value author John shares value investing expert, Charlie Munger’s investing principles to live by…
There Is No Such Thing as a Passive Investor Anymore
- Low-cost indexing has been a game changer in modern investing; the expansion in the index fund field allows investors to track a variety of funds now
- This has led to the myth that passive individual investors outperform active money managers as index funds are surpassing stock picked mutual funds
- It is the distinction between active vs. passive investing that is stirring confusion as most ‘passive’ investors actually make plenty of ‘active’ decisions about their portfolio
Collective Wisdom Making Market Predictions
- The ‘Reproducibility Project’ involves a group of economists experimenting to determine if they can make accurate predictions on the ‘future’ of the market
- Within fake mini Wall Streets, the group buy and sell ‘shares’ in an upcoming event and the share price demonstrates the collective wisdom as to whether it will happen or not
- Though these prediction markets are not foolproof, the forecasts have been correct 71% of the time—and they believe there are lessons to learn from the times they’re wrong too
Another Recession Is Coming? So What?
- Economists are predicting the probability of another recession happening within the next four years is nearly 60%
- Given that during the 20th century there was a recession on average once every five years this is highly probable—this is mostly just a provocative forecast
- Having failed to predict the start of the three most recent events (1990, 2001, and 2007), it’s not worth getting too concerned with their forecasting skills anytime soon
Not All Technical Analysis is Nonsense
- Technical analysis is the attempt to forecast future stock movements by analyzing the data from recent trading activity
- Many believe though that the driving force behind share price is earnings only, but actually, sentiment is a motivating factor, and it can be taken into account
- If you consider technical analysis as a useful tool for evaluating risk rather than an attempt to predict the future, it can work favorably for you as an investor
Do you believe in technical analysis? Or is it forecasting nonsense? Share your thoughts in the comments section below
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Charlie Munger; Solving Problems With a Checklist
- Before any new investment; evaluate risk, above all the reputational risk, strive for objectivity and rationality in your assessment
- Preparation is essential; never stop learning and asking “why?”—and be honest with yourself about your own limits
- Become an efficient business analyst and learn to allocate your assets wisely
- Be patient and act decisively, and always be prepared to adapt to new circumstances
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form – and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
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