Over the weekend through simple poor management on my behalf I was exposed to two articles purporting to tell me what 2014 had in store for me. The first was in the Age which I spotted over toast and vegemite whilst out enjoying breakfast. Grandiosely titled What the charts predict for 2014 – technical analysts once again made themselves look like peanuts by implying that they could predict the future. The second was an article published my Morningstar, the ratings folk told me what the 4 investment trends for 2014 were. In this case it was macroeconomic fundamentalists making peanuts of themselves.
There are a raft of reasons ranging from the philosophical to to quantum as to why we cannot predict the future yet there is always someone who says that they can. This is despite the overwhelming evidence that they cannot. In a hat tip to the James Randi foundation I used to have a standing bet with people who claimed they could predict the future. I would give them $1 million if they could tell me the closing price of six instruments during 6 different times frames during the year. Get them right win $1 million – get them wrong you owe me $1 million. Nobody ever took me up on it because strangely enough people who claim to be able to predict the future dont seem to have a spare $1million laying around.
I can excuse fundamental analysts for thinking they can predict the future because they believe they think they know what something is worth and that most of the time the markets assessment is wrong. But what really annoys me is technical analysts who as a population continue to insist that they can predict the future. They then lob these predictions out in public and make the rest of us look like twats.
Any form of technical analysis is by definition post-dictive – you are looking in the rear view mirror in an attempt to tell you what the road ahead will be. We can tell perfectly what the road behind was but we have no idea what lies ahead of us. Everything is one of a series of possible futures. I might be absolutely convinced that BHP is going to $25 whereas the markets view is that it is going to $75. It doesn’t matter what my tea leaves say – all that matters is what the market says.
The simple fact of the matter is that if we could predict the future we would not need money management to preserve our capital for if and when it goes wrong.