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Ep. 369: Market Predictability with Michael Covel on Trend Following Radio

Market Predictability with Michael Covel on Trend Following Radio
Market Predictability with Michael Covel on Trend Following Radio

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Just as shamans have been consulted throughout time to provide the desperate and gullible with prophecies, so too are financial shamans (often masquerading as experts) are looked to for comforting myths about market direction.

Of course, we can and should prepare for the many possible market eventualities by looking at the data and trading trends, but to expect anyone to be able to provide absolute predictions for the future is absurd. The truth is that we do not know for sure, and anyone that tells you they do know might as well be gazing into a crystal ball.

Today’s episode looks at the various attitudes and beliefs concerning the falsehood of market predictability. Michael Covel runs the commentary, drawing a narrative thread through various excerpts from some of the most prominent economic and financial thinkers.

In this episode of Trend Following Radio:

  • Recognizing when you are being misled by the experts
  • What to look for in trend analysis and what to be wary of
  • Considering bubbles and other unpredictable global factors in the markets
  • Finding an objective approach to investing based on quantifiable information
  • Considering timeless human investment psychology elements
  • Making investment decisions without being blinded by rigid economic processes or political ideologies

“It’s mind numbing to study financial history, because it is so repetitive: we do the exact same things over and over. We have followed this pattern in every major bubble, starting with the coin mania in the Roman empire.” – John Galbraith

Mentions & Resources:

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Why Is the EMF Theory So Widely Advocated?

Consider (source) an excerpt:

Why is the EMF theory so widely advocated? Academics love EMH because they can claim that they have mathematics-based formulas which can predict the future even though the underlying assumptions (borrowed from physics) are provably false. For a professor, the ability to create beautiful mathematics is important since it means that they are less likely to be teased by physicists in the faculty club. Life is infinitely more interesting for an academic if they can create beautiful mathematics in their papers.

Charlie Munger adds:

“I have a name for people who went to the extreme efficient market theory—which is “bonkers.” It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. It just had a difficulty in that the fundamental assumption did not tie properly to reality.”

More Munger:

“The possibility that stock value in aggregate can become irrationally high is contrary to the hard-form “efficient market” theory that many of you once learned as gospel from your mistaken professors of yore. Your mistaken professors were too much influenced by “rational man” models of human behavior from economics and too little by “foolish man” models from psychology and real-world experience.”

More Munger:

“Efficient market theory [is] a wonderful economic doctrine that had a long vogue in spite of the experience of Berkshire Hathaway. In fact one of the economists who won — he shared a Nobel Prize — and as he looked at Berkshire Hathaway year after year, which people would throw in his face as saying maybe the market isn’t quite as efficient as you think, he said, “Well, it’s a two-sigma event.” And then he said we were a three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas — better to add a sigma than change a theory, just because the evidence comes in differently. [Laughter] And, of course, when this share of a Nobel Prize went into money management himself, he sank like a stone.”

I will add more to this on today’s podcast (will be episode 51).

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