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Fascinating Insights From Nobel Prize-Winner Robert Shiller

Jim Byers passes along:

On why so many experts missed the 2008 financial crisis: “Experts have always missed big events like this. If you look at the record of statistical forecasting models, they tend to get to the recession when it’s starting to come. A casual observer might start to worry about it. Forecasting it years out, they don’t get; in particular, if you look at the Great Depression of the 1930s, nobody forecasted that. Zero. Nobody. Now there were, of course, some guys who were saying the stock market is overpriced and it would come down, but if you look at what they said, did that mean a depression is coming? A decade-long depression? That was never said.”

On short-term thinking: “I think that there’s too much faith in analysis of short-term data. You see some pattern, and you can do a statistical test and prove that will prove that it is significant or passes the smell test to a statistician. But the problem is, the world is always changing. It’s not a stable thing. The underlying human parameters may be stable, but you can see that there is institutional and cultural evolution, and it’s not something that you can quantify.”

Too Simple: A Big Reason Many Investors Miss Trend Following

An unexpected source explains why many miss understanding trend following trading:

If the explanations you’re demanding for what works aren’t working, perhaps it’s because you’re avoiding nuance in exchange for simplicity.

[For example], your boss keeps asking you to explain your whole plan in three Powerpoint slides. The VC who allocates one minute to understand why your business will work has done everyone no favors. The blog reader who clicks away after a paragraph wasted his time visiting at all.

Skip the complicated, time-consuming part at your own risk…If it were obvious, everyone would do it. Wait, that’s too simple. How about this: Nuance and subtlety aren’t the exception in changing human behavior. They’re the norm.

A great example of how some miss understanding trend following by avoiding the subtle? They see one losing month and panic. If you work with that type of quick judgement you would be better off taking the blue pill and going back to sleep. Seriously! That excerpt connected well with this article sent by a reader in Australia that pumps the mistaken notion that investors can predict trends:

He’s adapted Nate Silver’s model very unscientifically to the global news cycle, using it to compile a handpicked store of knowledge, which he then aggregates to get a feel for where markets are heading.

The system requires at least five or six different news sources ranging across left to right leanings to provide the sort of radar that will give an accurate fix.

You may think you don’t have time to manage this, but there are apps that make it easy. Pulse is one I use because it enables the collection and collation, in chronological and subject order, of top news of the day from nominated sources. My friend’s favourites include Salon, Slate, The Atlantic, Bloomberg, CNN and Huffington Post.

He spends part of every morning trawling through headlines and reading only what he deems relevant to provide a snapshot of where the world is at any given moment. Over time this has helped him develop an accurate read on how he might reposition himself across sectors.

“If you’re reading a variety of news sources, you definitely start seeing trends, especially as everyone’s saying the same thing just in different ways,” he says. Lots of cautionary stories generally mean something bad is about to happen.

“If you’re hearing the same thing from multiple sources, that’s generally when something’s going to happen,” he says. “Which is why I’m out of stocks. There’s no way they’re going to stay where they are. They have to come down.”

Isn’t this akin to timing the market?

“No. I’m just trying to predict a medium- to long-term trend. If you want to get rich quick, this isn’t the way to do it because it’s very macro.”

He admits his method is not totally straightforward, and that there may be quite a wide margin for error depending on nominated reading material and how clever the reader is it at distilling it. But do it for long enough and you will get better at it.

Read, absorb, think and learn. Then do it again, then again. And eventually you’ll be smarter, too.

If you think tracking news sources to predict market trends might possibly make you rich, then you will probably get exactly what you want from the process. What is that? To have the feeling of losing money! For those of you who want the subtle from me, the nitty gritty, read.

Harvard Poker Pro Says Texas Hold ‘Em Can Teach Traders to Fold

From Bloomberg:

“Someone who has made a successful living as a poker player for a few years would more likely be a good trader than someone who hasn’t,” said Aaron Brown, a 53-year-old former poker pro who is now a risk manager at AQR Capital Management LLC in Greenwich, Connecticut, which oversees $23 billion. “They know to push when they have the edge and they know how not to bust, and that’s a tough combination to find.”

Thinking in odds is a crucial point of my film.

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