Monday, August 14, 2006

Everyday I wake up to be new

The current Friday linkfest on Abnormal Returns, is partly about two problems that are linked. The first problem is that active investing is very hard. The second problem is that quantitative analyses aren't as helpful as commonly thought.

Why is it not helpful? Mostly because the economic past is not very useful in predicting the near future. And so data about the economic past is not very helpful in predicting the near future.

Present conditions are hopelessly different than the past. Each year there is a different economic situation that has been preceded by different economic history, different market psychology, and different market participants. 1930 was preceded by 1929, which was preceded by 1928. Each year is very different from the others the preceded and followed it. In a situation where each year is an outlier, the average can be very deceptive.

To quote Gnarls Barkley, from the song "Feng Shui", the economy is:


To big to be boxed in/
it bobs and weaves/
it evolves, it solves/
it gives and receives/

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