CERF Blog
When I worked for the Fed, there were televisions in our building’s gym, and they were always tuned to a financial channel. We joked about how the talking heads had an explanation for every market move. Then one day, someone told the truth. He said something along the lines of “we don’t know why the markets did what they did today.”
The fact is that on most days no one knows why the markets did what they did. Sure, there are some days when everyone knows what happened, but these are the result of big and rare events, such as the collapse of Lehman Brothers. Does anyone really want to tell me why the Dow was down about 19 points on May 20th? Of course not. Nobody knows.
If we can’t explain the markets’ past movements, how can we perform the much harder task of predicting those markets’ futures? We can’t.
Lots of brilliant people have worked on the problem, because there are huge potential gains in solving the problem. They’ve used the best tools available, advanced time series econometrics, stochastic calculus, and the like. Markets just can’t be systematically forecasted.
So, why are there so many market forecasters out there? Why does Bloomberg radio exist? Why are hours of air time and forests of trees used to provide market forecasts?
They exist because people seek information to reduce uncertainty. Most don’t have time to follow economics, business, and markets closely enough to generate their own analysis. So, they listen to talking heads.
The problem is that a lot of stupid comes out those talking heads. Almost every morning I start my commute with the intention of listening to the heads. I seldom make it two miles without turning to music, because I’m frustrated with the stupid I’m hearing. They may have stories that sound good, but they seldom hold up under more serious analysis.
The media are part of the problem here. Radio and television are fast moving, and place huge premiums on entertainment and shock value. Watch Jim Cramer. With few exceptions, there is little room for subtlety or deep analysis.
The audience is part of the problem. Most just don’t have the patience for complex, technical, or subtle analysis.
It’s the same for in-person talks. At one of my events in October of 2000, we had a speaker who gave a great, but complex and technical, argument that stocks were over-valued relative to treasuries. He suggested that investors should adjust their exposure, by selling stocks to purchase treasuries.
My audiences are more sophisticated and patient than most, but they hated him. He was too technical, too academic, and not entertaining. He was boring. They didn’t listen to him. They never wanted to see him again. He received the worst audience evaluations I’ve ever seen, except for the woman a few years later who started out with “Can you believe some people still believe in God?” and then proceeded to tell us that the ten commandments were obsolete.
The audience hated him, but he was right. This was months before the dot-com bust. It they had listened to him then, they would be wealthier today.
If radio and television analysis is unsatisfactory, what is a small investor to do? Education is first. Even one finance class will allow you to reject the dumbest analysis. Next, search the web. There is good work being done in some corners of the internet. A finance class will help you recognize that good work when you see it. Finally, no one has all the right answers. Do your homework and make the best decisions for you.