Monday, May 07, 2018

The futility of predictions

Yesterday I had the misfortune to be copied in on an Facebook thread discussing an impending stock market crash, together with an invitation to join the group who were discussing it. 

This post had more than 200 comments from a number of traders covering the intricacies of the current economic climate and their opinions on this - most of which I didn't understand. 

Idly browsing through those comments wasted ten minutes of my life that I couldn't get back. But it did give me the inspiration for this post.

To me it was all theoretical hot air. Depending on your chosen timeframe, this current market uptrend can be traced back to March 2009 - nine long years ago. Since then, numerous 'experts' and theorists have continuously been the prophets of gloom, and warning us that disaster is imminent.

My twitter friend Jon Boorman (@jboorman) has input some of these past predictions into a chart of the S&P 500, which I show below with his permission, and makes for interesting reading (click to enlarge):


As we can see, none have been proven right yet. Anyone blindly following their opinions and predictions in anticipation of a big crash will have lost money - repeatedly.

We can also look back in history at other (in)famous market timers and forecasters who had their 15 minutes of fame before getting so entrenched with their theories and projections, they refused to admit when they were wrong - people like Joe Granville and Robert Pretchter spring to mind.

Away from the stock market, we have people like Dennis Gartman, who confidently predicted back in 2016 that oil would not move back above $44 "in his lifetime". Well, oil is currently around $70 a barrel and Gartman is still alive and making predictions.

I guess these people must have some followers who believe in their ability to predict. But when they are proven wrong, they quietly move on to their next big prediction. Maybe this one will work...

The thing is - at some point - these guys may well be right, in the same way the guys who wrote the book Dow 36,000 just before the dot.com bubble burst may eventually be proven right. Or those who predict Bitcoin to go to $50,000 or higher may be proven right. Or those who predict Bitcoin will fall to zero may be proven right. 

But as timing tools they are a bust.

Markets do have a habit of going up and down, and in certain phases they go more up than down, and in others more down than up. That is what forms trends in price. And we never know when there will be changes in the market 'state'. 

So traders who follow price trends have no need to form opinions or be 'chained' to a prediction about what may or may not happen. They just go with the flow.

The underlying reasons why price develops trends are of no relevance to a trend follower - they do not care about being intellectually correct about a market move, or whether a price move fits in with some economic theory. They are more concerned about profits and losses in their trading activities - which are solely driven by price and its movements.

A solid trend following method will clearly tell you when to get in a market, and when to get out - no thought is required. Just place your orders and stops at the appropriate levels and let the market do its thing. 

Given that, why would you bother with all the extraneous thoughts and forecasts of others?

So we will continue to follow price. In the meantime, the experts and theorists will continue to spout their predictions...

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