Probability, Mean Reversion and Forecasting

We’re down to the Final Four in this year’s iteration of March Madness, also known as the national collegiate basketball tournament. Our earlier discussion of “The March Madness Theory of Investing didn’t sit well with some readers. The lessons we sussed out from the bracket-destroying results included home-country bias, how expert forecasts are about as good as those of nonexperts, and the impact of noise and distraction.

One issue I want to delve into further is why predicting the future seems to be so hard, if not impossible. That particular “lesson” caused quite a bit of pushback.

There were many good responses, but Cullen Roche of Pragmatic Capitalism made perhaps the most interesting observation. In a blog post he wrote:

(P)redicting the future is actually pretty easy in a macro sense. For instance, anyone with a sound understanding of macroeconomics and the capital structure knows, with a very high probability, that stocks will tend to become more valuable over long periods of time because stocks reflect the value of some portion of our overall output.

 I don’t see this so much as a factual disagreement as simply defining epistemological elements differently.

At the risk of repeating myself, let’s define just what a prediction is:

Continues here: March Madness and the Perils of Predicting

 

 

 

Category: Apprenticed Investor, Bad Math, Psychology, Sports

Bull vs. Bear Debate: Is Biotech Is in a Bubble?

Awesome graphic:   click for ginormous graphic Source: Credit Suisse via Bloomberg    

Category: Markets, Psychology, Science

10 Monday AM Reads

Back to the workweek! Spring has sprung, the futures are green, and its time for our morning train reads: • Why are interest rates so low?  (Ben S. Bernanke Blog) • How to Combine Value and Momentum Investing Strategies (Alpha Architect) but see Woe Betide the Value Investor (Research Affiliates) • Confusing today’s liquidity with tomorrow’s (TRB) • How the world’s…Read More

Category: Financial Press

Low Interest Rates and Financial Stability

Category: Fixed Income/Interest Rates, Think Tank

60 Minutes: Killing Cancer

60 Minutes follows brain cancer patients in a Duke University clinical trial of a therapy that uses a re-engineered polio virus to kill cancer cells

 

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Category: Science, Video

Hate Mail Rules

1. CHECK YOUR GRAMMAR No one’s going to take you seriously if you use “there” instead of “their” or “your” instead of “you’re.” Maybe you should write your missives in Word first, where there’s a grammar checker. Or maybe run your prospective words by your mother, since you want her to be proud of you….Read More

Category: Humor, Psychology, Web/Tech, Weblogs

10 Sunday Reads

Good Sunday morning. Round out your weekend with some interesting reads you may have missed: • Need Financial Advice? Ask the Future You (NY Times) • Vanguard snubs outsiders in digital advice: As firms like Schwab and Vanguard build more online portfolios, money managers face an ‘open architecture’ question (Investment News) • Activist Investor Bill Ackman Sets a $1 Million…Read More

Category: Financial Press

Category: Real Estate, Think Tank

Every Tom Hanks Film: 30 Movies in 6 Minutes

James Corden, new host of The Late Late Show, has Tom Hanks as his “perfect” first guest:   James Corden and Tom Hanks Act Out Tom’s Filmography   James Corden and Tom Hanks Act Out Tom’s Filmography Air Date: 03/23/15 James Corden and Tom Hanks act out snippets from Tom’s illustrious film career, from Big…Read More

Category: Film, Weekend

Mesa Culpa: My 2014 Mistakes

Ritholtz: Admitting my 2014 mistakes Barry Ritholtz Washington Post, March 22, 2015   .   “Pain + Reflection  = Progress.” — Ray Dalio, founder of Bridgewater Associates 2014 is behind us, and before the first quarter sneaks by, I am obligated to offer my annual admissions of error. One of my biggest peeves about finance is…Read More

Category: Apprenticed Investor, Investing