Market analysis has a poor track record owing to biases and complexity. Fundamentals have lost most of their predictive power due to interventions in the markets in the form of quantitative easing and deficit spending.
Market analysis biases
Due to its inherent complexity, the market defies linear analysis. Biases, like confirmation and wishful thinking, plague market analysis. Irrational escalation, or escalation of commitment bias, is a human behavior pattern in which an individual or group facing increasingly negative outcomes nevertheless continues the behavior instead of altering course. They maintain behaviors that are irrational but align with previous decisions and actions. (Wikipedia)
One of the reasons market analysis has survived in an increasingly complex economic environment is the availability heuristic bias: simple explanations to complex problems are popular within a network of people because other people have accepted them. It is increasingly becoming evident that this type of analysis does not only lead to missed opportunities, as is the case with the gold move this year, but that it is also probably false when applied to complex non-linear stochastic systems. There are exceptions to all rules, and some market analysts may have developed unique processes and methods to allow them to be successful, but on the aggregate, especially after quantitative easing, the effectiveness of market analysis has diminished.
Rationalizing analysis failures often involves “denial of reality.” The goal in the markets should not be to make correct predictions followed by “victory laps,” but rather to make the right allocations to absorb the volatility in capital markets. Only a systematic process can effectively accomplish this. The human mind is susceptible to numerous biases that hinder the long-term success of market forecasts. Therefore, market analysis makes more sense if there is a process to translate it into a systematic framework that offers well-defined signals for the various assets used to diversify a portfolio. Only a few market analysts have reached this level of sophistication.
Avoiding the market analysis trap
In recent years, many investors have come to realize that most market analysts are only guessing. The market gurus, with some also referred to as furus, use convoluted terminology in an attempt to convince their audience that they possess special skills that allow them to make predictions about market direction. They usually point to their old credentials and employment in firms that mostly no longer exist. They employ techniques to create a cult following on social media while blocking anyone who is challenging them. They use analysis from various sources, often legitimate, in an effort to appear credible. However, it is easy to see that most of them lack basic quantitative skills.
Avoiding the market analysis trap is the first step to successful trading and investing. Even simple systematic strategies have generated respectable risk-adjusted returns over the years and do not require trying to predict the market direction with market analysis. Strategies provide well-defined entry and exit signals, which is something that a market analyst rarely does. Usually, market gurus produce many different articles with various market forecasts, some even contradictory, and after major market moves, they point to the ones that are in agreement. Systematic strategies render this impossible, as they already generate signals for both entry and exit.
Biases also impact quantitative strategies, but they do so during development rather than implementation. What this means is that strategies with strong economic value and minimal bias during development have a better probability of succeeding. Even the most basic strategies display some non-linear behavior, which, given the right market circumstances, can become quasi-adaptive.
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