Ritholtz on Why We’re Bad at Forecasting

Forecasts are unproductive, writes Barry Ritholtz in a recent Bloomberg article, and we should not make investment decisions based on them. Ritholtz offers a list of reminders for readers of “what we know about forecasts and predictions, and why they are so rarely right.” Here are some highlights: We’re generally bad at it. “Examples are everywhere,” Ritholtz argues, citing how data provides clear evidence to support our failings at economic forecasts, expectations of future technologies, and earnings estimates, “not to mention election predictions.” Ritholtz adds that “whenever you see someone forecasting their own behavior, what you are getting is a […]

Can Behavioral Economics Be a Channel to Profits?

Psychological biases lead to market overreaction and underreaction, and it can be difficult to discern which is happening at any given point, according to a recent article in Bloomberg. “For an investor, the idea that other people are making poor decisions is a tantalizing one,” the article states, which raises the question of if and how the predictable irrational behavior of humans can translate into stock market patterns that can be exploited by traders. ” The article asserts that when people can’t understand what’s happening in the markets they “turn to psychological phenomena to try and explain it.” It cites […]

Lessons From Over a Decade of Managing Money Using Quant Strategies

By Jack Forehand — When we started managing money, I used to focus on what I knew. Today, after over 12 years doing it, I have learned it is best to focus on what I don’t know because no matter how much you learn in this business, what you don’t know will always far exceed what you do. Looking back on everything I’ve learned, I’m pleased to say that the principles I initially believed have proven to be mostly correct. These include; following factor-based strategies with strong historical track records, focusing on the long-term and eliminating emotion from the investing […]

Investor Behavior Shows Delayed Reaction to News

A new study by Columbia Business School economists shows that the influence of news on financial markets is “often greater a year after the report than a month,” according to a recent article in Barron’s. The study analyzed how stock markets in 51 countries reacted to “millions of news items written by Reuters over a 19-year period ended in 2015.” The researchers conclude that the delayed reaction to news occurs because “of the time it can take for investors to fully appreciate the ramifications of what they read about.” Charles Calmoiris, one of the authors, concludes: “There is an undercurrent […]

Investor Returns Hurt by Attempts to Time the Market

The average investor has lagged behind the average fund for the past 10 years, writes Russel Kinnel, Director of Mutual Fund Research at Morningstar. The reason, he says, is that “in aggregate, investors’ timing is not very good.” Kinnel cites data showing that, for the ten years ending 2016, the average investor saw mutual fund returns of 3.96% even though the average return for those funds was actually 4.33%. Kinnel points out that there are many different factors at play–for example, he says, two funds “doing the same thing might have different investor returns just because they are in different […]