I am retired and take educated guesses on all things financial.

May 29, 2008

May 29, 2008: Respecting Uncertainty

The most important feature that distinguishes an investment strategy from a fantasy is the acceptance of uncertainty. Fantasies claim to eliminate uncertainty. Strategies deal with it.

The worth of a strategy can be judged by how well it allows for uncertainty, rather than how it claims to overcome it. The investor must accept uncertainty before an investment strategy can have a chance to perform in a positive way. With that in mind, here are some tips to help wring investment fantasies out of your thoughts:

No one accurately predicts human behavior in other matters, so there is no reason to expect anyone to predict future investment prices.

Coincidence and luck play a large part in any investor's results. These can make a nonsensical technique appear to have been confirmed by history. So, be sceptical of "past performance".

Truth is often stretched in the investment business, just as it is elsewhere. Take all claims from talking heads, a trading system or any method of analysis with a grain of salt.

Any assertion that a particular method of investment analysis is scientific should be ignored. Controlled tests are not possible for economic theories.

Don't believe an investment scenario because it seems to be widely respected.

If there were a single trading system or school of investment analysis that could beat the market, the investment community would not be continually devising new systems to beat the market.

If anyone had found the magic key to investment riches, they would not be telling anyone about the profits the system "would" have produced (hypothetically). They would be telling you of the profits it "did" produce.

Testimonials for investment systems or gurus are of no more value than they are for astrologers and used-car dealers.

Some people are especially talented as investors or speculators - just as some people are talented as musicians or athletes. Don't expect to imitate them successfully unless you have similar talents.

Since we should not expect an athlete to explain how they run so fast, we should not expect a successful investor or speculator to show us how to acquire the Midas touch.

Being realistic in a turbulent market may not make you Warren Buffet - but it will save you the frustration of losses and angst.

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