Nostradamus, Not!

I’m on vacation this week, but thought I would write a short note anyway.

For new traders, it’s very tempting to think that someone has figured out the market and can predict it’s every twist and turn (or at least 51% of them). And, best of all, their technique (or whatever it is) is for sale! Throughout the history of organized exchanges, there has always been those who claim that they have some super-secret process, known only to them, through which they can predict the market with uncanny accuracy. Each of these market messiahs develops a cult-like following that follow every detail with almost religious zeal. Most make one good call, usually against the consensus and around some low probability, extreme event (“the market is going to crash 25% in Q3…!!”), and are then coronated as the latest and greatest. Almost always, it’s the last time they get it right, but despite track records that consistently fail to beat index returns (or fall short of them), they continue to populate social media with a loyal following.

In my career, I’ve seen many fringey, out-there methodologies come and go. Cyclomaniacs (everything repeats in regular cycles), pattern seekers (technical analysis), Fibonacci followers, Elliot wave theorists, and even astrologers have all had their day in the sun. A quote from Edward Dewey, the dean of cycle theory, is typical: “I believe that the future is completely knowable, — but not, of course, by human beings.” Huh? Humans hate disorder, and all these methodologies are an attempt to convert unknowable complexity into manageable order. Adherents tend to remember when the technique worked, but conveniently forget when it didn’t.

Many intelligent and successful traders follow one or more of these methodologies, mostly to keep current on what everyone else could be thinking. After all, if enough people follow them, then they could become a self-fulfilling prophesy. In my experience, they aren’t converts, but follow them “just in case,” inconsistently, and in combination with other techniques. In other words, whatever works.

I have two multi-part questions for anyone who claims to have a technique to predict markets and is publicly touting its virtues:

  1. Has the technique or methodology been rigorously, consistently, and statistically back tested by an independent third party?
  2. If it’s so accurate, why are you telling people about it? Isn’t selling your analysis the least value option? Why don’t you start your own hedge fund?

To date, not one has answered both questions satisfactorily, in whole or in part.