Sunday, September 19, 2010

The Absurd Result of a Logical Assumption

During a conversation with a client last week, an interesting thought occurred to me. It's an observation that confirms the absurdities of the stock market. See what you think about it:

The stock market has a pretty good track record of presaging the direction of the economy. And the stock market is completely directed by human beings: men and women buy and sell the stocks that make up the market. So one might logically conclude that the people who make the market tick should be able to predict the market's direction.

But they can't. In study after study, the gurus with all the inside dope have been shown to be no better at predicting the markets' direction than a blind monkey with a dartboard. For some reason, this ironic fact strikes me as funny, frustrating, and reassuring all at the same time.

There's an important lesson here. While we naturally want to believe that there are people out there who can see where the markets are headed, there are no such people.

Clients occasionally will make a comment such as, "If any of your contacts sees that the market is headed for trouble, go ahead and get us out." Well, on any given day there are many such predictors of catastrophe. On the same given day, there are also predictors of unprecedented growth. We can't believe any of them, because none of them is correct often enough to be considered reliable.

Moral of the story: Trust the markets, but don't trust the people who run them

Have a great week!

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