A write-up discussing prediction and its use in investing.
"The ability to somewhat accurately predict (or rather project/estimate) future events, be it macro or microeconomic, is a powerful tool for any active investor or businessperson. However, this “predictive capacity” should not be conflated with blatant speculation or an attempt at such. Indeed, several things cannot be predicted to any level of accuracy, and therefore it should not be attempted if one is keen on retaining one's capital (on the presumption of making risky decisions on these predictions). A so-called prediction is more of a realization of what has already happened and what that must mean. The “what it must mean” is often inefficiently recognized by markets, allowing you to make significant profits. Or it may simply grant a de-risking opportunity.
Common sense
All that is required to predict future movements are three things. Common sense (1), a deep understanding of the topic at hand (2), and pattern recognition skills (3). When these three are coupled, it can allow one to spot opportunities that the markets have not yet realized. Here, it is apparent the expression, “the markets are efficient” or “the markets are smarter than you” is not necessarily the case. That said, when comparing this, to a long-term strategy taken by, say, Warren Buffet, which is significantly less risky (long term) on a statistical basis, recognition must be made that most will never be able to achieve the level of analytical prowess that is required to consistently beat the markets, for several reasons, including (generally) a massive time commitment. Being wrong is probable, as a regression to speculation often materializes.
Why is this? Because people are impatient, and fail to wait for a clear opportunity, instead making themselves blind to the gaps in their premature thesis or argument. If this tragic mistake is made, the theory is but mere speculation.
Another mistake virtual speculators make is choosing too short of a timespan for their prediction to be fulfilled. Once this is revealed to the individual by the passing of time, it is made clear that though one may have believed they had sufficient knowledge to understand the series of events that would unfold, a vital gap in knowledge existed. This may be rooted in a fault in logical reasoning or not enough data points. Then, serious considerations should be made as to whether the thesis had any shred of validity in the first place. There are three choices the investor may make. Re-consider the thesis (1), exit the position (1) (which may not necessarily be a loss, in many cases the price is higher than the entrance position, inducing an unfortunate confirmation bias), or disregard the clear fault (3). Of the three, the latter two are the only acceptable options (depending on the situation, 1 or 2 may be more appropriate than the other)."
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Submitted August 18, 2022 at 01:14AM by Academic_Top_9515 https://ift.tt/0emcFGn
