I’ve posted Entry #406 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It Doesn’t Matter All That Much How Long It Takes for Return Predictions to Work.
Juicy Excerpt: I think we focus too much on when the prediction pays off rather than on why it pays off. Shiller says that stock price changes are caused by shifts in investor emotion. If that’s so, it’s easy to understand why it would be hard to get the timing of a prediction correct. Emotion is an irrational phenomenon. So who can say when it will shift? But, if price changes are caused by shifts in emotion, we can know for certain that there will at some time be a price movement in the opposite direction. It is the entire purpose of a market to get prices right. So, if they go wrong in one direction for a time, they have to reverse. The direction of the price movement is certain, only the timing of it is unpredictable.
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