High on my list of foolishness is the notion that quant can actually predict stock prices. Now, that is distinct from having access to money flows data, which allows the holder to front run the lemmings into or out of particular companies or sectors. If you're a large enough holder, you can *be* the leader of the lemmings. Just note the Hunt brothers. They nearly got away with it. My guess is that a similar attempt under the Kim Jong-Don administration will succeed.
Well, in any case, comes a post by another skeptic.
There is a significant body of literature trying to forecast prices and to prove (or not) that financial markets are efficient in pricing publicly available information, including historical prices. This is the so called efficient market hypothesis. I have studied it, tried to trade for myself for a while when I was a Msc student, advised several graduate students on it, and the results are mostly the same: it is very difficult to find a trade signal that works well and is sustainable in real life.
In other words, events move prices, and not the other way around. And, of course, there's that fine print in finance/broker adverts, which goes something like, "pass results are no guarantee of future performance". If data drove prices, they wouldn't have to scuttle behind that mulberry bush. Events aren't predicted by data. Mostly. And, even more mostly, never soon enough for the retail plunger to see them.
Now, testing share predictors on indexes or subsets of same is nearly cheating: over time, large bundles of stocks (or bonds, for that matter) reflect the market rate of interest. Which fact is bedevilling the hedge funds these days.
Since January , investors pulled some $7 billion in assets from so-called multi-manager funds, data from research firm eVestment show. This marks a sharp reversal for a strategy whose promises of diversified strategies and strong returns drew in $56 billion in new cash in 2015.
And, of course, Buffett has something to say
Buffett told investors last Saturday that low-cost index funds are a better option for most than paying higher fees to managers who often underperform, specifically hedge funds.
Now, marry "you're not going to beat the market rate of return" with "you're at the flat part of the asymptote of knowledge", and what you end up with is a zero-sum game twixt consumption and saving (without tech progress, there's no surplus generated by investment over redirected consumption, so that return comes out as diminished consumption). Couple that to an historic low proportion of GDP going to earned income and you see a dark future. The recent rebound? Not going to be sustained.
So, the post's conclusion?
The main results of this simple study are clear: prophet is bad at point forecasts for returns but does quite better in directional predictions.
Which, one might argue, amounts to front running, a bit, money flows. See? I told you so.