I heard an amazing statistic on a TV channel the other day. The anchor stated that “As per certain market statisticians, for the past few decades, in all the years ending with the number Zero, the S&P 500 had moved up by an average of 2.1% in the month of July”.
Wow! I can imagine the number of nights these statisticians must have been up, in order to mine vast quantities of market price data and distill the same into such wonderful nuggets of information. However, I am not sure who benefits from such analysis. Merely because some index has acted in a certain manner in the past, there is no assurance that the same will be repeated in the future. To top that, we are discussing time intervals which are ten years apart. The dynamics of each decade are different and obviously the underlying market movements will be a function of those dynamics. Also, remember that this figure is only an average and there can be wild deviations from this average figure at times.
Often these data points are used by market participants (especially brokers) as a basis for action, recommendations and prediction of what the future holds. For instance, in the same programme, the anchor mentioned that there was a flurry of activity in the S&P Futures during the first week of July on the hope that the aforesaid historical performance would be repeated. One of the brokers then came on and looked beyond, saying that in October 2010 we would be breaking the low made in June 2010, and then we would be making a new high in December 2010. If only things were so easy……
There is an old adage which broadly states that things are never really different and that the more things change the more they remain the same. However, we should treat this adage in the right context.
Rather than wasting time trying to fit past patterns into the current scenario, it may be more prudent to actually spend time on analysing (not predicting) the market from a valuation and earnings point of view.There are many wise investors who buy stocks when they look cheap based on trailing earnings. They do not devote precious man-hours in trying to predict events. They realise their limitations and work within them.
Also, there have been innumerable instances of analysts being way off the mark in their predictions partly because many of such predictions exhibit a “Recency Bias” whereby the current prevailing scenario is extrapolated into eternity. Yet, individual investors depend on such crystal-ball gazers in the belief that these “Professionals” know more than them about the future.
Warren Buffett has been quoted as saying that if past history was all there was to the game, the richest people would be librarians. Maybe the so-called analysts who use past patterns to predict the future might be actually better off as librarians.