Why investment markets are not predictable

I tend to read a lot to help me keep up to date about the world of economics, finance and property investment.

I always enjoy the commentaries from Morgan Housel of Motley Fool.

He recently quoted a 1981 speech by Dean Williams of Batterymarch Financial Management, saying it may have been the smartest investment commentary he’s ever read.

You can read the whole speech here, but I think it’s worth reading this section on market predictability…

The first is an analogy between physics and investing.

With apologies to anyone who knows anything about physics — or about investing, for that matter — let me put it this way:

The foundation of Newtonian physics was that physical events are governed by physical laws.

Laws that we could understand rationally.

And if we learned enough about those laws, we could extend our knowledge and influence over our environment.

That was also the foundation for most of the security analysis, technical analysis, economic theory and forecasting methods you and I learned about when we first began in this business. 

There were rational and predictable economic forces.

And if we just tried hard enough … if we learned every detail about a company … if we discovered just the right variables for our forecasting models … earnings and prices and interest rates would all behave in rational and predictable ways. 

If we just tried hard enough.

In the last fifty years a new physics came along.

Quantum, or sub-atomic physics.

The clues it left along its trail frustrated the best scientific minds in the world.

Evidence began to mount that our knowledge of what governed events on the subatomic level wasn’t nearly what we thought it would be. 

Those events didn’t seem subject to rational behavior or predictions.

Soon it wasn’t clear whether it was even possible to observe and measure subatomic events, or whether the observing measurements were, themselves, changing or even causing those events.

What I have to tell you tonight is that [investing] is a lot more like quantum physics that it is like Newtonian physics.

There’s just too much evidence that our knowledge of what governs financial and economic events isn’t nearly what we thought it would be.

But we always knew investment markets weren’t predictable – didn’t we?

Source: Motley Fool