Stock Picking: Before predicting future performance, try predicting past performance

One of the bases of the quncertain platform is that probabilities are not measures of physical quantities. Rather, they are measures of the limits of your knowledge.

From this point of view, making educated guesses about the future is very similar to making educated guesses about the past. Of course there are a couple of differences.

For one, it is possible to have complete knowledge about certain aspects of the past. This is not true of the future.

Also, even if we have not memorized facts about the past completely, we still have ‘contact knowledge’ about the past. We may have heard about a heat wave in the eastern part of the US, or about a crash in the price of commodities, or a sports teams’ winning streak. These incomplete pieces of knowledge help inform us about specific events in the past.

But, unless you have encyclopedic access to past events, predicting events in the future is the same as predicting events in the past. With an extra dose of uncertainty.

Quncertain uses this equivalence to give immediate feedback on past predictions, allowing users to calibrate the plausibility they lend to their predictions.

 

 

Here are some common investing assumptions. How much plausibility do you lend to each one?

  1. Though the stock market will fluctuate, it tends to go higher. An index fund which tracks the US stock market will be worth more in a year. 5 years? 10 years? 20 years?
  2. Real Estate is a good investment. A house purchased now will be worth more in a year. 5 years? 10 years? 20 years? Portland market? Detroit market?
  3. Apple is the best company in the world, and investing in AAPL will give above average returns.

I hope to supplement this post with an interactive question set for each of the assumptions above. There are times in the past where each of the above statements turned out to be true, and times when each of them turned out to be false. The financial questions on quncertain.com will currently let you do something close — predict the performance of different sectors of the US economy, both in the past and in the future.

You will find that (unless you cheat), you will ‘predict’ the past imperfectly. And predicting the future is even more uncertain. This is not a revelation, but most people feel they have some insight into the market at some point of time. Maybe using this app will help you verify that feeling.

People have taken different strategies in reaction to efficient markets that are almost impossible to predict:

  1. Invest passively in index funds
  2. Opt out and keep cash
  3. Be a contrarian and fade the market when it makes large moves in either direction
  4. Be a momentum trader and pile in and out of stocks in proportion to market movements
  5. Use computers to model and predict the market
  6. Trade other people’s money, and take your guaranteed profit from salary, commissions, and other incentives (in other words, take your own skin out of the game)

Each of these strategies has assumptions, and we should realize that these assumptions may not be true. I hope using this site will help you understand that there is uncertainty in all forward-looking statements. It is wise to prepare for your assumptions to be incorrect. This is called risk management, an area I will write more about. Probabilities are just one of the inputs needed in handling risk optimally.

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