No need to be psychic about investing
The SEC, naturally embarrassed about letting Bernie Madoff get away with it for a mere 14 years, has taken to putting press releases on its homepage announcing their upcoming securities fraud actions. This one, though, is particularly good.
SEC Charges Nationally Known Psychic in Multi-Million Dollar Securities Fraud
Now, securities fraud violations are like potato chips; you can’t commit just one. The complaint alleges that the psychic Mr. Morton did not invest all of his funds the way he said he would in his solicitations, including diverting money to his personal religious organization. However, the press release also alleges that “Morton made numerous materially false representations relating to his psychic abilities,” and the director of the SEC’s New York office added “Morton’s self-proclaimed psychic powers were nothing more than a scam to attract investors and steal their money.”
Of course, if this goes to trial the SEC will have to prove that the claims Mr. Morton made are materially false, meaning that they will have to prove in court that he is not a psychic, which I would really like to see.
But not all psychics in the market bill themselves as such. The Elliot Wave people trying to predict the time of the next grand supercycle have no better claims than Mr. Morton in predictive ability. The quantitative analysts who provided ratings agencies cover to give subprime CDO tranches investment grade ratings are no better than Mr. Morton; they’re just better at math (and allegedly better at not embezzling). They essentially make the same psychic claims, but because they call it econometrics instead of psychic abilities, they get away with it.
The lesson we should take from this is that deterministic prediction is more or less useless; by deterministic prediction, I mean saying “This is what will happen,” as opposed to “this is probably what will happen,” or ideally “this is the set of what could happen, do what you will.”
It puts me in mind of these endless histrionic circular debates about the shape of the recovery. “Will it be a V shaped recovery?” “Will it be a W shaped recovery?” “Will it be an L shaped recovery?” “Will we invent time travel and make it an O shaped recovery?” The correct answer is that it will be a ? shaped recovery until further notice.
So stick with an investment strategy that has stood the test of time. Stick with value investing.
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