Interesting blog posting you linked by Jared Kizer on The Small Sample Problem.
I think this is a huge, huge problem
for investors and investing theory. I have gone through these stages in my personal progress toward nihilism.
Stage 1: Wow, "everybody's" talking about it. The Money
magazine in the dentist's office. The glossy thing I get quarterly from the brokerage. The guy at work who subscribes to The Wall Street Journal
. Maybe I'd
better get some of those (130/30 funds, oil ETFs, international bonds).
Stage 2: I am a disciplined, long-term investor. I shall ignore fads. I shall pay close
attention to "track records" and "consistency," as shown in the 10-year charts and numbers in the fund factsheets. Nothing less than ten year for me!
Stage 3: Ten years is nothing
. I only believe it if you can show it to me in CRSP-based data going back to 1926. (Thank heaven CRSP made those adjustments to correct problems in their data...)
Stage 4: It's hopeless. By the time there's enough data to believe the parameters can be estimated. the world has changed. Is it really possible to the believe that the stock market of the 1920s, when a comptometer was the latest computing technology and there was no SEC, is really the same thing
as it is today? And besides, what if Mandelbrot is right?
You should probably have both some stocks and some bonds--nobody actually knows anything more than that.
Many are curious about the future prospects for bonds, but what do you make of something like this, I mean what do you make
So, what's the next one going to look like? We have a grand total of 2-1/2 data points in 140 years. So, I pulled 2-1/2 chips out of the bag, and one of them was "5" and one was "15" and the broken one was "5 point something." 15, 5, 5.5. Put THAT in your T-test and calculate the 5% confidence limits on the mean!
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.