If we cannot predict future and if past results are not a reliable predictor of future...

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KneePartsPro
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by KneePartsPro »

It is somewhat of a paradox, isn't it?

I wish the statement was more like: Past results and the calculations that were born from them provide the only guidelines we have. Use them to invest today even though they don't guarantee tomorrow. Nothing does.
I can tell you almost anything about artificial knees used in knee replacement, and almost nothing about investing.
Normchad
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Normchad »

Times like these worry me; I fear that their are a lot of market participants who don’t really have any understanding of what they’re doing. We’re in the midst of a decades long bull market, so everybody has been making money. And the folks who don’t understand what they’re doing, are completely unaware of what they don’t understand.

So when things go sideways, they are very likely to make poorly informed decisions. Or to look at the world with from an inappropriate viewpoint, and really hurt themselves. Everybody should go back and read up on what they’re actually investing in, and understand why it makes sense or doesn’t make sense. We’re not in a game of chance here. All possible future outcomes aren’t equally likely, etc.

To Homer’s point, back in 1900, half of all Americans were working in Agriculture. Today, it’s only 2%. That’s astonishing, 2% of the population is now productive enough to feed all,of us. And it freed up 48% of the population to go work on other economically productive pursuits. All of that makes the entire pie bigger. The pie is always growing. Just buy your fair share of the pie......
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spanky123
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by spanky123 »

My interpretation of the statement is:
Recent winners may continue to be winners (outperform the market)
Recent winners may become losers (underperform)
Recent winners may stay at par
Recent losers may remains losers
Recent losers may become winners
Recent losers may stay at par
oldfort
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by oldfort »

antisa wrote: Thu Jan 07, 2021 12:40 pm
retiredjg wrote: Thu Jan 07, 2021 12:24 pm We don't know now which will "do better" in the future. That' why it's a good idea to just hold pretty much all of it.

Control the amount of risk you take by your stock to bond ratio. Within stocks and bonds, diversify.
You see, you mention stocks and bonds like that's a given. Why didn't you say - control the amount of risk you take by your gold to REIT ratio?

You see what I mean? If US stocks historical CAGR was 1%, wouold you still be recommending them?
Right now, the 30-year real return on Treasuries is -0.21%. If stocks return 1% real, that's better than what I'm expecting from government bonds.
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skipper
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by skipper »

I read OP's original question more like, "What came first, the chicken or the egg?" Or more likely, "Why can't we reinvent the wheel?". Ever wonder what was going on in the minds of those who invented the wheel? Folks walking around barefoot a million years were probably going, "Hey, let's not reinvent the foot here."

I see current investment theory and asset allocation as the wheel; it's here, it works and works well when it's not bent or flat... and everybody's is round. Some wheels are better, taller, wider, faster, or more rugged than others and there are a lot of folks out there trying to reinvent the wheel. One day a round wheel may not work anymore; the rules of the game may change such that the wheel will be a different shape (or no shape at all). It's only on the cusp of a monumental shift that you can understand why a universal law works the way it does. I'll give an example: Remember what cell phones were like before the iPhone? Bars, sliders, flips, COLORS (haha), keys, antennas, etc. Enter the iPhone and now all cell phones are the same size, color and shape. We all saw the change, so we know why this is; someone born yesterday won't know why.

Someone upthread mentioned Depression era investors; remember the pre-Depression phrase, "You have to speculate to accumulate?" I'm a novice, but were I asked to guess what the basis of of all investment strategies is, I would answer exactly that... guessing, i.e. speculation. See below (emphasis mine).

spec·u·la·tion [/ˌspekyəˈlāSH(ə)n/]
noun
1. the forming of a theory or conjecture without firm evidence.
2. investment in stocks, property, or other ventures in the hope of gain but with the risk of loss.

Until the game changes and a new universal law goes into effect, the best guess today is the same as all of the best guesses that have occurred in the past.
"Reasons not to hold cash are fed money printer go brrrrrr..." -UnitaryExecutive
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AerialWombat
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by AerialWombat »

Here’s the way I look at, in an ELI5 way:

1. Money is an artificial human construct.
2. As such, we can create more of it. And we do. Daily.
3. Some businesses are really good at absorbing portions of that ever increasing money supply like a sponge.
4. Thus, those stocks keep going up.

There is no ceiling, because the money supply is limitless.

So, own a piece of all those companies, ride the infinite growing sponge.
For entertainment purposes only.
LittleMaggieMae
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by LittleMaggieMae »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
Maybe because we can deduce what the future might hold based on our knowledge of what has occurred and what current conditions/what's currently happening?

For example:

I'm pretty sure you will go to bed and sleep at some point in the next 24 hours. I can't tell you what time it will be though - possibly it will be dark out though. I'm pretty sure you will brush your teeth (but I can't say what kind of brush or flavor of toothpaste you will use.) before getting into bed (I'm predicting you'll sleep in a bed and not say a recliner ).

I can even predict that you will eat in the next 24 hours. Possibly 3 times maybe more. :) I can't say what you'll eat but, wait, I'm getting an image - maybe you'll have blini??
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antisa
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by antisa »

HomerJ wrote: Thu Jan 07, 2021 2:28 pm
antisa wrote: Thu Jan 07, 2021 12:37 pm
Marseille07 wrote: Thu Jan 07, 2021 12:19 pm While we can't predict future, there's an underlying assumption that both equities and bonds go up over time. If this doesn't hold then Boglehead portfolios don't work.
What is this assumption based on?
A couple of billion people going to work each day. It's not a closed system. Human work and capital is input into the system every day, making the system more valuable over time.

That's a good argument for buying stocks,thank you.
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antisa
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by antisa »

Thank you all for your replies. Please don't think I am inpolite if I don't reply to some posts, I am still a novice and struggling to understand a lot of what is written on this forum.
Northern Flicker
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Northern Flicker »

antisa wrote: Fri Jan 08, 2021 6:56 am
Northern Flicker wrote: Fri Jan 08, 2021 4:30 am
antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
Investing is an activity of probabilities. We don't know what will happen, but we can invest in portfolios that provide a good chance of meeting our goals while not taking more risk than is appropriate.

What is this good chance based on other than past returns?
Past returns are one input to understanding the probabilities of future returns. That does not violate the principle that past returns are not a reliable predictor of future returns. And fundamental analysis is another very significant input into estimating future expected returns (a mathematical concept that should not be interpreted as "what we should expect").
Risk is not a guarantor of return.
Stocks4LongRun
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Stocks4LongRun »

Marseille07 wrote: Thu Jan 07, 2021 12:19 pm While we can't predict future, there's an underlying assumption that both equities and bonds go up over time. If this doesn't hold then Boglehead portfolios don't work.
Although one does have to take a stern look at the current state of bonds with 10 year yields 1% or less and question whether the phenomenal 60/40 performance of the last 30 years will come close to the same performance over the next 30.
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JoeRetire
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by JoeRetire »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
Your assumptions seem to be incorrect.

There are plenty of things we can predict about the future.
And what makes you think you must have a reliable predictor to make it useful?
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willthrill81
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by willthrill81 »

willthrill81 wrote: Wed Aug 05, 2020 3:37 pm Any time the topic of backtesting comes up, it seems that 'camps' emerge where one side argues that inductive, empirical data driven decision making (i.e. backtesting) is superior and another side argues that deductive, theory driven decision making is superior.

As a social scientist who probably studied this topic more than most, I can say with confidence that in both the 'hard' and 'soft' sciences, neither approach is held by anything close to a consensus to be inherently superior to the other. Both have their roles and can be useful for helping to accurately predict the future, which is very often taken to be the ultimate goal of understanding phenomena.

That said, while most scientists hold both approaches to be useful, each seems to personally lean more on one or the other as a matter of course. In my own case, I tend to favor the inductive approach, though I certainly use the deductive approach as well.

At the risk of it seeming like I hold the inductive approach to be inherently superior, which I do not, the quote below from Oliver Heaviside, who discovered the operator method for solving differential equations before a mathematical proof for why the method work was put forth, comes to mind.

“Shall I refuse my dinner because I do not fully understand the process of digestion ?”
-Oliver Heaviside

In that vein, I submit that it should not be taken as an absolute requisite that a compelling, theoretically sound explanation for why something occurs be put forward before an investor can assume that, to some extent, the phenomenon will continue to occur in the future. Nonetheless, the most compelling evidence for a phenomenon exists when there is both a sound theory for why a phenomenon exists and that theory can be used to robustly predict the future with data not used in the formation of the theory. Sadly, this standard is, at least as of yet, very often unobtainable in many regards in the area of finance or else it takes so long to adequately implement it as to make the process nearly worthless.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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HomerJ
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by HomerJ »

JoeRetire wrote: Sat Jan 09, 2021 3:53 pm And what makes you think you must have a reliable predictor to make it useful?
No idea what you think you are saying here. Can you explain more?
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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JoeRetire
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by JoeRetire »

HomerJ wrote: Sat Jan 09, 2021 9:21 pm
JoeRetire wrote: Sat Jan 09, 2021 3:53 pm And what makes you think you must have a reliable predictor to make it useful?
No idea what you think you are saying here. Can you explain more?
I think I am saying that while the past doesn't always predict the future reliably, it does often point in a useful direction.
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dumbmoney
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by dumbmoney »

antisa wrote: Thu Jan 07, 2021 12:17 pm ...how are we to go about constructing our portfolio?

If we cannot predict future and if past results are not a reliable predictor of future, why is any assset better than the other one?
I think about this often! You have to make *some* guesses about the future, otherwise investing is madness. But with highly volatile investments like stocks, you're torn between making foolishly precise guesses, and vague and unsatisfying ones (like: in the proverbial long run, stocks will do well - doubtless true, but of no help).
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by Northern Flicker »

If I toss a coin 1000 times and it comes up heads 502 times, I would interpret that to mean that it is a fair coin with a 50% chance of either outcome on a flip. I've used historical outcomes to validate my prior hypothesis that it is a fair coin with either outcome equally likely.

On the other hand, I cannot use the past performance of the coin to predict what the outcome of the next flip will be. Past performance of the coin has no value to predict the next outcome. But past performance greatly informed my understanding of the probabilities of future outcomes.
Risk is not a guarantor of return.
afan
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by afan »

Getting far too hung up on how the statement is worded while not looking at what it means. Largely as a result of taking it out of context.

In the context of actively managed funds, which until a few decades ago, were all there were:

Deviations from market in risk adjusted returns in an active fund are random. Knowing that a given fund produced higher risk adjusted returns than the market over one period does not predict whether it will continue to do so.

Many things are quite predictable and reliable. The low correlation of stocks to bonds is a reliable prediction. The higher volatility of long bonds compared to short term bonds is predictable. The higher volatility of small cap growth stocks to the market is predictable. The lower than 1.0 correlation of international to US stocks is predictable. The lower performance of high cost funds than low cost funds is predictable. One could go on.

What the statement MEANS is that you cannot use past risk adjusted performance of an active manager, relative to the market, to predict their future performance relative to the market.

By extension, reviewing past performance of such funds does not tell you what they will do in the future.

Reviewing the past performance of, say, a high dividend fund should give you an idea of whether it really pursues a high dividend strategy. But it will not tell you whether that fund will do better or worse than the market as a whole.
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willthrill81
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Re: If we cannot predict future and if past results are not a reliable predictor of future...

Post by willthrill81 »

afan wrote: Wed Jan 13, 2021 11:13 am Getting far too hung up on how the statement is worded while not looking at what it means. Largely as a result of taking it out of context.

In the context of actively managed funds, which until a few decades ago, were all there were:

Deviations from market in risk adjusted returns in an active fund are random. Knowing that a given fund produced higher risk adjusted returns than the market over one period does not predict whether it will continue to do so.

Many things are quite predictable and reliable. The low correlation of stocks to bonds is a reliable prediction. The higher volatility of long bonds compared to short term bonds is predictable. The higher volatility of small cap growth stocks to the market is predictable. The lower than 1.0 correlation of international to US stocks is predictable. The lower performance of high cost funds than low cost funds is predictable. One could go on.

What the statement MEANS is that you cannot use past risk adjusted performance of an active manager, relative to the market, to predict their future performance relative to the market.

By extension, reviewing past performance of such funds does not tell you what they will do in the future.

Reviewing the past performance of, say, a high dividend fund should give you an idea of whether it really pursues a high dividend strategy. But it will not tell you whether that fund will do better or worse than the market as a whole.
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