Today Says Nothing About the Future

Ben Carlson on why is it so difficult to predict what transpires in the financial markets:

Peter Bernstein in Against the Gods: The Remarkable Story of Risk lays out three reasons regression to the mean can be such a frustrating guide to the investment decision-making process:

  1. Sometimes it happens at such a slow pace that any shock to the system can disrupt the process.
  2. Sometimes the regression happens so swiftly it overshoots to the upside or downside.
  3. Sometimes the mean itself is unstable, meaning yesterday’s normal can be replaced by a new normal if something has changed within the system.

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