Hard lessons to be derived by data driven pinners like me … I have come to realise having the most up to date data is helpful, to a point, but the real game is aligning interpretation of that data with how the market reacts to it … that’s not easy, even after nearly 4 years (?) of pinning.
[[[[ … beyond … “known” unknowns, there also are an indefinite number of “unknown” unknowns. Each of these also has the potential to sabotage an otherwise profitable investment strategy.
The investment philosophy to which this line of thought leads is “epistemic humility.” (I got this phrase from the Wall Street Journal’s Jason Zweig, who used it to describe a core principle of the late Charlie Munger’s approach to investing.) If you had any doubt about the virtues of epistemic humility, consider the following two studies:
The first analyzed the surprisingly modest profits of a cartel of former hedge-fund managers and asset managers who were given illegal access to thousands of corporate press releases before they were released to the public. Despite having “‘perfect foresight’ from stolen earnings announcement press releases,” the study’s author wrote, the cartel’s traders “were only able to enjoy mixed success in predicting next-day stock returns. Their poor performance implies that capital-market participants have difficulty mapping earnings information to stock price reactions.”
The second study analyzed the predictions made by corporate executives about how the stock market would react to their firms’ soon-to-be-released earnings. (The survey was conducted with the appropriate assurances of confidentiality and anonymity.) The authors of the study found that the “executives’ expectations are more accurate than mechanical prediction models… about 50% of the time — no better than chance.” ]]]]]
