Sunday, March 22, 2009

Many financial analysts have got it wrong

Today, most studies in equity forecasting rely heavily on historical prices along with its derived figures exclusively, this generally does not generate significant (if any) edges. The answers sit elsewhere.

Fundamental flaw

Many assume that some esoteric, extraordinary relationship exists between the predicted security and its immediate past, that price impact transactions occur due to historical fluctuations alone. Not so. The big players with enough cash to influence markets make decisions on other elements, economic, liquidity measurements are a couple right off the bat.

George Soros mentions in Alchemy of Finance how some of his traders apply economic figures exclusively for trade recommendations. When guys like him and Warren Buffet started out, they made most of their initial fortunes with arbitrage schemes, which require fairly deep understanding of financial economics (and some math). See where this is going?


Relationships exist between financial markets, e.g. moves in treasury rates, bond returns, index volatility are some numbers with fairly significant correlation to equity markets. One of the really awesome books I’ve liked on this subject is Arbitrage Guide To The Financial Markets. Read it, understand it, relevant knowledge is power.

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