The Mysterious Market
In the dictionary, "puzzle" and "mystery" have similar definitions. In the thesaurus, they are synonyms. But this excerpt from a New Yorker article on the Enron debacle gives them a provocative twist which led me to ponder the question: Understanding the stock market well enough to invest successfully—is the challenge a puzzle, or is it a mystery?
The national-security expert Gregory Treverton has famously made a distinction between puzzles and mysteries. Osama bin Laden's whereabouts are a puzzle. We can't find him because we don't have enough information. The key to the puzzle will probably come from someone close to bin Laden, and until we can find that source bin Laden will remain at large.
The problem of what would happen in Iraq after the toppling of Saddam Hussein was, by contrast, a mystery. It wasn't a question that had a simple, factual answer. Mysteries require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much (emphasis added). The C.I.A. had a position on what a post-invasion Iraq would look like, and so did the Pentagon and the State Department and Colin Powell and Dick Cheney and any number of political scientists and journalists and think-tank fellows. For that matter, so did every cabdriver in Baghdad ....
If things go wrong with a puzzle, identifying the culprit is easy: it's the person who withheld information. Mysteries, though, are a lot murkier: sometimes the information we've been given is inadequate, and sometimes we aren't very smart about making sense of what we've been given, and sometimes the question itself cannot be answered. Puzzles come to satisfying conclusions. Mysteries often don't ....
Puzzles are "transmitter-dependent"; they turn on what we are told. Mysteries are "receiver dependent"; they turn on the skills of the listener ....
(From "Open Secrets—Enron, Intelligence, and the Perils of Too Much Information" by Malcolm Gladwell, The New Yorker, January 8, 2007)
The stock market presents a mystery. If it were a puzzle it could be "solved." What worked well last year to give us out-sized market-beating returns would do the same this year and next. But we know investing isn't like that. There's that bothersome "past performance is no guarantee..." disclaimer.
The market's not a Rubik's Cube where the smartest or specially-gifted guys on the block always win or where practice makes perfect. The erratic investment performance of so many experienced "experts" makes it clear that they have yet to decipher the mystery of the market. It's too vast and far too complex to be mastered.
If the market is a mystery rather than a puzzle, then gathering more and more information isn't going to provide an infallible answer on how best to proceed at any given time. In fact, more data inevitably leads to divergent conclusions, which in turn means more chaos in our decision-making.
What, then, should an investor do? Remember, mysteries are "receiver dependent"; they turn on the skills of the listener. So, be a better listener. Use a disciplined, unemotional process to sort through a few relevant data points in an organized and discerning way. What kind of process will help you do this? SMI's Fund Upgrading strategy, for one. For the five years ending March 31st, the average annual return (before transaction fees) was 13.7% (see Volatility Returns to the Stock Market). Of the 1,776 diversified U.S. stock funds in the Morningstar database that have five-year track records, only 90 did better. 1,681 funds, managed by Wall Street's best and brightest, data-obsessed all, did worse.
Imagine that! SMI readers could forego massive data gathering (concerning economic indicators and a vast array of market technicals) and instead simply listen to what the funds' performance momentum numbers were saying and, as a result, enjoy superior returns. The problem is not that we don't know enough; the problem is that we often don't listen carefully and act promptly on what we learn. Why
is that? Don't know—it's a mystery. 
- SMI's Editorials page
- Five Popular Reasons for Selling Mutual Funds, and Why You Can Ignore Them
- Why Now Is a Good Time to Launch Your Stock Market Strategy
- How to Take Market Turbulence in Stride
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