Wild fluctuations in asset prices show we know nothing

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Investing your capital is a difficult puzzle! But a puzzle that can’t be avoided, because your capital is always invested in one investment vehicle or another, even if it’s just gold coins buried under the roses. (No, I didn’t do that. Please don’t dig up my roses.)

The greatest puzzle for me is the wild fluctuation of asset prices. This seems to show that far from being a market with perfect knowledge, it’s instead a market with hardly any knowledge. If the main players had much knowledge — about current facts, the underlying processes, or the future that will result from them — then the prices would be very stable until some unforeseen event, such as an exploding volcano, added significant new knowledge to the game.

And it does seem to be little more than a game, like high-stakes poker in a card club. Even if there were any big guys with real knowledge, they’d be using it to get superrich, not sharing it with me in the pages of the Wall Street Journal or a newsletter from a bank.

Or maybe it’s a crooked game. According to the cliché, “The best way to predict your future is to create it!”, so it’s possible that the superrich are able to manipulate the market enough that they can cause and profit from predictable fluctuations. If so, they aren’t going to tell me about that either.

But you’ve got to put your retirement money somewhere.

It’s paralyzing.

Update: Eating an early dinner in the break room, my compulsively reading eyes fell on the June 8, 2010, Wall Street Journal. I read an interesting column by Sam Mamudi titled “Bond-Fund Managers See Signs of a Bubble: Heavy Inflows and Naivete About Losses”. I then turned over page C11 to see a story on page C12 by Richard Barley titled “For Bonds: Give Credit Where Credit is Due” that begins

During 2009’s rush to risk, stocks and corporate bonds soared in tandem. Renewed fear over slow growth and sovereign debt could break the link — with bonds the winners.

Maybe they are talking about different time frames, but is there really any reason to believe any of this, or is it just astrology?

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2 responses »

    • No, I haven’t, but they are exactly on topic. Thanks! “The New Finance contains a comprehensive and organized collection of evidence and arguments that develop a persuasive case for an inefficient, complex and, at times, nearly chaotic stock market.”

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