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Look at the most popular game these days, trading on analyst's "expectations". When the earnings come out the stock goes up or down depending on whether results met expectations, not on whether the company is doing better or worse. Since most analysts work for or with trading firms the opportunities for mischief are limitless.

This is a fundamental insight. what makes markets move these days (as it should in theory, btw) is "new information", i.e. information that shows that reality is different from expectations - or more precisely from the consensus, or average, of expectations.

Thus the sometimes aparently incomprehensible reactions of the market to some horrible news (it goes up, because the market was expecting even worse and had already discounted such bad news) or good news (it goes down because it now expects a different reaction from the Fed to that data).


Even mutual funds play the same game. They sell themselves on the basis of some vague idea that they can perform better than average because of superior stock picking techniques. Of course half do worse than average and half do better. Even the ones who do worse still collect their management fees, however.

Actually, more than half do less well than the market (which may be compatible with what you say, as the average of managers and what the market does may be different). It would seem that, apart from a few people that seem to be genuinely better (or are extremely lucky), the vast bulk of that industry are useless parasites.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Mar 27th, 2007 at 04:59:21 AM EST
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We had a story about how well the markets' implied probabilities predict future price movements, and the answer was not too well.

Colman: A very murky crystal ball. (May 19th, 2006)

The fact is that the "market expectation" has implied probabilities of future movements that bear little relationship with the likelihoods of actual events.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Tue Mar 27th, 2007 at 05:13:19 AM EST
[ Parent ]

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