It all boils down to what will work going forward. That’s what we are all trying to decipher. And we should know by now that the past does not necessarily reflect what will happen going forward.
My opinion is that market psychology drives prices in the near term (minutes to months) and that psychology is based on assumptions made every day by others about what will work and why. If we use the themes of value, growth, quality, and momentum as broad categorizations of stocks, then performance (market psychology) of each theme will ebb and flow based on the factors most relevant to it. The factors themselves are influenced by interrelationships among market sectors or industries and, most importantly, external influences like interest rates, exchange rates, economic policies, technological changes, commodities, wars, weather, and so forth. Those external factors affect profits which affect interrelated industries and drive the market psychology.
So if we want to know what has a good chance of working going forward, we must at least attempt to understand the complex relationship of external factors driving market psychology. This strongly complicates our attempts, or at least mine. I would love to have the time and drive needed to explore further, but I do not at this time. So I am stuck choosing a theme that has been effective over a long period and letting the ebb and flow of the market psychology ocean suck me down once in a while. As long as I can pop up for air once in a while and stay afloat…
I don’t think it’s a matter of your not having sufficient drive or time. I think it’s more likely a matter of you (and all of us) being human. There is A LOT to consider – too much probably for the human brain even when aided by modern technology. That’s why so many just throw up their hands and say that it’s random. I don’t think anything in the markets is random; it’s just that there are too any factors for us to articulate and analyze. That said . . .
Some factors are more conspicuous and impactful than others and there’s no reason why we shouldn’t use what we can grasp.
Example: the change in interest-rate regime. We know with 100% certainty that the regime under which we all grew up and worked (persistent declines) is over and done with fort a long time, perhaps beyond the life expectancies of many of us in the p123 community. We’re not exactly what the new regime will be (sideways, up modestly, up dramatically, etc.) but we know with absolute certainty that have entered a new regime (the absence of a prolonged decline). That pretty much destroys the usefulness of mixed (equity-fixed income) simulations. They’ll be usable again but not until we accumulate a reasonable amount of data under whichever new regime takes hold.
Here’s another likely but less certain regime change: Global trade. We’ve presumed and become accustomed to a regime in which “comparative advantage” has been the driving ideology and breakdown in trade barriers has been the norm. It very much informs the data we use every day, which industries lead and which ones lag, margin trends, etc. Unlike with interest rates, we can’t say with certainty that this regime is dead. But we can say it may be under more serious attack now than it’s been in a while. As global trends in electoral politics, migration, etc. make clear, the number of voters worldwide who appreciate and understand the long-term benefits of comparative advantage is microscopic compared to the number who feel and are resisting the impact on themselves. Whether Trump wins or not, it’s hard to ignore the tide he has unleashed and to not be at least alert to a potential regime change.
I don’t see this as a best-that-I-can-coping-stance but as good common sense. That’s why it’s so important to understand the drivers of stock performance (financial and behavioral) and to see testing not as a representative of what returns we can expect but as feedback on whether we’ve effectively translated our ideas into Compustat-p123 language.