Acme Rocket Motor's shares are going to the moon because Wily E. Coyote uses them all the time to chase the Road Runner....
A lot of financial writing and prognostication is poorly done. I am not merely speaking of the outcomes, but rather the rigor of the presentation and thought behind the processes. Few escape the sobriquet, of bad punditry, be it Joe Random Blogger or the once august periodicals such as the Wall Street Journal and the increasingly banal Barron's which serves as an over priced blog in paper form with increasingly dubious editorial quality and declining relevance.
Forget John Galt, where is the Tyler Durden of Print? It probably isn't Matt Taibbi.
The pundit who says X will go up and Y will go down is noise. A prediction or opinion to be useful and actionable needs 3 components.
Entry (A time, price, fair value or point of entry)
Exit (A time, price, fair value or point of exit)
Risk : Reward (Sharpe ratio, Loss limits, Stop losses, Probability of success, risk of ruin etc.)
Please note that a useful prediction does not mean a correct one. A useful prediction is one which can be acted upon with some measured degree of confidence and then assessed for effectiveness in hindsight. Not all predictions are correct, but some are useful.
In project management there is a standard triangle model of framing the boundaries or constraints of a project. Using these constraints, communicating and managing a project and its participants becomes easier as the expectations are understood as bounded.
The graphic shows, the traditional project manager's model. If you are a project manager you tell the respective parties that they can move any 2 points on the project triangle, thus keeping the potential quality area realistically fixed.
The equivalent in the prediction sphere is that all three components need to be explicitly stated or implicitly understood for an effective prediction to be potentially considered much less acted upon.
If an individual suggests you buy this or that stock, your next questions should be for how long and at what risk in addition to why? Without the other 2 legs to the prediction triangle you have pretty much nothing.
It is tough enough with all 3 legs to choose a prediction or model, but without 3 legs, it is impossible in retrospect to assess the value of a prediction or selection process.
Entry can be explained as buy now or this asset is worth price $ or value. An exit can be expressed as hold for 10 years or until price/ value Y is reached.
The trickiest and most often missing component is the Risk:Reward qualifier or quantifier. If one is investing/trading/betting, it is better to know whether to bet the farm or merely a farthing.
Predictions are acted on in the context of alternative choices in a portfolio of options, so it is important to understand the risk reward scope of a particular choice. Risk can be expressed as a stop loss, likelihood of major loss or potential probability weighted outcome etc. even the dreaded VaR. This doesn't mean the risk assessment will be correct, but it is better to discuss risk in some context leave it as the unmentionable issue blighting the brilliant predictor.
So there you have it. If some joker shows up on television, print or digital form lacking a robust prediction triangle with an Entry, Exit and Risk Reward stated, please discount said blather, ink or bits accordingly.
