Watching the Trend Line

by F.

In many time series, there are local fluctuations that are just noise. So, better to keep an eye on the trend line. As John Kay said recently in this FT column:

Nassim Nicholas Taleb, the trader and author, illustrates the curse of knowledge with the example of the investor – call him Warren Buffett – who substantially outperforms the market over the long term. If Warren looks at his portfolio only every five years, the results will almost always be encouraging. If he reviews his investments annually, he will have observed more good years than bad ones. But even a successful investor who looks at his portfolio every day can easily become depressed. Fifty one per cent good days and 49 per cent bad days will produce a good result, just as someone whose coin tosses work out 51 per cent of the time will become extremely rich. But it may not feel like that.

For those who follow events too closely, the pain of regret can far outweigh the joys of success. Life, and markets, contain so many missed opportunities. Such feelings provide the best explanation as to why the equity premium – the difference between the return on shares and the return on safe assets – is so high.