Financial markets are highly reflexive as George Soros pointed out 25 years ago, and as a result, equity prices are dependent on the past. Momentum is a constant component of price formation. Also, the structural dynamics of the money management business are clearly heavy influences in stock prices -- the heavy hand of relative performance among money managers and the problem of career and business risk are two of the most important influences in the process of pricing investments. Tax issues and the changing regulatory environment are certainly more important drivers of prices than the Gaussian distribution. Not to mention social contagion, feedback loops, and of course changing technology.
The smart money manager must rely on a much more sophisticated framework than just the bell curve. I like to approach my investments following a 4 level framework (ex hedge fund manager turned media entrepreneur Todd Harrison follows a similar approach):
Structural overview. An analysis of the political, regulatory and technological environment.
Fundamental overview. Valuation analysis like Cyclically Adjusted Price/Earnings ratios and others.
Technical market make-up. Momentum, mean reversion, support and resistance, volatility.
Sentiment overview. A comprehensive behavioral analysis.
Comprehension of financial markets and the risks they inherently breed is a never ending process. As elegant as Beta and EMH were they were clearly not the answer.
http://www.safehaven.com/article-14922.htm
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