I was listening to an Audio Book called “The Black Swan” by Nassim Taleb this weekend and found the topic of predicting future events through historical events fascinating.
Summarizing his main point on the topic as it relates to trading and investing is we believe that we can somehow predict future price outcomes by simply studying the past price movements. It’s as if you were to buy 10 previous copies of the New York Post and with what you’ve learned from those articles, you’ll somehow predict the next few days’ news stories.
We often get trapped into that thinking when it comes to our investments. We see a certain high performing mutual fund that is offered in our 401k plan for example and we believe it will continue forever, only to trap us several years later when we realize we got in at the absolute peak price.
This doesn’t mean we should disregard price charts, and other historical evidence altogether. But, instead we should consider the probable outcome and include those unpredictable events within our portfolio.
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