Can "butter in Bangladesh" predict the market?

How about the superbowl indicator, seasonality, back-testing strategies (this is hot now with the online trading brokers). You may have a fovorite of your own, but does knowing what happened in the past help you predict the future?

One of VIA's favorite writters, Jason Zweig, wrote a great article in the WSJ (the outcome of which you undoubtably know if it is a post by VIA) and video on this subject that I highlight below:

"The stock market generates such vast quantities of information that, if you plow through enough of it for long enough, you can always find some relationship that appears to generate spectacular returns -- by coincidence alone. This sham is known as "data mining."

Every year, billions of dollars pour into data-mined investing strategies. No one knows if these techniques will work in the real world. Their results are hypothetical -- based on "back-testing," or a simulation of what would have happened if the manager had actually used these techniques in the past, typically without incurring any fees, trading costs or taxes.

Those assumptions are completely unrealistic, of course. But data-mined numbers can be so irresistible that, "they are one of the leading causes of the evaporation of money, especially in quantitative strategies."

Over history, humans have become the ultimate "pattern recognition machines" which served us well when we had to hunt for our food in the wild, but doesn't work in the financial markets.

We have added Nerds on Wall Street: Math, Machines and Wired Markets to our reading list. Light reading. Enjoy.