One of the most fascinating things about markets is the sheer volume of data they generate. Every day, millions of data points get created. The vast majority of this amounts to little more than noise. This endless stream of information leads thousands of us everyday on a hunt for meaningful signal amid the cacophony.
Most of the time, we are unsuccessful. We can be tricked into seeing significance where none exists. Our pattern recognition engines are fooled by what turns out to be mere randomness (there’s a good idea for a book in that). There is a meaningful needle buried somewhere in the haystack of numbers, but we underestimate both how hard it is to identify, and just how huge that stack is.
As an example, let’s take a number we are all familiar with: Average market returns. Depending upon the period of the data set under discussion, we usually envision a long-term annualized compound return of 8 percent to 10 percent.
Have a look at the chart below:
Continues here: Average Returns, Rarer Than You Think