Forecasting - With the Latest AI - May-June 2022

Results below show a mid-May turning-point forecast, followed by 4 screens, which show the result of the Federal Reserve tightening, and the reversal.  Interesting experiment, but shows the difficulty of the job.   Forecasting accurately, enough to make money, remains difficult.  :)

[ May 19, 2022] We (well, our AI, actually...) are calling a bottom to the current brutal stock-market correction. It has been harsh. But we (and the AI) are taking the Buffet Approach to this. We have had the worst start to this year (by the S&P 500 in USA-land, down 17% roughly) since back to the 1940's. Seems to be a tad overdone. The inflation is being driven by *real scarcity*, not by knee-jerk price increases. This is actually a market postive - ie. the price-system doing it's job. We went hard long, all-in yesterday, and for the first time in a while, used some margin. (We typically avoid margin, like we avoid (mostly) options trading. Note: If someone can show us a good and sane way to go long the VIX, I would love to see the scheme. We have not figured out how to do that sensibly, yet.)

We post this screenshot (of our testbed equity which is not named) as public service. The AI says a turn is possible. We cannot yet put proper probabilities on this (but yes, we should determine a proper way to do that), but historically (and heuristically), this particular model seems to work the best.

And note: If Putin can be arrested, (or removed by some other means), and the illegal and horrifically stupid war in Ukraine can be ended, the market can be expected to have a serious bounce, as peace (and food surplus!) can become available again. Seriously, we think a reward of several billion US dollars (a fraction of the cost of his ugly, illegal war), should be offered to any person or group of persons that can remove that murderous criminal from his position of power. Seriously. The Osama Bin Laden reward was $20 million, IIRC, and a nice $20-billion (US dollars), for Putin's removal, might motivate a few folks with the ability, to get the job done. And the job *needs* to be done, as the World agrees it must, even if that tragic failure, the United Nations, is unable to do anything.
(Click on image to enlarge it, if you want.)

[ May 20, 2022 ] Update: Looks like another leg down in the making. We lightened up yesterday, driven by rules-of-thumb that mandate staged closure of offside positions. Oh my. Our concern, of course, is the curious lack of wisdom that we seem to see everywhere. Never in my own personal life, have I seen so much unwise action, being both proposed and implemented, by so many people and organizations, in so many places, simultaneously. It is very curious. China's "Zero Covid" policy is idiotic. Covid-19 is an airborne virus, and the Omicron variant is more contagious than a common cold. Trying to do "Zero Covid" with lockdowns, is like trying to put a fart in jail for smelling bad. It is simply moronic. China should import 3 billion doses of a proper mRNA vaccine, and give everyone three shots. We have had our three vaccines, and we are not even wearing masks anymore. Our Homeland has re-opened. If you don't want to take a vaccine, no problem. Go home and fucking die. We don't mind. Your choice, guy. This is the only sane model.

Control-Freak Governments, which disrespect Science and Human Reality, are toxic, stupid, and the obvious product of insane, mal-adjusted ignorant thugs. They are also very, very dangerous entities, which will likely bring about global war and associated economic and social destruction. Such destruction is un-necessary, and tragic, yet history shows that it seems to be baked-in, (or "hard-wired", as we techie types might say), to the human condition. Curiouser and curiouser. Maybe Bill Ackman is right - World War Three (the "Zombie War"?), looks like it has already started. The Russians are even selling T-shirts with the letter "Z" on them. Of course they are.

I suppose all I can do now, is go out and buy some more food and ammo. (I am only half-joking. We seem to have enough food, I suspect. ) I have this concern that as major down-shifts are made in the global money-supply, we might risk triggering a credit-collapse phenomenon. The result of such an event, if synchronized across several economies, could create an accellerating collapse in financial assets - like a global "run on the bank". This is, of course, an absurd and foolish outcome, which can be prevented by simply stopping doing the astonishingly stupid things that every major government seems to be doing. Just:

1) End the war in Ukraine, either by giving the Ukrainians every single weapons system we have, and/or by removing Putin. Easy.

2) Change leaders in China, and end Covid-Zero madness, and the Chinese import several billion proper Covid-19 vaccines, and immunize all their citizens with working mRNA vaccines, either Moderna or Pfizer/Biontech. ("Sinovac" does not work).

3) Engineer a return to "Free Trade" across the globe. TPP, NAFTA, whatever. Free Trade worked well. Tarrifs are abusive, economy-damaging taxes that encourage bad behaviour by junk companies and corrupt government henchmen.

4) Remove all stupid "sanctions" on every nation, everywhere. Sanctions to damage economic action, only create angry, poor, war-focused political entities. They are extremely stupid beyond belief, and should not be used. They only hurt small business, the poor, and the weak. The Cruel and the Evil governments benefit from sanctions. Remove *all* economic sanctions everywhere.

5) Engineer enlightened democracy models. Make people pay to vote. Don't want to vote? No problem. Go away. Voting should be a paid choice. You should *earn* the right to vote. Citizenship should be a high-privilege, not a right. Democracy is a good political model, but having every know-nothing doofus drive the democratic process, is insane. This engineers the expanding and dangerous "race-to-the-bottom" that we are seeing everywhere now.

6) Fix the Schools and get them back into the business of teaching *knowledge*, and not politics. End the curious "war on boys" that is encouraging boys to take on non-male (female) characteristics, allow the girls to just be girls if they want to be, and do not try to program sexual action on the young kids, as corrupt companies like Disney are trying to do. Disney should just be avoided. End all the public LGBQTxyz nonsense, and require the weirdly gruesome stuff to be a private matter, between consenting adults. Allow full sexual freedom, but end the relentless public promotion of deeply un-natural human behaviour. This is damaging the world, and creating obvious concern among the "Normies". The world should not be degraded into being a Hieronymus Bosch hell-scene. Sex and religion should be personal things that are not publically promoted as political models for kids to follow. You can be free to be as gay/dyke/trans crazy as you want to be - but we should not promote it as a lifestyle-choice to public-school children. That is just a really bad idea.

(But the promotion and proselytizing of rank weirdness and hyper-stupid behaviour - which has been going on since the 1980's - explains a great deal of the over-the-top madness and butt-faced ignorance we are seeing today, in our modern world, we suspect. No one can say this sort of thing publically, and that probably makes it all the more certain to be a key truth behind the failures and foolishness we are seeing everywhere. )

[ May 26, 2022 ] We still have all our original position in this stock, which was up $2.38 yesterday, and is up another $0.78 as I key this at 10:41 AM here on Thursday. The turn that the AI indicated last Friday, induced us to hold the main position (even if we got stopped-out of the margined part). The company (a financial major), reported very good results, and also raised it's dividend three precent, so we are, as they say in the old song: "standing pat.." Curious times. The demand for new-construction houses in our small Homeland city, is so great, that buyers for new-construction houses must enter a pool, and as houses are built, buyers are selected at random and given the chance to buy the house that is under construction. This prevents idiotic bidding wars, ensures the builders get a good and fair profit on each build, and gives every buyer a chance at a somewhat reasonable price. (Still typically in the $700,000 plus range) Just learned from a friend we met at Costco yesterday, that the pool had 38,000 folks wanting to buy a "new construction" house, a while back. The population inflow to our small, lovely urban+country region, is big and getting bigger. There are high-salary jobs available. There is pretty much zero chance of anyone in Canada defaulting on their mortgage, unless they are insane, retarded or maybe bankrupted by very bad personal decisions. The OSFI mandates big Canadian Banks to maintain ongoing AIRB risk-analysis, and the Basel III capital requirements are carefully managed and monitored, so that American-style 2008 "Financial Crisis" fraud-stupidity is unlikely to occur here. We were a poor agricultural-economy country, for most of our history. These days we are learning to be more like Switzerland, and less like Argentina. It is still difficult to teach this critical strategy to our political people, but we continue to try.

[ May 25, 2022 ] This company reported good earnings results this morning, and so the stock price is up almost 2 dollars Cdn per share. Hilarious - Yesterday, we unloaded our margined trade (but kept the main position). I feel like that guy who turns on his windshield wipers on a sunny day in his new car, and can't figure out how to turn them off: They say to the world: "Dumb Guy! ... here is a Dumb Guy!..." over and over and over. What is interesting, is that the AI seemed to catch the turn, before it happened, even if the turn was trigger by the earnings beat. Buy stock. Make money... (or maybe not, eh?) That's ok, but I hate like hell to miss a turn, especially when it was handed to me by the technology, the technical factors, and the improving fundamentals, here in "Fortress North America." Dumb guy indeed.

[ May 24, 2022 ] - It will be a choppy time, we fear. It appears that bad results have leaked out, we suspect. Difficult times for everyone. We note that Credit-Swiss has now picked up coverage on Canadian Banks - their Analyst has put market-positive ratings on the Big Six - which probably in part accounts for their ugly weakness today. The professional Analysts are always wrong, for some curious reason, we find. God help the poor bastards who are holding "funds" and such - and losing 2% fees as well as the +20% losses that the sector (and the world) is now taking. All around this broken World, we are seeing Government henchmen try to hijack the profits of successful enterprises, since the finances of most Governments are so truly awful. The dangers that confront us now are manifest, from a global synchronized collapse in asset values, to the Third World War, (which we have better get moving on, unless we are keen to *lose* it!). We are certain now, that all-out war with Russia is inevitable. The idea in warfare, is to win, not to lose. We seem to have leaders that are seeking to have a minor, loss-making war, while Russia is showing a dangerous willingness to go "all in". We need stronger, more effective leaders, who are able to see the extreme danger this madness represents, and respond accordingly. (Note: I have been impressed with our Mr. Trudeau. He has shown courage and resolve, and has offered some serious weaponry to Ukraine. Good for him. He is maturing as a Leader. We may be OK. But we might also need to put the entire Dominion under arms, which is going to be interesting - and difficult.) The real problem is the USA. The Americans are in turmoil, and need to send out clear, focused messages. It is a time for unity, strength, and resolve. So far, this has not really been evident. We re-iterate, that *sanctions* will have counter-productive effects, and will *strengthen* not weaken, the propensity for Russia to behave in an outrageous and beligerent manner. Russia needs to remove Putin - but they have no way of doing so, short of using a Tokarev 7.62x25mm vote of non-confidence. They face difficult and uncertain times - as do we all.

[ May 23, 2022 ] Looks like the forecast might be working.

Here is quicky screen-shot of the actual May26th price series of close-values, for our testbed security. We remained fully-invested, but got stopped out of a small 1000 share margined position. See below for May19th predictive forecast, from our AI model. The security in question (for our investment & research purposes) is a Canadian Bank. Curious times call for non-traditional strategies - but the old guys from back in the 1970's would have felt quite comfortable with what we are doing. The market always gives a hint of what is to come. Not sure why, but it just does.
June 1, 2022 Update: Seems to be tracking true. The AI is better than me, and most of the Analyst folks. Curious and curiouser.

This is June 7, 2022 forecast, prepared using the data up to June 6, 2022, for our PRIMARY-position equity investment. The AI successfully called the turn, which as any quant researcher (or market hacker), will tell you is not an easy thing to do. We have a non-trivial amount of this stock, in a couple of different portfolios. It's a position that has been ticking along well, despite the ups and downs. - M.

[June 15, 2022 update: Volatile times. Federal Reserve 75 basis point uplift, rocks the mkt. We actually expect rising rate-of-return on capital (nominal) across the board, and expect equity positions to show uplift. (Contrary to the usual IS-LM models which assume demand destruction.) But so far, we are getting no joy. Harsh times. Life during wartime? ... perhaps... We will let you know how it plays out. We remain long.]

Here is the June 10, 2022 forecast. This is the "Acid Test" - we see if this approach can help us navigate the coming "Dimon Hurricane", which looks to be on our doorstep now. The World will endure some complex phenomenon over the next couple of months. FD (Full Disclosure): We are holding our positions in our "Testbed" position here, since on balance, it seems to be indicated. Bonds offer nothing anywhere near inflation levels, and well-run Financials (banks) should be able to profit by the operational characteristics of the evident inflation. In early times (1960s and 1970s), bonds were often termed: "Certificates of Capital Confiscation", as their prices fell as inflation took hold, and interest-rates (both market-set and bank-rates) were dialed up in response. And the AI-model still says re-trace is expected in equity price here. The actual price closed below 82 on Friday, with the AI forecasting 86. This is the machine-generated forecast using data up to an including June 10, 2022. Of course, it might be far-off wrong. We are happy if it just gets the sign right. And we already have the "Rancho." :) [Click on image to expand it.]

June 18, 2022. Our experiment with the AI has been a bit grim - after 4 falling datapoints, even the AI has to throw in the towel, and the forecast curve has turned down. We have one model which still shows an upward turning "green curve" forecast, but this has been the best model, and although it is forecasting prices above the June 17th close price, the curve is now pointing downward, which is a significant swing. We remain long, and feel the reactive response to the USA Federal Reserve rate increase has resulted in an "oversold" market. There are very few attractive investments out there now, but we feel this Canadian bank remains one of them. We even took on a little wee bit of margin, to add to our position, since this stock is coming up on an ex-dividend date, and we believe the current price represents an attractive opportunity. But it is not without risk.

Forecasting is Difficult - Previous Efforts

This forecast did not work so good. It was basically, just wrong.

But shortly after this one, the AI model turned up. We traded, but remained long, and have done ok. The model seems to work, even in times of madness.

Mar. 17, 2022 - With the exception of some sale-and-repurchase actions, the AI model has kept us all-in "long" in this diffcult and somewhat insane market.   This has worked well, for us.  We truly grasp the value of computer-assisted methods, as they can demonstrate what appear to be very unwise & counter-intuitive action, which has consistantly been useful and has offered actionable, postive-outcome advice.

The Putin terror-and-murder-campaign in Ukraine is cruel, tragic, illegal and we believe now (seriously) to be the actions of an evil man who is insane and suffering from multiple levels of dementia.   We hope the Russians can disable this abusive lunatic, before the World has to.

What is astonishing, is that we have made money (using the AI, and acting on it's picture-of-the-world-to-be) throughout this episode of tragic insanity.

But it causes us real pain, to see this tragedy unfold.  It is as profoundly stupid, cruel and driven by dishonesty, as it was unnecessary.   Putin must be arrested, and handed over to the World Court in the Hague, for prosecution.   The reward for doing this, has become substantial.

Jan. 13, 2022 -  The AI just keeps point up.  Going into monetary tightening, we can not be certain that banks will make more money.  The valuation of financial stocks is based on their asset values - and if mortgage rates move up, the price of houses will move down.  And the old models based on fundamentals, suggest bank stocks plateau & then turn down.   The market does not seem to be discounting this at all, quite yet.  It's trading on technical momentum now.  It's looking insane - but the AI says the trend is hard positive.   AI is right, and I am wrong.  Fack.

Here is My Chemical Romance, doing a fine cover of Dylan's "Desolation Row"... 

https://www.youtube.com/watch?v=FOuSxal8pf4

Dec. 15, 2021 -  Forecasting is difficult - especially about the future. 

It turns out to be almost (but not quite) impossible.    The future remains a terra-incognita, until we arrive there, in our small, wet time machines.

Much about the future can be guessed by looking at how the past played out.   This is obvious.  And there are physical, cyclic processes, which help - such as the orbit of the tilted-Earth, around the sun.  It is not too difficult to forecast cold, snowy days in winter, and warm, sunny days in summer.  The trick, of course, is to forecast spring and fall - ie. when to plant, and when to harvest.   Those who could do that well, became the rulers and/or priests, in ancient-world societies.

Investment efforts are aided by successful attempts to forecast - but only if one bets money on the outcome.  Investments or speculations that require accurate forecasts to be successful, are fraught with real risk. 

If speculating, one must accept the usefulness of forecasts, only lightly, and be willing to jettison the forecast, if it turns out to be wrong - and even if it is just beginning to look like it might be wrong. 

The future is basically unknowable - except when specific physical properties are evident, that can be carefully assessed, documented, and the underlying mathematics crafted to define and then solve, the relevant equations of motion.  And even then, you might still be wrong just a little bit, and that might be enough to ruin the usefulness of your forecasting efforts.  Your guided missile or your rocket-ship misses the target, fails to achieve correct orbital insertion, and either crashes, or zooms off into deep space, for a million-year voyage before impacting a neutron-star.

So, beware of forecasts.   Even a good, very accurate one, can destroy you.

 

Predicting Freak-Out!!

Bad Results are Always Possible. But are they really programmed in?

Sept. 29, 2021 - Forecasting is a bit of a Fool's Project.  It falls into that class of tasks that really cannot be done successfully & consistantly, if humans are involved in determining the future results.

But we try anyway, since the rewards for a successful forecast can be very substantial, if initial decisions are taken on the basis of the forecast, and events play out as expected.

I've been reviewing the MIT note about "Panic Selling", and the use of a neural-network model to forecast - based on client demographic and ethonographic characteristics - the likelihood that a particular client would "freak out" and dump his/her entire portfolio, during times of rapid decay of price level in the market.

The whole effort is difficult, and the study does not indicate if they are dis-aggregating the portfolio data sufficiently, to make their market assumptions.   You really need to look at individual holdings, on a client by client basis - not just overall aggregate market performance.  Most academic studies of the stock market are actually quite worthless - unless the analyst-researchers take the time and effort (and considerable effort is required, to do this sort of thing correctly) to examine - and price track - the price-and-quantity held valuation evolution of the portfolio over time.   This is complex and difficult to do.

But this study is interesting, in that the researchers had monthly portfolio details on roughly 600,000 clients, over a period from 2003 to 2015 (inclusive) so 13 years of monthly data,  by portfolio holdings.  One is looking at an almost 94 million record dataset, where each data-element is a table of price and quantity holdings.

The study indicates a cross-entropy training objective and a gradient-descent training approach, which is pretty much the same as what we use for our Xerion model.  Their neural net models used 5 hidden layer and 15 hidden layer nets of 60 neurons in each layer.  They draw their market data from Yahoo-Finance as we do also.   Their objective is to attempt to predict what they term "panic selling" events, where the client liquidates his/her portfolio, due to adverse market conditions.  They used 6 month lags, and their demographic profile made use of age, gender, marital status, number of dependents, self-declared investment knowledge, and occupational group.

The 5-layer network converged 3150th step. The 15-layer net converged after the 2650th step.  The logistic classifier was manually terminated at the 8000th step.

The study determined that those who are most likely to "freak out" and panic-sell all or most of their stock holdings tend to be over 45, male, and business owners with good or excellent self-declared investment knowledge.

To us, these results are not surprising, and are interesting, in that they incorporate the use of a simple (yet effective) neural-network.  The 5 layer network and the 15 layer network both had slightly better predictive ability than the Logistic Regression approach (also tried.)  (We like logistic regression.)

Market factors, such as the lagged series of the 20-day S&P 500 volatility, the 60-day S&P 500 volatility, and the volatility of the S&P trading volume, are the best predictors of panic selling.

The study concludes, indicating that the data suggests that panic selling in normal market conditions is harmful to the median retail investor, but is not harmful, and marginally beneficial, in environments of sustained market decline as it is shown to prevent further losses and protect the client's capital. 

Copy of this study available at:  https://ssrn.com/abstract=3898940

Forecasting & Prediction => Hacking the Future, for Fun and Profit! Can we forecast the future price of stocks? Sometimes. We can't know exactly - but we can make projections based on existing current and historical knowledge. There is always uncertainty, as the future of human activities cannot be known for certain.

But I can forecast a high probability of the sun rising tomorrow, based on the expectation of the continued revolving of the Earth. And I can forecast when Spring planting should occur, if I can know the current position of the tilted Earth, as it orbits the Sun, and can count days, and make use of a calendar created by careful past observations.

A circle of stones, and a line of stones that indicates sun-position on the horizon, at the various northern and southern limits of the sunrise or sunset positions, and some sort of counting/recording tool (perhaps lines scratched on a large rock) is a sufficient astronomical observatory for the purposes of calendar-creation. Once I have the range of sunrise positions on the horizon, I can successfully and with accuracy predict the seasons - and the seasonal changes in temperature and weather.

The obvious cycles and rotations in nature, allow meaningful, accurate and actionable predictions to be made about what future events will occur, and when they will occur, and what should be done to exploit them (ie. plant crops in Spring, time your night-time attack on your enemies with the rising of the bright moon, etc.)

Prediction of astronomical events is profoundly possible - and can be actionably useful - even with very simple tools available to everyone. One need only observe carefully, and see what is actually taking place - over and over, again and again.

Paul Saffo's 2007 article: "Six Rules for Effective Forecasting" and MCL's Rule #7.

Fortuna Turns Her Great Wheel. What Shall We Gain? How Shall We Feel?

[Note:  Material on the Internet routinely disappears behind clever paywalls, or is subject to other abusive removal (eg: Wikipedia material).  This is such a good article, I've archived it here.  If anyone objects, and claims they own the copyright, and I must remove it, then I will do so.  But I explicitly claim "Fair Use" as this is a valuable article of scientific scholarship. It provides useful, actionable advice on the science and art of forecasting, and as such, is right there with Decarte's "Search for a Method", so it deserves a wider audience.  We are funding this effort by posting it here.  Hope this is useful! ] 

[ Forecasting - 101 ]

Six Rules for Effective Forecasting
by Paul Saffo

From the HBR Magazine (July–August 2007)

Summary.  The primary goal of forecasting is to identify the full range of possibilities facing a company, society, or the world at large. In this article, Saffo demythologizes the forecasting process.

 
People at cocktail parties are always asking me for stock tips, and then they want to know how my predictions have turned out. Their requests reveal the common but fundamentally erroneous perception that forecasters make predictions. We don’t, of course: Prediction is possible only in a world in which events are preordained and no amount of action in the present can influence future outcomes. That world is the stuff of myth and superstition. The one we inhabit is quite different—little is certain, nothing is preordained, and what we do in the present affects how events unfold, often in significant, unexpected ways.

The role of the forecaster in the real world is quite different from that of the mythical seer. Prediction is concerned with future certainty; forecasting looks at how hidden currents in the present signal possible changes in direction for companies, societies, or the world at large. Thus, the primary goal of forecasting is to identify the full range of possibilities, not a limited set of illusory certainties. Whether a specific forecast actually turns out to be accurate is only part of the picture—even a broken clock is right twice a day. Above all, the forecaster’s task is to map uncertainty, for in a world where our actions in the present influence the future, uncertainty is opportunity.

Unlike a prediction, a forecast must have a logic to it. That’s what lifts forecasting out of the dark realm of superstition. The forecaster must be able to articulate and defend that logic. Moreover, the consumer of the forecast must understand enough of the forecast process and logic to make an independent assessment of its quality—and to properly account for the opportunities and risks it presents. The wise consumer of a forecast is not a trusting bystander but a participant and, above all, a critic.

Even after you have sorted out your forecasters from the seers and prophets, you still face the task of distinguishing good forecasts from bad, and that’s where this article comes in. In the following pages, I try to demythologize the forecasting process so that you can become a more sophisticated and participative consumer of forecasts, rather than a passive absorber. I offer a set of simple, commonsense rules that you can use as you embark on a voyage of discovery with professional forecasters. Most important, I hope to give you the tools to evaluate forecasts for yourself.


Rule 1: Define a Cone of Uncertainty
------------------------------------

As a decision maker, you ultimately have to rely on your intuition and judgment. There’s no getting around that in a world of uncertainty. But effective forecasting provides essential context that informs your intuition. It broadens your understanding by revealing overlooked possibilities and exposing unexamined assumptions regarding hoped-for outcomes. At the same time, it narrows the decision space within which you must exercise your intuition.

I visualize this process as mapping a cone of uncertainty, a tool I use to delineate possibilities that extend out from a particular moment or event. The forecaster’s job is to define the cone in a manner that helps the decision maker exercise strategic judgment. Many factors go into delineating the cone of uncertainty, but the most important is defining its breadth, which is a measure of overall uncertainty. Other factors—relationships among elements, for example, and the ranking of possible outcomes—must also be considered in developing a forecast, but determining the cone’s breadth is the crucial first step. Imagine it is 1997, the Toyota Prius has just gone on sale in Japan, and you are forecasting the future of the market for hybrid cars in the United States. External factors to consider would be oil price trends and consumer attitudes regarding the environment, as well as more general factors such as economic trends. Inside the cone would be factors such as the possible emergence of competing technologies (for instance, fuel cells) and an increased consumer preference for small cars (such as the Mini). At the edge of the cone would be wild cards like a terrorist attack or a war in the Middle East. These are just a very few representative examples. (See the exhibit “Mapping the Cone of Uncertainty” for more on the process.)


Mapping the Cone of Uncertainty

A cone of uncertainty delineates the possibilities that extend out from a particular moment or event. ...

Drawing a cone too narrowly is worse than drawing it too broadly. A broad cone leaves you with a lot of uncertainty, but uncertainty is a friend, for its bedfellow is opportunity—as any good underwriter knows. The cone can be narrowed in subsequent refinements. Indeed, good forecasting is always an iterative process. Defining the cone broadly at the start maximizes your capacity to generate hypotheses about outcomes and eventual responses. A cone that is too narrow, by contrast, leaves you open to avoidable unpleasant surprises. Worse, it may cause you to miss the most important opportunities on your horizon.

The art of defining the cone’s edge lies in carefully distinguishing between the highly improbable and the wildly impossible. Outliers—variously, wild cards or surprises—are what define this edge. A good boundary is one made up of elements lying on the ragged edge of plausibility. They are outcomes that might conceivably happen but make one uncomfortable even to contemplate.

The most commonly considered outliers are wild cards. These are trends or events that have low probabilities of occurrence (under 10%) or probabilities you simply cannot quantify but that, if the events were to occur, would have a disproportionately large impact. My favorite example of a wild card, because its probability is so uncertain and its impact so great, is finding radio evidence of intelligent life somewhere else in the universe. Nobody knows if we will ever receive a message (radio astronomers have been listening since the late 1950s), but if we did, it would send a vast and unpredictable tremor through the zeitgeist. One-third of the world’s population would probably worship the remote intelligences, one-third would want to conquer them, and the final third (the readers of this magazine) would want to do some extraterrestrial market research and sell them something.

The tricky part about wild cards is that it is difficult to acknowledge sufficiently outlandish possibilities without losing your audience. The problem—and the essence of what makes forecasting hard—is that human nature is hardwired to abhor uncertainty. We are fascinated by change, but in our effort to avoid uncertainty we either dismiss outliers entirely or attempt to turn them into certainties that they are not. This is what happened with the Y2K problem in the final years before January 1, 2000. Opinions clustered at the extremes, with one group dismissing the predictions of calamity and another stocking up on survival supplies. The correct posture toward Y2K was that it was a wild card—an event with high potential impact but very low likelihood of occurrence, thanks to years of hard work by legions of programmers fixing old code.

The result of the Y2K nonevent was that many people concluded they had been the victims of someone crying Y2K wolf, and they subsequently rejected the possibility of other wild cards ever coming to pass. Consideration of anything unlikely became unfashionable, and as a result, 9/11 was a much bigger surprise than it should have been. After all, airliners flown into monuments were the stuff of Tom Clancy novels in the 1990s (inspired by Clancy, I helped write a scenario for the U.S. Air Force in 1997 that opened with a plane being flown into the Pentagon), and it was widely known that the terrorists had a very personal antipathy toward the World Trade Center. Yet the few people who took this wild card seriously were all but dismissed by those who should have been paying close attention.

The result of the Y2K nonevent was that many people subsequently rejected the possibility of other wild cards ever coming to pass. As a result, 9/11 was a much bigger surprise than it should have been.

Human nature being what it is, we are just as likely to overreact to an unexpected wild card by seeing new wild cards everywhere. That’s a danger because it can lead you to draw a hollow cone—one that is cluttered with distracting outliers at the edge and neglected probabilities at the center. So don’t focus on the edge to the exclusion of the center, or you will be surprised by an overlooked certainty. Above all, ask hard questions about whether a seeming wild card in fact deserves to be moved closer to the center.


Rule 2: Look for the S-Curve
----------------------------

Change rarely unfolds in a straight line. The most important developments typically follow the S-curve shape of a power law: Change starts slowly and incrementally, putters along quietly, and then suddenly explodes, eventually tapering off and even dropping back down.

The mother of all S curves of the past 50 years is the curve of Moore’s Law, the name given to Gordon Moore’s brilliant 1965 conjecture that the density of circuits on a silicon wafer doubles every 18 months. We can all feel the consequences of Moore’s Law in the extravagant surprises served up by the digital revolution swirling around us. Of course, the curve of Moore’s Law is still unfolding—it is still a “J”—with the top of the “S” nowhere in sight. But it will flatten eventually, certainly with regard to silicon circuit density. Even here, though, engineers are sure to substitute denser circuit-carrying materials (like nanoscale and biological materials) as each successive material reaches saturation, so the broadest form of the Moore’s Law curve (density regardless of the material) will keep climbing for some time to come. This distinction reveals another important feature of S curves, which is that they are fractal in nature. Very large, broadly defined curves are composed of small, precisely defined and linked S curves. For a forecaster, the discovery of an emergent S curve should lead you to suspect a larger, more important curve lurking in the background. Miss the larger curve and your strategy may amount to standing on a whale, fishing for minnows.

The art of forecasting is to identify an S-curve pattern as it begins to emerge, well ahead of the inflection point. The tricky part of S curves is that they inevitably invite us to focus on the inflection point, that dramatic moment of takeoff when fortunes are made and revolutions launched. But the wise forecaster will look to the left of the curve in hopes of identifying the inflection point’s inevitable precursors. Consider Columbus’s 1492 voyage. His discovery falls at the inflection point of Western exploration. Columbus was not the first fifteenth-century explorer to go to the New World—he was the first to make it back, and he did so at a moment when his discovery would land like a spark in the economic tinder of a newly emergent Europe and launch thousands upon thousands of voyages westward. Noting the earlier, less successful voyages, a good forecaster would have seen that the moment was ripe for an inflection point and could have advised the Portuguese that it would be unwise to turn down Columbus’s request.

Ironically, forecasters can do worse than ordinary observers when it comes to anticipating inflection points. Ordinary folks are simply surprised when an inflection point arrives seemingly out of nowhere, but innovators and would-be forecasters who glimpse the flat-line beginnings of the S curve often miscalculate the speed at which the inflection point will arrive. As futurist Roy Amara pointed out to me three decades ago, there is a tendency to overestimate the short term and underestimate the long term. Our hopes cause us to conclude that the revolution will arrive overnight. Then, when cold reality fails to conform to our inflated expectations, our disappointment leads us to conclude that the hoped-for revolution will never arrive at all—right before it does.

One reason for the miscalculations is that the left-hand part of the S curve is much longer than most people imagine. Television took 20 years, plus time out for a war, to go from invention in the 1930s to takeoff in the early 1950s. Even in that hotbed of rapid change, Silicon Valley, most ideas take 20 years to become an overnight success. The Internet was almost 20 years old in 1988, the year that it began its dramatic run-up to the 1990s dot-com eruption. So having identified the origins and shape of the left-hand side of the S curve, you are always safer betting that events will unfold slowly than concluding that a sudden shift is in the wind. The best advice ever given to me was by a rancher who reminded me of an old bit of folk wisdom: “Son, never mistake a clear view for a short distance.”

Once an inflection point arrives, people commonly underestimate the speed with which change will occur. The fact is, we are all by nature linear thinkers, and phenomena governed by the sudden, exponential growth of power laws catch us by surprise again and again. Even if we notice the beginning of a change, we instinctively draw a straight line diagonally through the S curve, and although we eventually arrive in the same spot, we miss both the lag at the start and the explosive growth in the middle. Timing, of course, is everything, and Silicon Valley is littered with the corpses of companies who mistook a clear view for a short distance and others who misjudged the magnitude of the S curve they happened upon.

Also expect the opportunities to be very different from those the majority predicts, for even the most expected futures tend to arrive in utterly unexpected ways. In the early 1980s, for example, PC makers predicted that every home would shortly have a PC on which people would do word processing and use spreadsheets or, later, read encyclopedias on CDs. But when home PC use did finally come about, it was driven by entertainment, not work, and when people finally consulted encyclopedias on-screen a decade after the PC makers said they would, the encyclopedias were online. The established companies selling their encyclopedias only on CD quickly went out of business.


Rule 3: Embrace the Things That Don’t Fit
-----------------------------------------

The novelist William Gibson once observed: “The future’s already arrived. It’s just not evenly distributed yet.” The leading-edge line of an emerging S curve is like a string hanging down from the future, and the odd event you can’t get out of your mind could be a weak signal of a distant industry-disrupting S curve just starting to gain momentum.

The entire portion of the S curve to the left of the inflection point is paved with indicators—subtle pointers that when aggregated become powerful hints of things to come. The best way for forecasters to spot an emerging S curve is to become attuned to things that don’t fit, things people can’t classify or will even reject. Because of our dislike of uncertainty and our preoccupation with the present, we tend to ignore indicators that don’t fit into familiar boxes. But by definition anything that is truly new won’t fit into a category that already exists.

A classic example is the first sales of characters and in-game objects from the online game EverQuest on eBay in the late 1990s. Though eBay banned these sales in 2001, they anticipated the recent explosive growth of commerce in Second Life, Linden Lab’s virtual world in which members create 3-D avatars (digital alter egos). Through the avatars, members engage in social activities, including the creation and sale of in-world objects in a currency (Linden dollars) that can be exchanged for real dollars through various means. Today there are approximately 12 million subscribers participating in virtual world simulations like Second Life, and they’re having an impact measurable in actual dollars. Real transactions connected with Second Life and other online simulations now are (conservatively) estimated at more than $1 billion annually. Where it ends is still uncertain, but it is unquestionably a very large S curve.

More often than not, indicators look like mere oddball curiosities or, worse, failures, and just as we dislike uncertainty, we shy away from failures and anomalies. But if you want to look for the thing that’s going to come whistling in out of nowhere in the next years and change your business, look for interesting failures—smart ideas that seem to have gone nowhere.

Let’s go back to Second Life. Its earliest graphical antecedent was Habitat, an online environment developed by Lucasfilm Games in 1985. Though nongraphical MUDs (multiple user dimensions) were a cultish niche success at the time, Habitat quickly disappeared, as did a string of other graphical MUDs developed in the 1980s and 1990s. Then the tide turned in the late 1990s, when multiplayer online games like EverQuest and Ultima started to take off. It was just a matter of time before the S curve that had begun with Habitat would spike for social environments as well as for games. Linden Lab’s founders arrived on the scene with Second Life at the right time and with the right vision—that property ownership was the secret to success. (Sony missed this crucial point and insisted that everything in EverQuest, including user-created objects, was Sony’s property, thus cutting EverQuest out of the wild sales-driven growth of virtual world simulations.) So although the explosive success of Second Life came as a considerable surprise to many people, from a forecasting perspective it arrived just about on time, almost 20 years after Habitat briefly appeared and expired.

As the Second Life example illustrates, indicators come in clusters. Here’s another good example. Some readers will recall the flurry of news around the first two DARPA Grand Challenges, in which inventors and researchers were invited by the U.S. Department of Defense to design robots that could compete in a 100-mile-plus race across the Mojave Desert. The first Grand Challenge, which offered a $1 million prize, was held in March 2004. Most of the robots died in sight of the starting line, and only one robot got more than seven miles into the course. The Challenge’s ambitious goal looked as remote as the summit of Everest. But just 19 months later, at the second Grand Challenge, five robots completed the course. Significantly, 19 months is approximately one doubling period under Moore’s Law.

Around the same time I noticed a sudden new robot minicraze popping up that many people dismissed as just another passing fad. At the center of the craze was the Roomba, an inexpensive ($200 to $300) “smart” vacuum cleaner the size of a pizza pan. What was odd was that my friends with Roombas were as wildly enthusiastic about these machines as they had been about their original 128K Macs—and being engineers, they had never before shown any interest in owning, much less been excited by, a vacuum cleaner. Stranger yet, they gave their Roombas names, and when I checked with Roomba’s maker, iRobot, I learned that in fact two-thirds of Roomba owners named their Roombas and one-third confessed to having taken their Roombas on vacation with them or over to friends houses to show them off.

Alone, this is just a curious story, but considered with the Grand Challenge success, it is another compelling indicator that a robotics inflection point lies in the not-too-distant future. What form this approaching robot revolution will take is still too uncertain to call, but I’ll bet that it will be greeted with the same wild-eyed surprise and enthusiasm that greeted the rise of the PC in the early 1980s and the World Wide Web in the mid-1990s. Oh, and don’t look for these robots to be the multitasking intelligent machines of science fiction. More likely, they’ll be like the Roomba, more modest devices that do one or two tasks well or are simply cute and cuddly objects of affection. One indicator: Roomba owners today can even buy costumes for their robots!


Rule 4: Hold Strong Opinions Weakly
-----------------------------------

One of the biggest mistakes a forecaster—or a decision maker—can make is to overrely on one piece of seemingly strong information because it happens to reinforce the conclusion he or she has already reached. This lesson was tragically underscored when nine U.S. destroyers ran aground on the shores of central California on the fog-shrouded evening of September 8, 1923.

The lost ships were part of DesRon 11, a 14-ship squadron steaming from San Francisco to San Diego. Misled largely by overreliance on the commander’s dead-reckoning navigation, the squadron undershot the turn into the Santa Barbara Channel and instead ended up on the rocks at Point Pedernales, several miles to the northwest.

The squadron had navigated by dead reckoning for most of the trip, but as the ships approached the channel, the squadron’s commander obtained bearings from a radio direction station at Point Arguello. The bearing placed his ship, the Delphy, north of its dead reckoning position. Convinced that his dead reckoning was accurate, the commander reinterpreted the bearing data in a way that confirmed his erroneous position and ordered a sharp course change towards the rapidly approaching coast. Nine ships followed the disastrous course.

Meanwhile, the deck officers on the Kennedy, the 11th boat in the formation, had concluded from their dead reckoning that they in fact were farther north and closer to shore than the position given by the Delphy. The skipper was skeptical, but the doubt the deck officers raised was sufficient for him to hedge his bets; an hour before the fateful turn he ordered a course change that placed his ship several hundred yards to the west of the ships in front of them, allowing the Kennedy and the three trailing destroyers to avert disaster.

The essential difference between the two skippers’ responses was that the Delphy’s skipper ignored evidence that invalidated his dead-reckoning information and narrowed his cone of uncertainty at the very moment when the data was screaming out to broaden it. In contrast, the Kennedy’s skipper listened to the multiple sources of conflicting weak information and concluded that his ship’s position was much less certain than assumed. He hedged their bets and, therefore, saved the ship.

In forecasting, as in navigation, lots of interlocking weak information is vastly more trustworthy than a point or two of strong information. The problem is that traditional research habits are based on collecting strong information. And once researchers have gone through the long process of developing a beautiful hypothesis, they have a tendency to ignore any evidence that contradicts their conclusion. This inevitable resistance to contradictory information is responsible in no small part for the nonlinear process of paradigm shifts identified by Thomas Kuhn in his classic The Structure of Scientific Revolutions. Once a theory gains wide acceptance, there follows a long stable period in which the theory remains accepted wisdom. All the while, however, contradictory evidence is quietly building that eventually results in a sudden shift.

Good forecasting is the reverse: It is a process of strong opinions, weakly held. If you must forecast, then forecast often—and be the first one to prove yourself wrong. The way to do this is to form a forecast as quickly as possible and then set out to discredit it with new data. Let’s say you are looking at the future cost of oil and its impact on the economy. Early on, you conclude that above a certain price point, say $80 a barrel, U.S. consumers will respond the way they did during the Carter administration, by putting on cardigans and conserving energy. Your next step is to try to find out why this might not happen. (So far it hasn’t—perhaps because Americans are wealthier today, and, as evidenced by the past decade’s strong SUV sales, they may not care deeply enough to change their habits on the basis of cost alone until the oil price is much higher.) By formulating a sequence of failed forecasts as rapidly as possible, you can steadily refine the cone of uncertainty to a point where you can comfortably base a strategic response on the forecast contained within its boundaries. Having strong opinions gives you the capacity to reach conclusions quickly, but holding them weakly allows you to discard them the moment you encounter conflicting evidence.


Rule 5: Look Back Twice as Far as You Look Forward
--------------------------------------------------

Marshall McLuhan once observed that too often people steer their way into the future while staring into the rearview mirror because the past is so much more comforting than the present. McLuhan was right, but used properly, our historical rearview mirror is an extraordinarily powerful forecasting tool. The texture of past events can be used to connect the dots of present indicators and thus reliably map the future’s trajectory—provided one looks back far enough.

Consider the uncertainty generated by the post-bubble swirl of the Web, as incumbents like Google and Yahoo, emergent players, and declining traditional TV and print media players jockey for position. It all seems to defy categorization, much less prediction, until one looks back five decades to the emergence in the early 1950s of TV and the subsequent mass-media order it helped catalyze. The present moment has eerie parallels to that era, and inspection of those similarities quickly brings today’s landscape into sharp focus: We are in a moment when the old mass-media order is being replaced by a new personal-media order, and it’s not just the traditional media players that are struggling to adjust. The cutting-edge players of the information revolution, from Microsoft to Google, are pedaling every bit as hard.

The problem with history is that our love of certainty and continuity often causes us to draw the wrong conclusions. The recent past is rarely a reliable indicator of the future—if it were, one could successfully predict the next 12 months of the Dow or Nasdaq by laying a ruler along the past 12 months and extending the line forward. But the Dow doesn’t behave that way, and neither does any other trend. You must look for the turns, not the straightaways, and thus you must peer far enough into the past to identify patterns. It’s been written that “history doesn’t repeat itself, but sometimes it rhymes.” The effective forecaster looks to history to find the rhymes, not the identical events.

One must look for the turns, not the straightaways, and thus one must peer far enough into the past to identify patterns.

So when you look back for parallels, always look back at least twice as far as you are looking forward. Search for similar patterns, keeping in mind that history—especially recent history—rarely repeats itself directly. And don’t be afraid to keep looking further back if the double interval is not enough to trigger your forecaster’s informed intuition.

The hardest part of looking back is to know when history doesn’t fit. The temptation is to use history (as the old analogy goes) the way a drunk uses a lamppost, for support rather than illumination. That’s the single worst mistake a forecaster can make, and examples, unfortunately, abound. Jerry Levin, for instance, sold Time Warner to AOL in the mistaken belief that he could use mergers and acquisitions to shoulder his company into digital media the way he did so successfully with cable and movies. He ended up closing the deal just when AOL’s decade-old model was being wiped out by new challengers with models allowing them to offer e-mail free of charge. Another case in point: A dark joke at the Pentagon is that the U.S. military is always fighting the last war, and indeed it is evident that in the case of the Iraq conflict, planners in certain areas simultaneously assumed that Iraq II would unfold like Iraq I and dismissed Vietnam as a source of insight because the U.S. had “lost that war.”


Rule 6: Know When Not to Make a Forecast
----------------------------------------

It is a peculiar human quality that we are at once fearful of—and fascinated by—change. It is embedded in our social vocabulary, as we often greet a friend with the simple salutation, “What’s new?” Yet it is a liability for forecasters to have too strong a proclivity to see change, for the simple fact is that even in periods of dramatic, rapid transformation, there are vastly more elements that do not change than new things that emerge.

Even in periods of dramatic, rapid transformation, there are vastly more elements that do not change than new things that emerge.

Consider again that whirling vortex of the 1990s, the dot-com bubble. Plenty new was happening, but underlying the revolution were deep, unchanging consumer desires and ultimately, to the sorrow of many a start-up, unchanging laws of economics. By focusing on the novelties, many missed the fact that consumers were using their new broadband links to buy very traditional items like books and engage in old human activities like gossip, entertainment, and pornography. And though the future-lookers pronounced it to be a time when the old rules no longer applied, the old economic imperatives applied with a vengeance and the dot-com bubble burst just like every other bubble before it. Anyone who had taken the time to examine the history of economic bubbles would have seen it coming.

Against this backdrop, it is important to note that there are moments when forecasting is comparatively easy—and other moments when it is impossible. The cone of uncertainty is not static; it expands and contracts as the present rolls into the future and certain possibilities come to pass while others are closed off. There are thus moments of unprecedented uncertainty when the cone broadens to a point at which the wise forecaster will demur and refrain from making a forecast at all. But even in such a moment, one can take comfort in the knowledge that things will soon settle down, and with the careful exercise of intuition, it will once again be possible to make a good forecast.

Consider the events surrounding the fall of the Berlin Wall. In January 1989, the East German leader, Erich Honecker, declared that the wall would stand for “a hundred more years,” and indeed Western governments built all their plans around this assumption. The signs of internal collapse are obvious in hindsight, but at the time, the world seemed locked in a bipolar superpower order that despite its nuclear fearfulness was remarkably stable. The cone of uncertainty, therefore, was relatively narrow, and within its boundaries there were a number of easily imaginable outcomes, including the horror of mutual destruction. Uncertainties popped up only where the two superpowers’ spheres of influence touched and overlapped. But even here, there was a hierarchy of uncertainty: When change eventually came, it would likely unfold first in South Asia or restive Poland rather than in Berlin, safely encircled by its wall.

But the Berlin Wall came crashing down in the fall of 1989, and with it crumbled the certainty of a forecast rooted in the assumption of a world dominated by two superpowers. A comfortably narrow cone dilated to 180 degrees, and at that moment the wise forecaster would have refrained from jumping to conclusions and instead would have quietly looked for indicators of what would emerge from the geopolitical rubble—both overlooked indicators leading up to the wall’s collapse and new ones emerging from its geopolitical detritus.

Indeed, the new order revealed itself within 12 months, and the indicator was Iraq’s invasion of Kuwait on August 2, 1990. Before the collapse of the USSR, such an action would have triggered a Cuban Missile Crisis–like conflict between the two superpowers, but without a strong Soviet Union either to restrain Saddam or saber-rattle back, the outcome was very different. And with it, the new geopolitical order was obvious: The cone of uncertainty had narrowed to encompass a world where the myriad players once arrayed in the orderly force field of one superpower or another now were all going in their own directions. All the uncertainty shifted to center on whether the single surviving superpower could remain one at all. Iraq II of course has provided the answer to that question: A unipolar superpower order is not possible. As others have observed, we live in a world where the sole remaining superpower is too powerful to ignore but too weak to make a difference.

Bottom line? Be skeptical about apparent changes, and avoid making an immediate forecast—or at least don’t take any one forecast too seriously. The incoming future will wash up plenty more indicators on your beach, sooner than you think.• • •

Professional forecasters are developing ever more complex and subtle tools for peering ahead—futures markets, online expert aggregations, sophisticated computer-based simulations and even, horizon-scanning software that crawls the Web looking for surprises. That is why it is essential for executives to become sophisticated and participative consumers of forecasts. That doesn’t mean you must learn nonlinear algebra or become a forecasting expert in your own right. At the end of the day, forecasting is nothing more (nor less) than the systematic and disciplined application of common sense. It is the exercise of your own common sense that will allow you to assess the quality of the forecasts given to you—and to properly identify the opportunities and risks they present. But don’t stop there. The best way to make sense of what lies ahead is to forecast for yourself.
 
   - Paul Saffo (paul@saffo.com) is a forecaster based in Silicon Valley, in California.
     July 2007

[ *** My Added Rule 7 - February 6, 2021 - MCL. ***  ]

Rule Number 7 - (see below)...

MCL's Note:   Nothing wrong with learning a little non-linear algebra.   It can be kind of fun, and combined with the non-linear output from neural-network models, it can offer actionable suggestions on which way the trend is pointing. 

Jessie Livermore did some very similar work with his "Pivotal Point" charting, using two prices of related securities, creating a third synthetic "Key Price" (just  a linear combo of his two tracked stocks), and then using red and blue ink, and pencils to document the price movements of all three price series over time, depending on how they tracked.    This model is detailed in his little monograph "How to Trade in Stocks", original published in 1940, shortly before he shot and killed himself in the washroom of his favourite restaurant, November 28th, 1940.  

His "Pivotal Point" approach is actually a fine little algorithm.  And using two related price-series, combined with a synthetic third series - and tracking how they evolve thru time, is a clever and insightful methodology for several reasons.  

Also, one should know that Livingstone had millions in cash in his apartment when he died.   His second wife - Harriet - was an interesting person - she had been married 4 times before, and each time, each one of her previous husbands had committed suicide. (!!?)  Jessie's suicide was number 5 in a sequence.  It is profoundly curious and interesting that this clever fellow, who had great facility with numbers, and had successfully developed techniques which let him understand and see how price-series-data evolved thru time - could be so blind to this lethal dataset sequence that lay behind this woman he married. 

I was curious, did some reading - and found out that this woman insisted that Jessie call her every hour on the hour each day, "just to let her know he was safe".   That provided some insight.

Livingstone didn't kill himself over money.  I suspect he was just number 5 in a sequence.  Once a person gets an algorithm that works really well, it is unrealistic to expect them not to apply it, if it is still working.  The evidence suggests Harriet had an algorithm.  According to one of the Livingstone biographies, when Harriet was informed of her husband's death, she removed several large shopping bags full of cash (well over $1 million, is the estimate) from their New York apartment, and took it away in a cab, along with her jewelry, to an undisclosed address.   We have no explicit knowledge of what drove Livingstone to suicide, and although he left a long note in his notebook, it does not seem to have been preserved or published anywhere.  Information in one of his biographies indicates it dwelt on the theme of failure over and over.

Rule Number 7 (Seven is the big one): 

----------------------------------------------------

If you are forecasting and then using this information for trading, recognize that you are swimming in dangerous seas of randomness, and you must nuture and protect your own emotional stability and peace-of-mind at all costs.  You will have losses.  You will have bad times and reversals.  How you handle these will determine - to a large degree - how successful your outcomes will ultimately be.  Bet carefully, hedge if you need to, and keep your life and your actions, and your mind itself, under gentle, yet firm control.   Remove and/or restrict anything that threatens to damage or degrade your emotional balance and mental well-being.   This is the most important rule of all.

====

The Great "Wheel of Fortune" will turn.  And even when you see and forecast successfully how it will turn and what will occur - you may still make errors, have technical problems, be misled or cheated, and fail to profit.  You may be shredded by an exogenous variable that cannot be foreseen.  It may be a virus, a war, a bandit gang, a military coup, an earthquake, or a jealous lover. 

But guys (and gals), at the very least - apply the same discipline to your emotional life as you apply in your work, just for your own safety.    I would forecast that it might be unwise to hook-up with a mate who had a string of suicides in their previous marriages.   One or two is bad, three is pretty clearly a pattern, and OMG, 4 is right out!  Run the other way! 

Do whatever you have to do, to maintain your own emotional balance, and mental stability.  You will need it in your trading.   It is a critical and necessary part of what will let you be successful.  

Reserve part of your day, for things that are relaxing, and keep your mind calm and on an even keel.  Stay cool, and try to take some enjoyment in watching the cycles turn, and the wild storms of randomness lash rain against your windows.   Make sure you live somewhere you like, and are with someone who understands you and is good for you.   In your inner heart, you know whether or not this is the case.  I often made changes or took decisions that seemed very un-economic (eg. leaving the City, buying a farm, and settling on it to live).  I did this because I just wanted to.   I suspect it has probably saved my life, perhaps several times over.  

I like where I am, and what I am doing - and I realize this is something many people cannot say.  I find this curious.  But the rational economist in me says:  "No, you are fine and rational.  You simply, wisely, factored in psychic costs and benefits.  This was not an irrational choice, despite the lower level of financial gain it implied - as the psychic benefits are profoundly valuable."

Your own peace-of-mind is the most valuable asset you possess.  Guard it carefully, and value it correctly.   😀

[ Sept. 23, 2021] - Market Swings very positive, up over 544 points on the DJIA as I key this. US Fed has said it will soon begin to taper bond purchases, and Evergrande has said it will pay interest on its bonds. It seems any forecast gets hit now, just wait a few days... :) But this AI generated forecast was not very useful.


[ Update: Sept. 21, 2021: This played badly. Market collapsed in response (most say) to expected default of a major Chinese property development company - Evergrande. We expect this latest fiasco will not be serious.

[ Sept. 20, 2021] The forecast was not right. Mkt tracked opposite of this expectation indicated here. A nice try, but it was simply wrong. Mkt moved down, instead. :/

[ Sept. 15, 2021] Actually, fcst is showing slight upward bias.

[ Sept. 14, 2021] Tracking flat to down. Not a nice month or time of year. The massive Biden tax increases, coupled with the unwise expansion of more extreme leftist entitlement costs in USA, has to weigh on the American world. The spectacular debacle of the Afghan collapse and surrender to the Taliban has also badly tarnished the image of "American Power". The world has been shown - clearly, without ambiguous messaging being possible - that American power and influence is on the decline. These two factors, combined with rising commodity prices, material shortages and still-lethal Covid infections mutating rapidly, suggests it will be difficult to maintain an upward-trending market in US shares. Defensive postions in dividend-paying stocks seems to be indicated now, more than ever.

Bonds are again perhaps poised to become "certificates of capital confiscation" as they were known back in the 1970's, in the times of high-inflation and rising rates. The model still has a tiny upward bias, but it likely will not tonite, when after we run it, with today's numbers. FD: We remain full invested a mixed basket of telecoms and financials. Why? For the money, of course. We are getting yields of 5 to 6 percent, and we expect these to continue for the foreseeable future.

One key point: Today, as the markets experienced across-the-board weakness, we note Bitcoin is currently quoted up $1,894 per coin, to $46,570, a 4.24% upmove. This makes Bitcoin curiously attractive, due to it's *negative* correlation with the movement in share prices (down 308 on Dow-Jones 30, -0.88%). If you are running a big portfolio, Bitcoin, just because of its inverse price correlation, is basically what you are looking for, since share prices now all seem to move together. Bitcoin reminds me a bit of the old idea of "God" - a rather silly idea, with serious implementation issues, but so useful that it's very non-existence mandated it's invention. :)

[ Sept. 1, 2021 ] - updated forecast for our testbed security. We tweaked the parameters, more restrictive assumptions, slight changes, updated program, re-ran forecast, and we still get the up-pointing vector.

Does the AI know something we don't? Not possible. But we have man vs. machine thing happening here, it appears. I consider this a rather dangerous time, and have trepidation and concern. The traditional technical patterns looks negative - head-and-shoulders formations, failure to break thru obvious resistance levels, an unattractive time of year (September is often an ugly month) and monetary conditions - which while still attractive, suggest that the future holds less-attractive conditions, 6 to 12 to 18 months out (the time-frame locus that the market generally trades upon), so all in all, caution and a possible shift in market-position structure seems indicated - and the market price weakness we see each day, that seems to confirm this somewhat negative thesis. And add to this witches-brew of concern, the ugly and dishonest actions of the Americans in Afghanistan, and one gets a strong feeling to pull out of the market for a while.

And yet, this AI model says, yes, all that is priced-in. This stuff represents ownership of a wildly-profitable, low-risk business, that is still growing, has global opportunities, and is throwing out almost 5% in reasonably hard-currency cash. Even if it fluctuates 5 or 10%, it is a
fine holding. And it has built a base from which new buyers will have to bid the price up, if they want to take positions. (This is not the AI - just the counter-argument I would make, if I was attempting to make that thesis.) The AI just looks a prices and patterns.

FD: (Full Disclosure): We remain significantly long here, as the dividend stream is attractive, and the local economy seems to be ticking along at a good, stable crusing speed, and we run our portfolios typically with very little, or no, debt or "gearing". This allows us to sleep at night, and also to take advantages of opportunities, if and when they appear. We find - even with the technology - it is difficult to forecast the future with significant accuracy.

Who would have expected a buffoon like Joe Biden, to execute such a fool-stupid strategy in Afghanistan? It is one of the most stupid, tragic and awful things I have ever seen play out - far worse and with more far-reaching consequences than the Vietnam defeat. But it teaches us clearly, so many things. You simply CANNOT TRUST what American authorities say. Their entire world changes every election-cycle. Their political-people will say and do anything to win the elections, and their legal systems and administrative processes are hostage to this reality.

We must ALWAYS remain aware of this. This reality allows American markets to be dynamic and flexible in operation, as both opportunity and danger dance together in a never-ending demonic waltz. Dance with this process, and both wealth and disaster are possible. But don't expect any sort of long or even medium-term stability.

Everyone has to understand this now. The only real integrity that is possible, seems to come from private companies and their agents, who have a deep and real desire to operate with honesty, and with the necessary long-term planning horizon to allow real results to be accomplished. The business of America is business. It is what they do honestly, and well (mostly). It's the politics (like here in Canada also), that is so badly broken. We all have this problem now, sadly.

But our model - and our medium and long-term picture of the world, advocates remaining long, all-in. And so we are.

Stay tuned... We will see how the plays...

[ Update: Sept. 21, 2021: It played badly. Market collapsed in response (most say) to expected default of a major Chinese property development company - Evergrande. We expect this latest fiasco will not be serious.

Ram-headed god Khnemu: "Well, thank-you Ptolemy. The Gold Balls are very nice. But I was rather hoping for some Bitcoin and an equity position."

Ptolemy-V: "Well, Khnemu, we think the markets are really stretched now, and the Seers - and the old grey Analysts - seem to think it's all about to break down in a rather ugly fashion. We thought you might be happier with the gold, since - you know - you live forever, right?"

This is where I live. Many years ago, I sold my downtown Condo in the City, and bought a farm. Most of what you see, in this picture, is my land. It is good land. This has turned out to be a very good decision. I could not forecast "Covid-19" and the 2008 "Financial Crisis', but I could determine that urban-life was not healthy, was not nice, and I was not happy in the City. Rule 7 was applied, and it worked well.

Below, I describe the results of a real-time experiment, where we tried to forecast the track of an equity price, during September, 2021. It did not work very well, as the market swung with significant volatility. But it did encourage us to remain fully invested, long financial stocks. This has been a trade that has been working well for almost two decades now. And as of late September 2021, it is still working.

C_Machine AI forecast for testbed equity position, Sept. 16, 2021. Still slight positive upward bias. FD: We remain fully invested, all in. (Hurts a bit. My "inner trader" wants to trade technical...)

[ Sept. 20, 2021] - My cynical "inner trader" beats the AI, hands down. The inner-voice demanding I trade on technical patterns, is growing more insistant. It is an interesting real-time experiment. The chart above shows a disturbing, classic "head-and-shoulders", a negative pattern, which suggests decay in future price prospects. Today, market opens down 550 points on the DJIA, and no news stories - just Fed chatter and more disaster stories of the failing Biden White House. Some pundit-poltroons assert the market is getting contagion from the Evergrande implosion (a bogus China real-estate investment company - We've always said it's bogus, since all land in China is owned by the Reds. "Real-estate" in China is pure bogus, a big house built on the sand of Communist deception. But that had to be priced in already. The meltdown today is a North-Am thing, more based on season than Sezchuan. We have such serious "idiots-in-charge" problem in both Canada and USA. We cannot blame China for our failures here. Really, it's just that America seems dangerously off the rails, and the political collapse is now being mirrored in the market.

The AI's mechanical focus is missing the decaying "spirit-of-the-times". Perhaps I need to include a "zeitgeist" parameter?? :/

Stock certificates and Bonds that are worthless - except as economic history artifacts.

To forecast economic valuation levels: Forecast a future value of zero. Your forecast will eventually be correct.

(I found these among my dead father's legacy material...)

Namazu - the mythical giant catfish that was thought to cause terrible earthquakes and tsunami waves - approaches Edo Japan, and the Builders, Construction workers, and Brothel owners and their women, celebrate because of the fountain of gold koban coins that will shower down upon them. Destruction meant death and poverty to many, but wealth & good fortune to others, who could profit from the disaster and the necessary rebuilding work. The future is uncertain, but people do not really change much at all. That is how we can often forecast what will happen, once we know what actually IS happening.

One can safely and accurately forecast that the sun will rise next morning. But *YOU* may not. Remember this.