A History Lesson for Wall Street Resesarchers
Wall Street researchers are terrible at history!
The worst examples occur when they make hasty and sloppy comparisons. A current example is finding an old chart from one time period and lining it up with current trading. This is a blatant form of data dredging, but some find it to be compelling reading. (Here is a typical example from The Big Picture, but please note that the inference is not endorsed by Barry Ritholtz).
The problem is that everyone who follows the markets looks at charts on a daily basis. Even the non-technicians claim some basic skill. Show us a chart, and we all have an opinion.
At "A Dash" we have tried to point out that the data we really need for good research is rarely available. This forces us to reach back in time — often way back — to get enough data to review more than one or two market cycles.
We seriously doubt that market data from the Taft Administration has much relevance for today. In fact, we question any information from the era before stock options and futures, and maybe before the invention of the personal computer.
There are some market characteristics that endure over time. Sure, everyone should read and enjoy
It is a question that must be asked repeatedly, every time someone presents data that reaches back more than twenty-five or thirty years ago.
It helps to be fully grounded and in touch with what people really believed in the era you are using. If one wants to use data from 1900, why not see what people were thinking then?
There is a wonderful list of predictions for the year 2000 made in 1900 by J. Effreth Watkins in The Ladies Home Journal. It is a rather long list, but very entertaining. Each of us will find certain favorite observations. (Thanks to Tyler Cowen at Marginal Revolution, where we spotted this).
Our own overall conclusion is that Watkins was very good at extrapolating technology known at the time — the rise of automobiles and improvements in medicine (including diagnosis), and the anticipation of FedEx (with a lot of pneumatic tubes).
He was less successful at quantification. The U.S. was to have 350 to 500 million people. We would have a life expectancy of 50 instead of 35 in those days) and everyone would be able to walk ten miles a day or be thought a "weakling."
He was predictably weak on technology that was just appearing like airplanes, which he thought would never replace the automobile for passengers and freight.
Most mysterious are the predictions that must have seemed plausible, but went terribly wrong? Why DO we still have all of these mosquitoes?
The lesson for those doing market research: Take care to make sure that historical comparisons are well-researched and appropriate.
The lesson for our fellow consumers of Wall Street research: Let the warning bells go off when there is a chart or analogy including a time period from long ago.