You might have had this thought before. If I could see into the future, I would really make money in the stock market. Like shooting fish in a barrel, as the saying goes. If only I knew who was going to win the election, surely I could profit from that! It seems logical, much like getting inside information on a company before anyone else does and acting on it.
While getting information in advance might seem helpful, Nassim Taleb disagrees. Taleb authored a classic book on investing entitled The Black Swan. A main focus of the book is the occurrence of rare events, hence the title. After all, we all know swans are white, right? In his book, Taleb makes the bold statement, “give an investor the next day’s news and he’ll be bankrupt in a year.”
Victor Haghani and his colleagues at Elm Labs decided to test Taleb’s statement in the fall of 2023. They put together a group of 118 young adults with financial training. Their experiment was called “The Crystal Ball Challenge”. Each participant received $50 that allowed them to trade stocks or bonds or both. Participants were given the information printed on the front page of the Wall Street Journal one day in advance. The contest covered 15 days selected at random, one day from each year during the period 2008 through 2022.
Financially trained participants with front page financial news in advance. A winning combination, right? Actually, no, not at all. Roughly half of the group lost money and one out of six went completely broke. The average participant ended up with $51.62, a gain of about three percent! Despite being given the news in advance, players guessed the direction of stocks and bonds correctly only 51.5 percent of the time. Pretty much equivalent to a flip of the coin.
The experiment by Haghani and colleagues pretty much bears out the statement made by Taleb. Advance notice of the news does not produce excess returns. Former Goldman Sachs CEO Lloyd Blankfein seemed to echo this belief in a tweet he sent years ago: “this is one of those trading days where if you had the news in advance, you REALLY would have lost a lot of money!”
The good news for you as an investor: you don’t need a crystal ball to make money in the stock market. But you do need patience. Markets go up and down. But over time they go up. They reward folks who stick to a steady plan and don’t react to the news of the day. Even if you don’t have a crystal ball!
