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Past performance IS indicative of future results

Why do people selling supposedly great ROI on the stock market MUST disclaim that "Past performance IS NOT indicative of future results", or else face litigation?

If I had to tell that statement to my clients, nobody would buy. Indeed, I tell the opposite (as in the subject line), because I'm confident about my predictions based on 20 years of experience, and because it is true. Yet I did not take any of the SEC exams, and will never do.

This absurd law has been enacted because the people selling securities and stock trading strategies (so called financial advisers) are pure sales people with no analytic skills. In short, they are selling snake oil. True stock market experts design and sell market-neutral strategies, based on cross-validation involving BOTH "walk forward" and "back-testing", together with state-of-the-art sensitivity analysis (that is, how much your strategy is robust against trading errors). These strategies don't tank when the market is going down, or conversely - and they are tested on long term data, using time series techniques and volatility elimination techniques.

Of course, many simple strategies don't work because everybody use them - and the statistical laws of arbitrage clearly predicts that these strategies can't work when too many people use them (cannibalist law #1). A bit of (impossible to prove) insider trading (e.g. you get a job interview with a company you want to invest in, to harvest useful business information) together with trading strategies unlikely to be used by Wall Street gurus, and maybe some social network data analysis, will give you a strong boost.

Just my 2 cents, would love to read your comments.

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Comment by Dmitriy Kruglyak on October 14, 2012 at 2:15am

This is Exhibit #7983858 from the list of requirements created by ridiculous government regulations that assume consumers cannot think for themselves and need to be "protected". Politicians use this to get votes.


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