Is the trend really your friend?

“Many shall be restored that now are fallen and many shall fall that now are in honor.”
Horace, Ars Poetica.

We humans have a tendency to extrapolate recent trends into the distant future.  This approach doesn’t work in the real world. 

Stocks that roared from 1996 to 2000 were expected to keep roaring.  They didn’t.

The national housing market that hadn’t declined since the 1930’s was expected never to decline.  It did.

Extrapolating recent trends into the distant future is foolhardy.  And yet, people do it over and over again.

Once dominant IBM became less so.  The same can be said for Apple and Google today, or even Facebook and LinkedIn.  But, try telling that to the raving supporters of such companies.  You’ll be angrily told you don’t get it.

China is on the upslope and Japan on the downslope.  These trends, too, are unlikely to continue.  Such is the nature of things. 

Regression to the mean–the tendency of economic series to drift back to average–is a well-founded phenomena.  And yet, people expect present trends to continue forever.  They won’t.

Corporate profit margins are at all-time highs.  They won’t continue higher for long, or even stay at today’s levels.

Commodities have been roaring.  That trend will not go in one direction.

Bond yields have been going down since the early 1980’s.  That cannot continue indefinitely.

The U.S. government has never significantly defaulted on its debt.  Just a matter of time.

Small capitalization companies have done exceedingly well over the last 10 years.  The future will not look the same.

Emerging markets have been on a decade-long tear.  Anyone want to bet that will go on forever?

Trend extrapolation is a dangerous way to invest.  And yet, people keep doing it over and over again–and then losing their shirts.

A few trends last long, but they are the exception, not the rule.  Those who bet on a regression to the mean always look stupid in the short run, but then rich in the long run. 

So, why are so many suggesting, once again, that the trend is your friend?

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Is the trend really your friend?