Data-Driven Investment

Would you know that even with my 12 years of experience on the traditional buy-side of the investment industry and my title as a Chartered Financial Analyst, I still can’t predict the market?

They base their answers on what they think they know, but they aren’t using cold-hard facts.

Some investors use price-to-earnings ratios, which leads to fundamental analysis, which is good. Other technical experts look at the technical momentum to make decisions. No matter their expertise, though, all experts have some level of human bias, myself included.

 

Drastic Market Changes

Let’s take a 10% drop in the market in a single day as an example. It’s hard to wrap your head around what happened, right? Now you’re expected to analyze the situation and make rational decisions? Even the most stable investor can’t do that.

We all make irrational decisions, even in good times. We either get scared and panic or get excited and sell too soon. What if you miss the upside opportunities? What if you don’t change your portfolio to be slightly more conservative to ride out the storm?

Without using the logistics of a machine to make your investment decisions, you put yourself at the mercy of behavioral factors and poor investment decisions. Honestly, every time I watch CNBC and hear the commentator make short-term stock pick suggestions for his viewers, I think ‘Wow, he must have a computer for a mind to be able to process such important information so quickly and rationally.’

The truth is, his opinion is a biased one. No one can time the market that quickly.

 

Stop the Irrational Investment Decisions

Successful investors must know how to limit the risk of making irrational investment decisions. If you’d love to learn more about how this works, I suggest reading Edwin Burton’s Behavioral Finance.

What else can you use? It’s the tool I love the most – data. It doesn’t lie, or at least not nearly as much as humans. There’s always room for error, but it’s a lot more reliable than any human advice could ever be.

 

Making Rational Data-Driven Decisions

The above commentary doesn’t mean I can predict the market or time it perfectly. No one can – not even the best algorithm available today. Take COVID-19 for example. Did any algorithm or even person predict it? No, it threw us all for a loop. Why? Because there isn’t enough data surrounding pandemics, but now we’ll have that data and investors can use it to make more solid decisions.

This is all to say, data won’t help you beat the market, timing it perfectly all the time. But, it will help you make rational data-driven decisions.

 

 

Our Free Interactive Stock Market Indicator

  • Every data point on the visualization is clickable.
  • When clicked, it will show underlying information.
  • Yellow bars represent recessions.
  • Red dots indicate ChuckyData’s recession warnings.

 

The dashboard will be updated as soon as we can access the underlying data we trust. Please note a few of the data factors we use for running our model are only updated monthly via FRED.

According to our algorithm, there were a few recession warnings in late 2019. Coincidentally there was a short recession period in 2020 due to COVID-19. Did our recession warnings predict it? I don’t believe so. However, historically speaking, the real recessions have arrived 12 – 18 months after our warnings. Are we going to have another recession soon? This is where your rationalism comes into play. You decide if you should take the warnings seriously or ignore them. Our algorithm is built based on the analysis of historical records and their relationships with past recessions. 

Please note, ChuckyData is not an investment advisor and is not providing any investment advice. We will continue to help you see what the data says.

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