One of the most common approaches to estimate future is extrapolation of the past. We have been taught to identify trends and extrapolate these into the future – sometimes into the infinite future. However, many things in life, especially the financial market returns, are cyclical and they do not move on the same trendily forever.
This is where the fallacy of forecasting lies. Very often, we are able to correctly forecast so long as the trend continues. However, identifying the trend reversal ahead of time is almost an impossibility. That makes our prediction track record unreliable. We are right some time, and wrong at other times.
Be careful of forecast based on extrapolations.
#RidingTheRollerCoaster – 229