The value of market blogs

But there is one crucial, missing ingredient: theories.

Theories are our explanations of the world we see. When we observe and describe
our sample of the world, we build a model based on our perceptions and say to
ourselves, “This is what I think the world is like.” That model–our
theory–provides us with the hypotheses that we test. When we check out and
revise our hypotheses based on those tests, we’re really refining our internal
models of the world: our theories.

So where do market blogs come in?

It is rare indeed to find market blogs reporting statistical significance tests.
Blogs are online journals: they describe; they do not infer. The really good
blogs show you how an experienced investor/trader thinks. They not only provide
valuable observations, but show readers how the writer moves from description to
explanation: from data to model of the world.

Barry Ritholtz

recently mentioned that he has three objectives in market analysis: 1)
determining objective reality; 2) determining consensus on market issues; and 3)
identifying where consensus varies from reality. In other words, he builds the
most accurate model of the world that he can and then tries to find where market
prices are not factoring in that model. This is the essence of opportunity:
points at which the majority of market participants have not adequately updated
their own models of the financial landscape to account for new realities.

The financial blog attempts such updating–hence the popularity of links–but
also illustrates how the blogger uses this information to generate his or her
own map of the world. Specific trade ideas generated from this theory can be
thought of as partial tests of the blogger’s map; over time, it is objective
reality itself that provides the tests of the trader’s ideas. In that context,
every trade is a hypothesis: the trader’s P/L over time reflects the degree to
which the trader is skilled at generating and updating models of the world that
are superior to the models of the consensus.

How does one learn to become a scientist? In graduate school, you join a
research lab and apprentice yourself to an experienced investigator and the
senior students of that investigator. Such an apprenticeship teaches skills, but
also produces a modeling of the scientific process. For many traders, reading
the ideas of experienced market participants in the blogosphere is as close to
an apprenticeship as they’re going to get.