Big Ideas
These blog entries offer some big ideas of lasting value relevant for investing and trading.
Random Walk, or Not? November 6, 2009
A reader asked: “Do the equity markets still follow a random walk? Has CXO Advisory Group LLC completed an autocorrelation test of S&P 500 Index returns recently? It would be informative to discover if randomness still dominates daily, weekly, monthly, quarterly and annual equity returns.” More…
Clarifications of The Black Swan October 22, 2009
Is The Black Swan: The Impact of the Highly Improbable gimmicky or profound? In his October 2009 paper entitled “Common Errors in Interpreting the Ideas of The Black Swan and Associated Papers”, Nassim Taleb seeks to clarify the import of this book and related publications, with some key points as follows: More…
How Can You Avoid the Fat Left Tails? October 10, 2009
A reader asked: “Do you have any insights on protecting one’s portfolio from the bad losses in the fat left tails of return distributions? Is there any data about stop-losses that actually work?” More…
You Should Look at Didier Sornette’s Work Again September 21, 2009
A reader suggested: “I know you’ve looked at Didier Sornette’s work in the past, but I think it would be worthwhile to look at his work again. His latest is ‘Bubble Diagnosis and Prediction of the 2005-2007 and 2008-2009 Chinese Stock Market Bubbles’, with abstract as follows:” More…
Basic Equity Return Statistics September 10, 2009
What do the basic statistics of stock market returns tell us about risk and predictability? Basic statistics are the measures of the moments of the return distribution: mean (average), standard deviation, skewness and kurtosis. Are these characteristics of stock market returns (and the risk-reward environment they imply), stable over time? To make the investigation manageable, we calculate these four statistics month-by-month based on daily returns for each month. Using daily closes of the Dow Jones Industrial Average (DJIA) for January 1930 through August 2009 (956 months) and the S&P 500 index for January 1950 through August 2009 (716 months), we find that: More…
U.S. Stock Market in 2000s = Japan’s Stock Market in 1990s? September 3, 2009
A reader asked: “I came across an interesting article comparing the Nikkei 225 Index in the 1990s with the S&P 500 Index in the 2000s. Do you have any opinion on this study? Also I would love for you to post some data on how different asset classes performed in Japan from 1991 (the beginning of the ‘Lost Decade’) until now.” More…
A Rather Unsatisfying Morass of Variables August 31, 2009
Has the last generation of academic research clarified which factors/characteristics/indicators predict which stocks will outperform and which stocks will not? How can academia do better? In his August 2009 paper entitled “The Cross-Section of Expected Stock Returns: What Have We Learnt from the Past Twenty-Five Years of Research?”, Avanidhar Subrahmanyam reviews recent research on cross-sectional predictors of stock returns at monthly or longer horizons and offers observations on how to improve this research. Citing a large number of relevant studies, he concludes that: More…
The Value of Fundamental Investment Research? July 30, 2009
Is it possible to measure the value of fundamental investment research? How does the degree of measurability affect the behaviors of investors and financial markets? In the June 2009 version of his paper entitled “Investment Research: How Much is Enough?”, Bradford Cornell speculates on answers to these questions. Citing a range of research on mutual fund research practices and performance, he concludes that: More…
A Few Notes on Reading Minds and Markets July 24, 2009
In his 2009 book, Reading Minds and Markets: Minimizing Risk and Maximizing Returns in a Volatile Global Marketplace, author Jack Ablin, Chief Investment Officer for Harris Private Bank, seeks “to help individual investors gain a foothold in a fiercely competitive investment marketplace… My own approach to doing this is not a get-rich-quick scheme… To successfully outperform the market over the long term…, you need to learn how to read the market’s mind, to figure out where the risk and rewards are most acute at any given point in time… I use the model and the tools I describe in this book every day of the week. …I show you exactly how to do so…” The principal messages of the book are: More…
Against the Gods: A Few Notes from the Summation July 10, 2009
In his 1996 book, Against the Gods: The Remarkable Story of Risk, financial historian, economist and educator Peter Bernstein traces in narrative fashion the development of probability and statistics in the service of risk management. In the closing chapter, he offers a few overarching conclusions, as follows: More…
