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What An Ordinary Market Looks Like

During the week I posted a link to some remarkable charts coming out of China. These show what a market in the grip of mania look like. The chart below is what a market that is struggling to get out of bed looks like.

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Its Friday

And I am about to jump a plane to speak at Michael Yardneys Wealth Retreat but before I go, a little something that reinforces the first rule of Buddhism – dont be a dickhead….




Love this chart by Jon Boorman at Alpha Capture

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Why The Oldest Person In The World Keeps Dying

Weaver’s five-day run as the oldest person in the world was short, but it turns out that the oldest person in the world never holds that title for very long. Since records started being kept in the 1950s, the average tenure has been just around a year, according to the Gerontology Research Group; it has dipped to just seven months since the year 2000. Weaver’s incumbency isn’t the shortest in recent years; North Carolina’s Emma Tillman died four days after becoming the world’s oldest person in 2007.

When she died, Weaver was the seventh-oldest person in verified history. The woman who preceded her as the oldest living person in the world, Japan’s Misao Okawa, died a month after she turned 117 — older than all but four other people in verified history. (Okawa credited her longevity to lots of sleep and lots of sushi.) The current oldest living person in the world, Jeralean Talley, is one of 11 children of Georgian farmers and is the 12th-oldest verified person in history; Brooklyn resident Susannah Mushatt Jones is only 44 days younger than her.

No one in the past 15 years has gotten anywhere close to the longevity of Sarah Knauss and Jeanne Calment, however. Knauss lived to be 119 years old, while Calment, a chain-smoking Frenchwoman and our modern Methuselah, was 122 years old when she passed away in 1997. (She was the oldest living person in the world for more than nine years.) They are the only two people known to have lived past 118.

More here – FiveThirtyEightLife

Now This Is A Rally

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More eye watering charts here – Bloomberg

So What?

I got bounced the snippet below by a punter who had taken it from The Reformed Broker

Screen Shot 2015-05-26 at 9.35.56 amThis particular punter has a penchant for anything that indicates that the market might be about to have a correction of any sort. As such they are drawn to this sort of analysis. The drivel about trailing PE’s is neither here nor there – it is simply someones narrative based upon their assumptions. The bit that interests me is the following implication –

The market has not had a 10% correction for sometime (longer than average) and is therefore due for such a correction.

I have a few problems with this sort of statement. Firstly, it is based upon an average and an average is a very blunt tool that doesn’t convey as much information as people think it does since it misses the notion of both variation and the circumstances of actual incidents.  The average does not contain much fidelity about what is actually occurring hence the old joke about the statistician who drowned in a creek with an average depth of three feet. Variation is the key to understanding any situation.

The second point I have difficulty with is that this has an inkling of the gamblers fallacy. This fallacy is based upon a misunderstanding of how statistics work. For example imagine you are betting on the toss of a coin – our intuitive sense of probability says that we expect that we have a 50/50 chance of a toss resulting in a head or a tail and that these outcomes are independent events.  So our chance of throwing 2 tails in a row is 0.50 x 0.50 or 0.25, the odds of throwing 3 tails in a row is 0.5 x 0.50 x 0.50 or 0.125. Thus the probability of extended streaks of a single outcome decreases. It is these extended streaks that catch people out. Their reasoning is that since there has been a run of single outcomes then the underlying probabilities governing the event changes. This is the gamblers fallacy in action.

Lets assume that we have tossed 5 tails in a row – the probability of such a streak is 0.50 x 0.50 x 0.50 x 0.50 x 0.50 = 0.03125. In any given sequences of tosses there is a small chance of generating this run. However, this probability applies to the run itself, it does not apply to the coin toss. If we toss the coin again the probabilities of it being either a head or tail remain fixed. They have not altered – the coin has no memory of past events. It is this disconnect between the probability of a string of events versus the probability of a single event that catches people out. Just because there has been sometime between a 10% correction on the S&P500 does not automatically imply that a 10% correction is inevitable anytime soon.

At some point in the future the market will undoubtedly correct – when this might be I have no idea, but more importantly nor does anyone else.


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