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A Basic Misunderstanding

The chart below is from a site called Spurious Correlations, it takes seemingly disparate facts and matches them together to create the illusion of a positive correlation. It is a simple and effective way of illustrating the problem of mistaking causation for correlation which is constant problem in the way people both think and view data.


If you were to take this at face value you would accept that there is a link between the number of films that Nicholas Cage has appeared in and the number of people who drowned by falling into a pool. You could even stretch the data a little and suggest that these drownings were not an accident and anyone who had even seen a Nicholas Cage film would nod sagely in agreement. Now consider the chart below which looks at significant historical events and the rise of the Dow.

This rather imposing looking chart is the centrepiece of an article titled The Dow’s tumultuous 120-year history, in one chart which appears on the MarketWatch site.  The article boldly claims the following –

At its simplest, the chart proves once again that over the long term, the stock market always rises because “intelligence, creativity, and innovation always trump fear,” according to Kacher.

No it doesnt – this is mistaking causation and correlation. What the chart shows is the profound upward bias of the Dow and this is the driving force of the index moving higher. This is an example of survivor bias nothing more. The original Dow components were as follows


It is obvious that these components would change over time and that this change would drag the index higher as non performing or irrelevant issues were moved out. The notion that it is innovation that is moving the market higher is not true and can be illustrated by the simple fact that Apple arguably the most innovative technology company of recent times was only added to the index in 2015. Google whose technology permeates everyday life and Amazon who have revolutionized retailing are nowhere to be seen. The Dow has remained technology light since its inception – if technology and creativity were the drivers of the market then these new companies would be added to the index very quickly.

It is quite a simple matter to generate events stick them on a chart and say they have some significance but simply saying it doesn’t make it true. As I explored last week news and significant events tends to have a complex relationship with an index and the question of does news move markets has been answered in the negative.

The article then goes onto make the bold claim –

 Investing is more challenging than brain surgery,” Kacher told MarketWatch.

I will leave others to ponder the idiocy of this last quote.

Dow Component Changes

I am still beavering away looking at changes in the S&P/ASX200 over time – it is a time consuming exercise as with all things Australian quality data is hard to come by. Both Standard and Poors and the ASX are friggen hopeless when it comes to providing useful hard core data for traders. However, the difference between the original S&P/ASX 200 and the current version is staggering. In the meantime I decided to have a quick look at the Dow which has proved to be much easier courtesy of Wikipedia


The cells highlighted in yellow represent companies that have held their spot over the past two decades. As you can see there has been significant turnover. And if you were curious about the weighting of each stock with the Dow these two neat little charts from IndexArb will help you.


Source – IndexArb

Bill Gates On Enthusiasm And Open Mindedness

Short three minute piece.

PS Gladwell is still wrong about the 10,000 hour rule. Talent beats practice anywhere, anytime……

Apple Versus Microsoft

I came across the chart below on the weekend.

Source – Why Microsoft Beats Apple

Unfortunately, it was accompanied by the following quote –

Today, those old rivals MicrosoftMSFT -0.53% and AppleAAPL +0.39% both look like inexpensive stocks.

Microsoft could be the better value. Not only is it cheaper than Apple relative to its earnings per share, but Microsoft’s business also has greater strengths, and better prospects, than the market appreciates.

Granted, when these two have gone head-to-head in the past, Microsoft has come off worse—in tablet computers, music players and smartphone software. Apple desktops and laptops also have gained market share in the past decade, albeit from a small base.

As you can see it is the usual collection of fluffy statements regarding value and other such bollocks. But, the article did serve a purpose in that it got me thinking about industries where you have two dominant players who are rivals in everything from their approach to business, the products they make even down to the personality of their CEO’s.

The first chart prompted me to look a little wider at the relative long term performance of the two.

As you can see if you had bought both companies in the early 1980’s and God forbid simply held them then you would be much better off with MSFT. Even with the fact that MSFT has gone nowhere for 14 years and AAPL has been the markets darling.

However, there is something much more interesting in the price trajectory of both companies that I might look at in more depth later on…….



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