Monday, September 11, 2006

Magnifying the Trivial

Hussman continues to be bearish or, at the least, hes not convinced there is any compelling reason to have market risk in is holdings.

Hussman Funds - Weekly Market Comment: September 10, 2006 - Magnifying the Trivial: "Think of it this way. Suppose that there was a high 80% chance that the market will rise 10% over the coming year, and just a small 20% chance that it will decline 15% over the coming year. Sound like good odds? Well, given those odds, the expected return would be [.80(10%) + .20(-15%) = ] 5%, which is the same as you'd get in risk-free T-bills. A risk-averse investor wouldn't take the bet. "


At 2:58 AM, Blogger said...

Yes, but one can easily propose a more detailed list of possible outcomes instead of a "80% chance of a 10% gain" such as:
20% probability of 5% gain
40% probability of 10% gain
10% probability of 15% gain
10% probability of 20% gain
that looks reasonable,and, combined with the 20% probability of 15% loss
end up with an overall "expected return" of 5.5% - which is better than T-bills or even your friendly online bank account.

Any playing with numbers that is based on someone's "guestimates" of next year's "likely returns" is a waste of time. Forget market timing based on guesses, and just stick to your long term asset allocation mix. If you start playing with dynamic asset allocation you might win - but it would be a fluke, and you're just as likely to reduce your returns as make any improvement.


At 6:15 PM, Blogger Will said...

Talk about magnifying the trivial! The harangue re. the Scooter pardon takes the cake. For example try, this.


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