Stumping about the Market

So if you haven't read my section about 'Our Own Ignorance' and Joe Bidden then you need to read that one before you read this one. So in that section I talked about guessing the number of whatevers in a phone book. Enrico Fermi used to ask a similar question on his final exam in Physics. Basically he would ask how many piano tuners are there in Chicago. The point here is that if you make enough guesses you can calculate yourself to the correct answer. Because for every error you make to the left you will make a correspond summation of errors to the right. Hence the final point comes out to be correct.

When we first started down the road to determine the stock algorythm I felt this approach of infinite guessing has some merit. My initial thought was that we would take huge internet feeds of news articles and weight them, sum them and then generate some form of outcome. What I found was a discussion on Efficient market theory. Basically the theory said that everything there is to be known with regard to a stock exists in the price of the stock. That made sense to me. It fit well with the phone book guessing problem and the Enrico Fermi problem. So I read on. Louis Bachelier stated that using efficient market theory you could not predict the behavior of a stock, but I wanted to see if that was true. Since then we have been able to successfully pick a stock correctly 92% of the time. With some added controls we are hitting 98% success rates and our average returns are around 1.5% per investment. Ahh so there must be a pattern or trend that we have deduced. Well kinda... read on.

So the other night I was looking at polling data about the election. If you go to realpolitics.com you will see the polling results are very similar to stock graphs. The interesting thing is that they are roughly 48/48 with 4 percent going to other canidates. This same randomness seems to occcur in our model. The first day we sell 50% of our stocks the next day we sell another 10% so on and so on until we get to 92%. So why are stocks and elections so random when viewed in a short time frame. Why are there not patterns to these behaviors.

Think about a sphere rolling down a hill. When you let that sphere go you anticipate that it will roll down the hill not up. But does it? Actually on a micro scale some of the atoms actually do proceed up the hill. It is just that the lion's share of the atoms go down the hill. Our eyes detect the atoms drawn by gravity and what we see is the majority of the atoms that stick together and go down the hill. For months I watched pigeons out of the 20th floor of our building. I would see one pigeon fly and then another but most of the pigeons would stay. Eventually 4 or 5 or 10 pigeons would go all of a sudden and all the pigeons would fly away. Why is that? Well that brings us back to my most recent enjoyment.

I bought a house with a pool and 6 acres. I have hundreds of large oak trees on my property. My pool remained green no matter how much chlorine I put in it. It was a constant fight. So my son's friend's dad had a land clearing business. Adroitly I had him push down 5 trees. He asked Tony what are you going to do with those stumps. Being the outdoor kinda guy I said oh don't worry I will take care of them (saving myself $500)..... Ok so I am not that smart sometimes. But I started getting rid of the stumps. Pick axe in hand I chipped away at the dirt and then started burning. It was then that I realized what was occuring physically with the stocks and why the elections are so close. It was all about the little sticks. For so long I was trying to understand the big logs....and they have very little to do with it. I will explain more when I have some more time. Gotta get ready to sell a bunch of stocks...