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October 11, 2005

125-year record or voodoo trading? Tues., Oct. 11, 2005, 5:26 AM

Robert wrote me this morning: Do you think we will end the year higher than we started?? They say we have not had a losing 5th year in 125 years! I am not sure I want to bet against that record!!"

My answer is: Robert, when you say you don't "want to bet against that record!" what are you really saying?

Sounds to me like if a coin flip comes up heads 5 straight times, you're sure it's going to be heads the next time. Isn't that voodoo trading?

The Diamonds (Dow 30 ETF) is down -4.66 pct year-to-date and we're in the 41st week. Should the DIA not break your 125-year record, it will have failed to achieve +23.2 pct annualized return for the balance of the year.

So, by saying you are going to put your money on a 125-year record (or whatever), what you are really saying is that you believe the Dow 30 will produce near 20 pct returns for the remainder of this year. I frankly doubt that the majority of Wall Street agrees with you.

So you might say that the investment world-at-large is betting against that record because I don't think more than a fraction of one pct of traders expect to achieve those returns in their diversified portfolios.

Could history persist? Sure! Anything's possible if you look at it enough ways, I suppose.

Let's look at the Nasdaq, which is down -3.49 pct YTF. To get back to even by year-end, the annualized return if invested in QQQQ today would be +18.2 pct.

That's still a little high as a reasonable performance target, but what about the S&P 500? The SPY is down just -1.44 pct YTD, so to bring it flat by year-end, an investment there today would require an annualized return of just +7.5 pct.

Now that is a number that seems reasonable to most traders.

Anyway, Robert, some market stats (as in 125-year records) are like baseball records (i.e., entertaining), but the calculation I just gave you is a better way of looking at markets.

If you were investing in 125-year data, I'm sure your track record would be perfect. But, trading is all about the future, so, unfortunately, your performance or mine will not be perfect.

In fact, if our performances were to revert to the 125-year mean average, we might be looking at something like 8 to 10 pct annualized returns, if the rest of the year turns out to be a good one.

Based on my analysis, I don't even think 8-10-pct annualized returns are likely in 4Q05.

Posted by Posted by Bill Cara on October 11, 2005 05:29:24 AM | Category: Cara Today in the Market

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