A Random Walk Through the Stock Market
Have you ever taken a random walk in the park? If you say yes, then chances are, you are incorrect. Nearly everything we do has purpose and direction to it...if only because our minds have trouble doing anything without it.
The Stock Market exhibits a mathematical phenomena we call a Random Walk. A truly random walk in the park would mean that one starts off in the middle (or somewhere else), spins a four sided dice and decides to take a step forward or backward, left or right, based on the dice roll. Now aside from the question about whether a dice roll is truly random we will say that the path taken by our dice rolling park-walker is random. It may even look like this...
So how does this relate to the Stock Market? If we look at the stock market as a random walk in a 1 dimensional park, or a tight rope, than the price is randomly walking from low to high....or at least it is very nearly randomly walking. Google has been marching upwards for a while, while Microsoft has been backpedaling for a while now. But for the most part we can look at a stock as a very indecisive tight rope walker, he flips a coin and takes a step forward, flips the coin again and takes another step forward, flips the coin a third time and goes back, etc. etc.
So how can we take advantage of a random walk? Let's say that you and a buddy go to see the random tight rope walker. Let's say that your friend likes to gamble. He says to you....I'll bet you $1 that every time the tight rope walker flips that coin, you can't predict whether he will go backwards and forwards. Unfortunately, your friend is unaware that you are an expert in coin flip pattern recognition, and you are able to predict heads or tails with 55% accuracy. As the hours wear on you begin to slowly increase your profit. In fact, if you plotted your profit, it may look something like this...
Thus, a random walk not only describes the movement of the price of a stock, but for a day trader, it describes the value of his bank account. Therefore, one can nearly always make money in the stock market, provided one can predict the next general movement of the market with only a slightly better than 50% accuracy level.
So the real question is....why spend time trying to predict whether my favorite stock will shoot up 20 points in the next month when all I need to focus on is predicting the up and down movements and letting the laws of probability and Random Walk work in my favor?
2 comments:
Hey Theo,
If I give you $75 a month to invest for my kids college education, what do you predict it will be worth in 10 years based on this random walk?
Your risk-averse friend,
Scott
Perhaps the reality behind the "random walk" of prices in the stock market has more to do with the reality of how hugely-wealthy persons and institutions CONTROL the stock market so that, when all is said and done, they are the only entities who ultimately profit. Merely do a search on stock trading around 9/11 and you'll find that there were ENORMOUS profits made by persons who knew which airlines were going to be hit that day and who put a HUGE number of 'put' options on their stocks!
Otherwise, trying to understand what should be a relatively simple process becomes insanity. The company's profits go up, but the price goes down. That's INSANE! Unless you know WHY that happens. It's not some "herd mentality" among the poor saps who think that the stock market is giving them something of actual value, it's willful manipulation by powerful groups. The same process is seen in electrical power distribution and the OBSCENE profits made by the oil industry where the profits being made because of having an industrial monopoly are STAGGERING!
But isn't all of this what the Bible said would happen at "the end of days"? The rich get richer, the poor get poorer. "A penny (a full days' wages for a laborer) for a measure of wheat (a days' food supply for one person), but don't hurt the oil and the wine (luxury items)." Revelation 6:6
It's all about greed, the love of money. Almost everyone is trying to get rich quickly, hoping for a "big hit" in the stock market, or its twin brothers, Las Vegas and the lotteries instead of honestly earning their money and investing it into worthwhile ventures and investments. We blindly ignore the multitudes of warnings in Scripture about lusting after money ("Those who DESIRE TO BE RICH cast themselves into a snare and many foolish hurts which drown men in sorrow and destruction". 1 Timothy 6:9)
All issues need to be looked at from fundamental levels -- not only is WHAT are we looking at doing, but WHY are we doing it. If the stock market is in fact a Godly way to invest God's money (that's assuming that He's your LORD, and that HE has the exclusive right to say what's to be done with what He's made you steward over), then you will ONLY make money in it if YOU have been told by God to do so, and then HE will tell you what stocks to buy and when. Anything else is "doing what's right in your own eyes" (a sin) and will result in destruction and loss of your investment, or worse yet, making a huge profit and foolishly thinking that "making a profit" somehow "proves" God's favor on your venture.
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