A simple math problem for you-smile maybe if you're a math major or an economist, I don't know... Since I came into a little money back in March-there's still the main part in the future-I put some money into the stock market-mostly options, which is my game more than stocks.
My only stock is Apple which has paid me very handsomely at 22 percent gains. However, how have I done overall? Let me see if you can guess. A few clues.
Just a week ago I was down 70 percent-options are very risky. However, after some big gains this week on JNJ, JCP, and BAC I am up again. After Bank of America's fine was agreed to yesterday, the stock rallied from $15.50 to closing at $16.16. Believe it or not this seemingly small rise of $.66 is huge in the world of options and I made just $1,700 off of that. By the end of the day I was now at 70% for the week after being down 70% since I first started back in April.
So you see the power of 17-it was $17 billion for the DOJ and $1700 on BAC option gains for me. The market liked this because even though the $17 billion was the 'embarassing number' BAC had wanted to avoid, still at the end of the day at least there is some sense of closure now. At least we have an idea of the ceiling on how bad this gets for BAC. The market hates uncertainty-that was what was driving down BAC. Now I imagine it can at least hit $17.
Question-did that bring me back to even? Ok, pencils down: no, It only brought me back to close to 60 percent of my initial investment, so I was still down about 40 percent. However, I also jumped into Gilead Sciences (GILD). This soared this morning over $2 dollars which gave me another $1,800. So now I'm up close to 90 percent since hitting bottom at 70 percent down last week.
Another question: did this bring me back to even? No, even now I'm just about about 70 percent-actually a little less than what initially came into the market with. It's much tougher to make up losses than the initial losing. Still, not to pat myself on the back, coming down back from 70 percent down with a 90 percent surge is impressive.
Anyways, such is life in the market. I've spoken to enough people by now to see that most would not have the stomach for all this-I mean if you tell someone that you're down 70 percent they would surmise that it's way too risky and that they would never consider trying it. However, unlike back in 2008 I'm not betting the rent money on it, I put in just a little bit to have some fun. If I do pull back to even-which requires about another 50 percent gain from here-which is not that much less than what I lost totally percentage wise from peak to trough initially, but is considerably less than I've rallied from since I hit the trough I must say that-again not to toot my own horn but just to be honest-that would be pretty damn impressive in itself.
I have to admit that the bears haven't been right in a long time-of course, that's statistics: bears are going to be right a lot less often than they're wrong as roughly for every 8 years in the market, at least 5 of them will be bull years, while no more than 3 will be bear. Sumner mentions the next 10 years after the late 90s as being a period that was bad for investors.
"DeLong identifies three periods when stock investors did poorly over the following 10 years—right before WWI, the late 1960s and early 1970s, and the late 1990s. Even today I’m not sure exactly how much of the poor stock market performance of 1968-81 was due to the Great Inflation. Inflation did punish savers given that the IRS taxes nominal capital income. But does that explain the entire underperformance? Was there money illusion (confusing real and nominal interest rates) when discounting future profits? I’m not sure. I am confident, however, that moving to a fiat money regime was a black swan for the US 30-year Treasury bond market, and pretty much every other bond market as well."
http://www.themoneyillusion.com/
True in that the indexes were lower at the bottom in March, 2009 than at the beginning. Yet, even here there were 5 bull years and 5 bear. Bull markets are-thankfully-more prevalent than bear markets just as boom years are more prevalent than bust years.
Interestingly, over the last 11 years-since the bottom of the 200-2002 bear market, we've had only 2 years of a bear market while 9 years of a bull market. This is kind of part of what this post is about-part of it was just to celebrate me getting some gains in the market but part of it was how numbers and statistics can mislead. While technically the last 11 years as a whole has had only two bear market years, it's hardly looked upon by anyone as a Golden Age of growth-this is true not just of the regular guy who doesn't have much in the stock market but even for most investors themselves.
Similarly, many would assume that if you're down 70 percent and then rally 70 percent that means your now even. This also suggests that Zarathustra's Spirit of Gravity is certainly present when one is trying to reach the top-it's much easier to fall than to rally. Even the law of numbers observes this Spirit.
My only stock is Apple which has paid me very handsomely at 22 percent gains. However, how have I done overall? Let me see if you can guess. A few clues.
Just a week ago I was down 70 percent-options are very risky. However, after some big gains this week on JNJ, JCP, and BAC I am up again. After Bank of America's fine was agreed to yesterday, the stock rallied from $15.50 to closing at $16.16. Believe it or not this seemingly small rise of $.66 is huge in the world of options and I made just $1,700 off of that. By the end of the day I was now at 70% for the week after being down 70% since I first started back in April.
So you see the power of 17-it was $17 billion for the DOJ and $1700 on BAC option gains for me. The market liked this because even though the $17 billion was the 'embarassing number' BAC had wanted to avoid, still at the end of the day at least there is some sense of closure now. At least we have an idea of the ceiling on how bad this gets for BAC. The market hates uncertainty-that was what was driving down BAC. Now I imagine it can at least hit $17.
Question-did that bring me back to even? Ok, pencils down: no, It only brought me back to close to 60 percent of my initial investment, so I was still down about 40 percent. However, I also jumped into Gilead Sciences (GILD). This soared this morning over $2 dollars which gave me another $1,800. So now I'm up close to 90 percent since hitting bottom at 70 percent down last week.
Another question: did this bring me back to even? No, even now I'm just about about 70 percent-actually a little less than what initially came into the market with. It's much tougher to make up losses than the initial losing. Still, not to pat myself on the back, coming down back from 70 percent down with a 90 percent surge is impressive.
Anyways, such is life in the market. I've spoken to enough people by now to see that most would not have the stomach for all this-I mean if you tell someone that you're down 70 percent they would surmise that it's way too risky and that they would never consider trying it. However, unlike back in 2008 I'm not betting the rent money on it, I put in just a little bit to have some fun. If I do pull back to even-which requires about another 50 percent gain from here-which is not that much less than what I lost totally percentage wise from peak to trough initially, but is considerably less than I've rallied from since I hit the trough I must say that-again not to toot my own horn but just to be honest-that would be pretty damn impressive in itself.
I have to admit that the bears haven't been right in a long time-of course, that's statistics: bears are going to be right a lot less often than they're wrong as roughly for every 8 years in the market, at least 5 of them will be bull years, while no more than 3 will be bear. Sumner mentions the next 10 years after the late 90s as being a period that was bad for investors.
"DeLong identifies three periods when stock investors did poorly over the following 10 years—right before WWI, the late 1960s and early 1970s, and the late 1990s. Even today I’m not sure exactly how much of the poor stock market performance of 1968-81 was due to the Great Inflation. Inflation did punish savers given that the IRS taxes nominal capital income. But does that explain the entire underperformance? Was there money illusion (confusing real and nominal interest rates) when discounting future profits? I’m not sure. I am confident, however, that moving to a fiat money regime was a black swan for the US 30-year Treasury bond market, and pretty much every other bond market as well."
http://www.themoneyillusion.com/
True in that the indexes were lower at the bottom in March, 2009 than at the beginning. Yet, even here there were 5 bull years and 5 bear. Bull markets are-thankfully-more prevalent than bear markets just as boom years are more prevalent than bust years.
Interestingly, over the last 11 years-since the bottom of the 200-2002 bear market, we've had only 2 years of a bear market while 9 years of a bull market. This is kind of part of what this post is about-part of it was just to celebrate me getting some gains in the market but part of it was how numbers and statistics can mislead. While technically the last 11 years as a whole has had only two bear market years, it's hardly looked upon by anyone as a Golden Age of growth-this is true not just of the regular guy who doesn't have much in the stock market but even for most investors themselves.
Similarly, many would assume that if you're down 70 percent and then rally 70 percent that means your now even. This also suggests that Zarathustra's Spirit of Gravity is certainly present when one is trying to reach the top-it's much easier to fall than to rally. Even the law of numbers observes this Spirit.
Hey Mike
ReplyDeleteFor those a little slow on the uptake its pretty easy to illustrate the problem with using percent gain and how to reconcile it mathematically.
If I have 100$ worth of x and the value drops 50% to 50$, I would now need the value to double or rise 100% to make my money money back. An increase of 50% only puts me at 75$. Now, here is an interesting twist as well. From 75$ my investment only needs to gain 33% to get me back to 100$, my original starting point. So 50% gain followed by a 33% gain is the same ending point as a 1 time 100% gain!! Its these types of unintuitive mathematical relationships that allow finance people to sucker folks.
Hope all is well. Been really busy this summer and doing a lot less internet comments and little less reading. Ive cut my reading by 33% and my commenting by 75%. Im gonna have to really amp up my commenting to return to my previous level! (quadruple it)
Great illustration of my point-thanks Greg! That's what I like-a nice simplification of a point. Now just raise both your reading and commenting by 70% we'll be in good shape! LOL
DeleteMikey, Mikey, Mikey,
ReplyDeleteHow the hell are you buddy? It looks like you just might get back to even with BAC. FINALLY. I don't think BAC will be paying all of that 17B back, and I wonder how much they will be able to write off as an expense. And, how is Popeye? yuk, yuk, yuk.
Nanute my Main Man! No they won't which helps the stock. At the end of the day the market hates uncertainty as with a lot of uncertainty leaving the stock the stock should rise as the $17 billion was fully priced in.
ReplyDelete