People tend to focus on the mystery of the ‘get-rich-quick’ stock market when they start asking questions about stocks, but there are also good questions among them. The question most people have is, “Can I get rich just buying low and selling high?” And the answer, of course, is “Yes, absolutely!” The caveat, however, is knowing when the stock price is low and when it will peak. In stock investing it is often said that hindsight is 20/20, so it is infinitely easier in retrospect to identify times when someone should have bought or sold shares and reaped the maximum possible gains from their investment. Continue reading...
The Random Walk Hypothesis states that in an efficient market, prices will correlate around the intrinsic value of securities, but there will always be a randomization and unpredictability to it. The Random Walk Hypothesis suggests that technical analysis and the efforts of chartists cannot beat the market over time, because the market will move randomly and unpredictably, and past results cannot predict future returns. Continue reading...
A theory about what will happen and why is a hypothesis, and to prove the hypothesis has some relevancy it will have to be compared to the probability of getting those results by pure chance. A hypothesis is a testable prediction of results that should be observed due to the effects of an independent variable. Such predictions must be tested against the probability of the resulting observations happening due to complete chance instead of the influence of the independent variable. Continue reading...
The January Effect is a hypothesis which states that stocks will see their biggest monthly gains in January. The January Effect states that the stock market usually increases during the first few days in January, or that the largest monthly gains of the year will be realized in January, therefore January will set the pace. There are many explanations for this effect, such as tax-loss selling in December, fresh starts after the New Year, and many others. Continue reading...
The Black Swan Theory serves as a reminder to investors that unpredictable events can radically change our lives, society, and the markets. The Black Swan Theory, based on a recent book by Nicholas Nassim Taleb called “The Black Swan: The Impact of the Highly Improbable,” analyzes how events that were completely unexpected, or perhaps considered impossible, radically changed the world. Historical events such as the attacks of September 11th, 2001 and the invention of the personal computer are categorized as Black Swans: they were unforeseeable, and their enormous impact on human civilization was only explainable in hindsight, according to Dr. Taleb himself. Continue reading...
There are investments which have the potential for very high returns, but they will always be that much riskier than the lower-yielding alternatives, and this is part of the risk/return trade-off. The relationship between risk and return is a positive linear relationship in most theoretical depictions, and if an investor seeks greater returns, he or she will have to take on greater risk. This is called the risk/return trade-off. For more stability and less risk, an investor will have to sacrifice some potential returns. Continue reading...
The Efficient Market Hypothesis (EMH) states that it is impossible to beat the market consistently over time, since all available information is priced efficiently into stock prices. But what the EMH misses is the impact that sentiment can have on price discrepancies in the short-term. Emotions can lead to gross mis-valuations (as we saw with the tech bubble in 2000), and market corrections can see stocks selling off dramatically for no fundamental reason. Continue reading...
The Adaptive Market Hypothesis uses theories of behavioral economics to update the aging Efficient Market Hypothesis. There have been many debates surrounding the Efficient Market Hypothesis and its validity, and a lot of research over the last 15 years or so has been done which suggests that behavioral finance holds many of the keys to an accurate “universal theory” of the markets. A marriage between the two schools of thought has given birth to the Adaptive Market Hypothesis, coined in 2004 by Andrew Lo of MIT. Behavioral and evolutionary principals come into play when theorizing about the large-scale behavior and adaptation of humans in a system. Continue reading...
The “NFL Effect” suggests that the outcome of the Super Bowl can foretell market behavior. Some market statisticians have analyzed the correlation between the behavior of the stock market and the winner of the Super Bowl, and suggest that the DJIA will go up or down depending on whether the winner was from the AFC conference or the NFC conference. While the Super Bowl indicator has been right 33 times out of 41, to serious investors, this correlation does not imply causality. You can find lots of other time-series which are also strongly correlated to the stock market performance, such as the number of sunny days in the previous year. Continue reading...
Securities in the market can be analyzed on technical levels or fundamental ones, and it is generally best to take both into account, despite the fact that some theories dispute the merits of technical analysis. Some might say that fundamental analysis is all that you need to make wise investment decisions, and to some extent that is actually correct: at a minimal level, if all you had were fundamentals, you could make wise investment decisions. That does not mean, however, that all technical analysis is superfluous. Continue reading...
Market efficiency describes the degree to which relevant information is integrated into the price of a security. With the prevalence of information technology today, markets are considered highly efficient; most investors have access to the same information with prices and industry news, updated instantaneously. The Efficient Market Hypothesis stems from this idea. Efficient markets are said to have all relevant information priced-in to the securities almost immediately. High trading volume also makes a market more efficient, as there is a high degree of liquidity for buyers and sellers, and the spread between bid and ask prices narrows. Continue reading...
Ever wondered about the magic behind the p-value in statistics? Dive into our comprehensive guide to unravel its significance, calculation methods, and pivotal role in hypothesis testing. Step into the world of data, decoded Continue reading...
The investing section in your bookstore has shelves packed with titles hoping to earn a five-star rating from you, but not all of these are going to be worth your time. There are thousands and thousands of books written about investments, stocks, Mutual Funds, retirement portfolios, and so on. By the time most of them hit the market, the information in these books has long become irrelevant. The classic treatise on investments is Ben Graham’s “The Intelligent Investor.” Try to avoid books with titles like “12 Steps to Financial Prosperity,” and “How to become a Zillionaire.” Continue reading...
Dividend capture is a strategy similar to dividend arbitrage that seeks to reap incremental gains somewhat reliably around the ex-dividend date of a stock. The investor seeks to benefit from the fact that stock prices don’t always go down as much as they should on the ex-dividend date, so by selling quickly at that point, the investor may still get a small gain from the dividend that will still be paid to him or her. Dividend capture is a strategy that plays on slight inefficiencies in prices around the ex-dividend date. Continue reading...
It requires a great deal of due diligence, but investors should understand that past performance is not indicative of future performance. Focus on experience. In the stock market, as with most things in life, hindsight is 20/20. There are countless lists on the internet with titles like “The Best Mutual Fund Families” and “50 Winning Mutual Funds.” It is important to understand that the names on those lists are a function of hindsight and not foresight. Continue reading...
Active management is when an investor or money manager attempts to outperform an index or benchmark, using tactical strategies. Many economists and financial professionals believe that the markets are efficient. This means that all available financial information has already been built into the prices of securities, and that you cannot outperform the market by making specific selections of stocks, timing the market, reallocating your assets regularly, following the advice of market pundits, or finding the best portfolio managers. Continue reading...
The concept of an efficient market is more applicable today than it was when it was conceived, a truly efficient market is nearly impossible. The Efficient Market Hypothesis states that random new information will affect the value of securities, and that new information disseminates so quickly among rational investors that it is futile to try to beat the “market portfolio.” Thirty years ago, this was more of a theory than an observable phenomenon, and plenty of inefficiencies in the dissemination of information and the pricing of securities could be pointed out. Continue reading...
Throughout the history of the U.S. Stock Market, there have been countless crooks, swindlers, and villains. Money can drive people to cheat, and there have been no shortage of cheaters over the years. Undoubtedly, the biggest hoax in the history of the market is credited to Bernard Madoff, who made off (no pun intended) with over $10 billion of his investors’ money through a massive Ponzi scheme. However, there have been countless other criminal activities, such as the Enron scandal of the early 2000’s. Continue reading...
Alpha (α), used in finance as a measure of performance, is the excess return of an investment relative to the return of a benchmark index. In simple terms, it's a way to evaluate how well an investment has outperformed or underperformed its expected returns. Alpha is a crucial concept in the world of investing, and in this article, we will delve into what alpha is, its importance, and provide real-world examples. Alpha is a fundamental concept in modern portfolio theory, which helps investors gauge an investment's risk-return profile. Continue reading...