Risk and Uncertainty Are Different

It would be nice if stock market data lea to conventional statistical assessment. There is certainly enough information that you would think it would average out and provide a strong signal.

  • Is this manager better than that one?
  • Is there a way to diversify so as to minimize risk?
  • Are there indicators that are usable?

Maybe. But I doubt it.

It’s about meaning

  1. Suppose you are value investor like Buffett or Klarman. You base decision on what you believe the prospects for the business  may be. Things like free cash flow, difficulty to compete, depth and quality of management, market share and other business variables. You know what you think a share is worth and you buy when there is a sufficient margin of safety. All value investors know they can be wrong. The future always delivers things previously unknowable. These investors intend to hold what they buy unless the factors change or someone offers much more than they think is worth.
  2. Growth investors look for different factors. The business financial structure still matters and so does management, but cash flow tends to be low or non-existent. Prospects matter a lot. New product or vastly better way to do old things will draw attention. If the growth rate is big, margin of safety is not so important. Holding time depends on how the trend line behaves. It is “the bus theory.” When you see something moving you get on when it stops you get off.
  3. Traders are those who buy stocks that they believe others will value more highly in future. They think they can assess information better or have access to more and others will catch up and the price will rise. “Anticipating the anticipations of others” is what Keynes called it. Timing is two-sided. When in, when out. Never easy but usually not long.
  4. Other traders listen to pundits, tips, and hunches. They are often the loser in the transaction. If a stock goes down they often hold it forever,
  5. Technical traders rely on charts, graphs and amazingly complex algorithms.
  6. High volume traders find anomalies in the market and exploit them. Buy a stock in London and sell it in New York to make a dime. The holding time for these trades is measured in milliseconds.

The questions – Does the data available for statistical analysis provide the same information to each style of purchaser? If it is style dependent, how can you use it objectively?

What it means to you

If you want to use the information, it is readily available. Your task will to sort out what it means given your style. If Buffett buys 100,000 shares of apple does that mean the same thing as some high-velocity trader who bought 100,000 shares of apple and sold them to Buffett half a second later.

Try to understand the range the price operates within. The noise. And why it is noisy.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

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