A few days ago at a conference I heard the following sentence: “drink food and eat water”. At first, I thought the speaker wasn’t feeling well, but in reality this phrase has a profound meaning: we must chew our food well until it liquifies and water must be kept in our mouths for a long time before ingesting it. The phrase is counter-intuitive and strives to convey that the right way to behave is the opposite of what common beliefs teach us from a small age. Why are financial markets counter-intuitive? Simple. Have you ever met a person who invests in a stock in order to lose money? I haven’t, but I’ve met many people who have lost money in the stock market. Even people who think they’re acting correctly, could be missing things that cause them to make mistakes. If the markets were intuitive, everyone would gain from investing
Read moreMonth: April 2014
Why markets cannot be considered random.
One of the most widespread arguments justifying that financial markets can be considered random is the monkey example: if we assume there are an infinite number of monkeys, each one in front of a typewriter pressing keys at random for an infinite amount of time, surely it can be statistically affirmed that one of them will sooner or later type The Divine Comedy word-for-word. Switching back to S&P500, its history can be reproduced exactly by using one of the infinite random historical series generated by a Montecarlo engine and conducting an extraction of random returns. I’ll add that just because a monkey can perfectly replicate The Divine Comedy, doesn’t make The Divine Comedy an aggregate of random letters that created a masterpiece, it is the fruit of extraordinary genius and intellect. The trends of the S&P500 are equally unrepeatable and generated by a sequence of events that have determined its
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