Stock Market Turn Around?

Well the year is almost half over and everyone still is wondering if the bear market is over. In the second quarter, it seems like there was a lot of hope for a recovery. The Iraq war had been won. Gas prices were going down. Inflation remained low, and additional tax reductions were being passed as further economic stimulus. The market did go up from it's March lows. But there are still worries. It seems like everybody is looking for real evidence that corporate earnings are improving and that companies are ready to spend and hire. Nothing concrete has really been seen yet.

For someone like me who is invested in stock mutual funds like the S/P index fund, these last three years have been tough. I still have the hope that a diversified stock fund will average around 10% per year in the long term just as history has shown for the last 80 years. So hopefully, these last three years are just the averaging out of above average returns seen in the last two decades.

There are many bears in the media. They claim stocks are still over valued and see new market lows in the near future.

Even the Great Depression started to improve after three years. The stock market crashed in the fall of 1929. The Dow hit its low in just under three years. In the next few years, the market went up until the late thirties where it faltered again. Then World War II came. But during this time, the market stayed well above its 1932 lows. However, it didn't reach a new high until the 1950's.

But what worries me is if the US market does something like what Japan's Nikkei market has done. The Nikkei peaked in late 1989 and has never since hit a new high. Earlier this year the Nikkei had hit a 20 year low. Many blame this bad market on Japan's banking system. The US may have a better banking system, but what about its other issues like rising debt, corporate accounting, loss of manufacturing jobs, etc.

One thing I like to do is to look back at market history. A thing nice about Yahoo is how you can grab market and company stock historical data. I did this for the S/P index. I chose the S/P index since it is a broad market index that is reflective in many of my mutual funds. I wrote a little perl program and did some analysis of the S/P index prices starting around 1950. I had the program find bear markets where the S/P index declined more than 10% from its previous peak. For example, in mid 1987 the S/P hit a new high. Later that year, the market crashed. It took the S/P about 18 months into 1989 before the S/P hit a new high. My program would find these valleys.

Before our current bear market, the worst bear market since 1950 started in 1974 when the S/P index had declined about 48% from its peak in the early 70's. The S/P didn't hit a new high until 1980. However, it did make a good run from 1975 to 1976 where it recovered about 75% of its decline.

Based on the S/P index, this bear market is worse. So far, the S/P has bottomed out at 776 last October. That's about 2.5 years after it peaked at 1527 in March of 2000. That's a decline of about 49%. The S/P came close to hitting a new low last March, just before the start of the Iraq war. But its decline stopped at around 800.

When Will the Bear Market End?

Purely from history, I would say this year and the next should be a good year for the market, and it should regain at least 50% of what it had lost. That would mean the S/P index should hit around 1150 or about 18% higher than it is now. But if this is like the 70's, another decline will happen which will prevent a quick return of new highs. So it may be another 5 to 10 years before the markets hit new highs. Hopefully, it will do better than the Nikkei.

My Dream is to Become Hopeless

On the subject of hope in the market, I picked up another fun quote from a Seinfeld rerun. This was an early episode in which Jerry and Elaine match up George with Elaine's friend. Before this match-up was made, George and Jerry were discussing dating (a similar discussioin was going on between Elaine and her friend). As usual, George's humorous form of pessimism comes out in this quote from that conversation:

"I don't want hope. Hope is killing me. My dream is to become hopeless. When you're hopeless, you don't care. And when you don't care, that indifference makes you attractive."

Then Jerry says: "So hopelessness is the key"

George then continues: "That's my only hope."

posted by Ken on 1:17 PM permalink and comments  

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Sunday, June 22, 2003

 

Survived Vegas

Vegas was worth the visit. Not being much of a gambler, I didn't spend much time inside the casinos. Most of my time was spent touring the giant hotels that line the strip. Thanks to gambling, the hotels freely open up their hotels (at least the areas near the casinos) to the public. If it wasn't for gambling, the giant hotels wouldn't be built. If they were, the hotels wouldn't be nearly as open to the public. But thanks to gambling and the hotels' effort to attract gamblers, there are a bunch of magnificient hotels with amazing designs and attractions (and much of it free to see.) So by avoiding gambling, I felt like I had a good deal in Vegas.

Although I didn't gamble much, I did spend quite a bit of time watching my brother and others gamble. At first I thought it might be possible to predict a range of numbers that the roulette wheel may fall based on the velocity of the wheel when it starts. However, I quickly gave this effort up after seeing how it's implemented. The wheel moves in one direction and the ball is thrown in the opposite direction. Plus, there are a bunch of little metal obstacles on the table that often deflects the ball and thereby adds more randomness to where the ball lands. Thus, I concluded that roulette is extremely random. The same goes with blackjack and the slots. I guess that should be expected...

One thing I noticed about gambling is that it is only entertaining if you win at least occasionally. It seems somewhat obvious, but it's very important psychological phenomemon that casinos take full advantage of. If every game only had tiny odds of winning anything, most people would get dissatified quickly. But by keeping the odds close to 50%, people do win some and that keeps them trying to win more. But probability does work. The casinos' odds are always above the gamblers. And casinos end up making big money, enough money for them to invest hundreds of million of dollars in these gigantic hotels.

But for those who can resist the temptation to gamble, they are rewarded by free access into some amazing hotels.

Other Things to See While in Vegas

There are a lot of other interesting things to do and see in southern Nevada besides casinos. I especially liked our tour of the Grand Canyon. We flew on a small plane from Vegas to a small airport just south of the Grand Canyon. The flight alone was worth the $160 tour price. Then we took a bus to two Grand Canyon overlooks where we had about 90 minutes at each stop to see the Canyon. The Canyon was an amazing view, better than I had anticipated. In addition to the Grand Canyon, Hoover Dam was great place to visit. Vegas also has some nice state parks nearby (Red Rock and Vallery of the Fire) with some nice trails.

The 3-Door Game

Calculating the odds of different gambling games can be difficult. You may sense that you know the odds, but you probably don't. Here's one example of a simple game that is very simple, but determining the odds is confusing. Here's the basic premise:

A gameshow host gives you a choice of three doors. Behind one of those doors is the prize. There's an equal chance that the prize is behind one of the three doors.

After you pick a door, the host opens up one of the other two doors which does not have the prize. The host then gives you another choice. You may keep your original guess, or you may pick the other door. What should you do to maximize your chance of picking the door with the prize?

Many people who I have told this puzzle to think the odds of keeping the original door and the odds of switching to the other door are equal. But that is not the correct answer.

Here's the easiest way to think of it. First, the probability of the first guess being right is 1/3. The probability of the first guess being wrong is 2/3. Now suppose your first guess is wrong. That means the first door you pick does not have the prize behind it. So it has to be behind one of the other two doors. Then the host opens up a door that you didn't pick and that does not have the prize behind it. If your first guess is wrong, there is only one door left that he can open. So if you switch doors, you will win. In other words, if your first guess is wrong and you always switch doors, you will always win. The probability of guessing wrong is 2/3. So by switching, your probability of winning is 2/3. If you decide to keep your original guess, your probability is 1/3. Thus, switching doors improves your probability to win the prize.

As you can see, determining this probability of this simple game wasn't easy. So if you think the odds favor you at some casino, don't be so sure. Unfortunately, I didn't find the 3-door game at Vegas....

posted by Ken on 1:40 PM permalink and comments  

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