The Stingy News Weekly (01/19/01)
The Markets This Week
DOW 30: 10,587.59 +0.59% to a P/E of 26.5
TSE 300: 9,161.07 +5.10% to a P/E of 23.4
Dow earnings improved slightly and the TSE galloped ahead with the help of Nortel. This week Nortel reported healthy quarterly results while cutting thousands of workers. Something of a moral issue that will probably influence employee morale. Investors should keep a close eye on the situation...
The decision to switch stocks can be a tricky one. Understanding the probabilities involved can help one avoid excessive trading.
Let's use Naive Ned as an example. Ned owns a bunch of ABC stock, and thinks that it will decline. He also thinks that XYZ has good prospects and will go up. However, Ned isn't a good stock picker. He is right only 50% of the time.
What is the chance that Ned's switch from ABC to XYZ will be a good one? Well, there are four possibilities. ABC could either go up or down. Similarly, XYZ could go up or down.
ABC ABC Up Down XYZ Up 25% 25% XYZ Down 25% 25%
Ned is really making two bets. The first is that ABC will go down (50% chance) and the second is that XYZ will go up (50% chance). Ned has a 50% * 50% or 25% chance of being right about both. Not great odds.
The situation can be more complicated. Let's say that Ned isn't quite so naive, and he is right 60% of the time. The probability table changes.
ABC ABC Up Down XYZ Up 24% 36% XYZ Down 16% 24%
In this case the odds are better with Ned being right 36% of the time (60% * 60%).
It turns out that if Ned were right 70.7% of the time the odds of both ABC going down and XYZ going up would be 50%.
Naturally, one can look at even more complicated cases. Suppose that Ned knows more about ABC than XYZ. As a result, he has a 70% chance of being right about ABC and a 50% shot of being right about XYZ.
ABC ABC Up Down XYZ Up 15% 35% XYZ Down 15% 35%
In this case, Ned is right 35% of the time (70% x 50%).
The moral of the story is that switching can be difficult, and the only winner may be your broker. However, by forming a probability table you can get a better idea of the odds, and, maybe, trade less frequently.
Etrade will execute in 60 seconds
Etrade Canada will now execute your trades in 60 seconds, or they are free. Way to go Etrade!
Hot Hands and a Cold Reality
Picking portfolios based on 1-year performance doesn't look like a winning approach.
The Hidden Face of Janus
A detailed review of the ins and outs of this famous U.S. fund. It's a tale of growing too big too fast.
Will you be ready?
A retiree takes on the notion that expenses fall on retirement.
The dot com graveyard
The list grows longer...
The Money Machine
The Money Machine takes the reader on a journey through the mutual fund landscape. It reveals many of the colourful characters in the industry, and the marketing practices that have made it successful. A good read for any fund investor.
The trivia questions this week are:
The Winter Warmth Contest
Inspired by Hersh Shefrin's book "Beyond Greed and Fear" I'm starting a contest similar to one that was run by the Financial Times in 1997. Hersh's description of that contest is:
"Readers were told to choose a whole number between 0 and 100. The winning entry would be the one closest to two-thirds of the average entry. The Financial Times provided the following short example to help readers understand the contest: Suppose five people enter the contest and they choose 10, 20, 30, 40, and 50. In this case, the average is 30, two-thirds of which is 20. The person who chose to enter 20 would be the winner. What is the point of this pick-a-number game? The point is that if you are playing to win, you need to understand how the other players are thinking. Suppose you think everyone who enters the contest will choose 20, since that is the winning choice in the example. In that case, you should choose the integer closest to two-thirds of 20 or 14. But you might reflect on this for a moment, and wonder whether most other entrants would also be thinking along these lines, and therefore all be planning to choose 14. In that case, your best choice would be 10. And if you kept rethinking your choice, you would eventually come down to choosing 1. And if everyone thinks along these lines, then the winning entry will indeed be 1. But in a group of normal, even well-educated, people, the winning entry will not be 1. In the Financial Times contest the winning choice was 13. [...] The real point of this game is that playing sensibly requires you to have a sense of the magnitude of the other players' errors. The pick-a-number game illustrates two of the three themes of behavioural finance. People commit errors in the course of making decisions; and these errors cause the prices of securities to be different from what they would have been in an error-free environment."
The rules of the Winter Warmth Contest are similar to those mentioned above. This time contestants are asked to pick a number between 0 and 1,000 (no decimals or fractions). The winner will be the one who is closest to 3/4 of the average entry with ties resolved by random draw.
The winner will receive a bottle of Dave's Insanity Sauce. I've found it most pleasing when added to a bowl of chili.
To enter the contest you must be a current subscriber to the Stingy News and email your choice of number, before February 14 2001, to:
Only one entry per person. Good luck!
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|Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...|