Scientist Predicts 60% Market Collapse

[Easy Rider]

Just as long as they use a leash!   

[Admin]

At the risk of a stern talking-to by our gracious Admin...

No way!  I love these threads.  The markets, theoretical physics, diet.  Topics where you can be wrong more than right and still be an expert in your field.

[PonoBill]

I love the notion that being a scientist provides some credibility in predicting market behavior. Sort of like being a Doctor or Dentist. There's a simple rule of prudent investment. When anyone with a white coat invests---bail.

[Califoilia]

At the risk of a stern talking-to by our gracious Admin...

No way!  I love these threads.  The markets, theoretical physics, diet.  Topics where you can be wrong more than right and still be an expert in your field.

Love these threads also, as they simply instill the fact that the investing world is a crazy, and loopy as ever.  They are the exact opposite of the "random walk hypothesis" which then makes the "efficient-market hypothesis" that much more understandable.

IOWs, the current price of whatever stock or index you want to use at any time during the trading day (or after hours), is the "fair market value" at that moment, and there is basically just a 50/50 chance of it being higher or lower (sans the small % that the stock closes exactly the same, which is negligible in highly liquid issues) in a minute, five minutes, five hours, tomorrow, next month, or in whatever time frame you wish to use....

Unless of course someone has discovered the magic stock picking crystal ball that they've not shared with the rest of us, but I think it's a 100, 1000s times better bet to say that that crystal ball's yet to be found, than it is to guess where the market will be at any time in the future....up, down, or sideways.  So how does this all play into the market?  Options, and volatility.....

There's a good reason that statistics show that 90% of the folks buying options lose when doing so, as they think they are able to (or they've heard someone) "predict" that a certain market or issue will be at a certain price in the future.  The only problem lies, in that so far, no one's be able to accurately predict "when" in the future this is supposedly going to happen.

So they go out thinking that the price is going to shoot up (or down) at some guessed time in the future, and go and buy the appropriate stock option to reflect their bias.  Option sellers love this, because what these folks don't realize , is that the market makers using price movement modeling algorithms have already priced these same "guessed" price moments into the premium of the options being sold.

What poor Joe Q. Public option buyer doesn't realize, or price into his "investment", is that it is costing him X-amount of dollars per day for the supposed opportunity to wait for the price to move in his direction and fast enough.  Let me give you a practical example.  Adobe (ADBE) has an earnings announcement coming tomorrow after the close, as a result of this "unknown", the front month option prices are 49% more expensive than they usually are.  But why does this matter?  Well.....

Yesterday, with ADBE trading at roughly $79.50, people "predicting" that ADBE would go up $5.50 by Friday, were willing to pay $69 for every "100 share" option contract for the "right" to buy ADBE for $85 by the close of trading in 3 days....and actually more ($100/contract) for the people "predicting" the opposite, and that ADBE will be down $4.50 by Friday.  All the while, the market makers selling the options have priced in a $4.82 move in ADBE by Friday.

So these poor folks are paying (or "losing"), $28 per day/per contract on average, which is going into the pocket of whomever sold it to them, just for the "right" to buy ADBE at $85/share or sell it for $75 a share come Friday ....meaning ADBE needs to move roughly $2.40 ($85.69-$79.5=$7.19 divide by 3 days) in their direction per day for the "up predictors" just for them to break even in the trade.  Today ADBE was up $1.....

Oh, and the folks selling those options get another nice added bonus.....sell both sides of ADBE, and they not only collect the $21 a day from the folks who were "sorta right" (ADBE did go up, just not fast enough so far...tomorrow it needs to pick up not only the $1.40 it was short today, but also the $2.40 it needs to for that day also), but they also pocketed the $33 per day from the folks that were completely wrong in their prediction today, and who now need ADBE to go down the $1.83 they missed today, plus the $1 it moved up today against them, plus the $1.83 it needs to lose tomorrow, and all the remaining two days till Friday expiry.

If you didn't happen to notice, the folks thinking ADBE was going down, are now looking for a $4.66 down move tomorrow just to get back on track for the $1.83 per day they needed....but they had "predicted" a $5.50 overall move by Friday.  And let's not forget those people who were "sorta right" today, if ADBE does happen to go lower a few dollars tomorrow at the joy of the "down predictors"....the up predictors have just lost any "gain" in their direction from today.

In the "mathematical nutshell" to eventually land this plane....for the people selling options to the stock market "predictors", they are going to collect a total of $1.66 per share for the obligation to sell ADBE for $85 per share if it happens to go that high by Friday (the mathematical algorithms say there's a 79.27% chance that it won't after today's trading)....or buy ADBE for $75 per share (a 79.87% that it will not, also from the same modeling algorithms) from those who thought it would fall that low.

However, if you apply the $1.66 per share they've already collected from the buyers.....ADBE can go all the way up to $86.66 or as low as $73.34 before they start losing money.  IOWs, they can make money if ADBE goes up some, down some, or ends up right back where it is the day they sold the option....when the option buyers, can only make money if ADBE goes up, and up much faster than the market makers setting the "fair market value" of the options believe it will move.

So for those option sellers to lose money, ADBE would have to get all the way up to close to recents highs, or fall all the way down to the lows of the recent market "corrections"  Could it happen?  Sure, feds could raise or lower rates, and the market could do all sorts of weird things, but what are the odds that those "weird" things would effect ADBE to the drastic swings either high or low in two days?  Well, the odds are almost 80% against it....I'll put my money on that.

Hope that wasn't all too long, too complicated, or too boring as compared to that cool "scientist" and his crystal ball getting his 15 minutes of fame should he just happen to luck out once in his lifetime, and guess....oops, "predict" when, and just how far the market is going to "collapse" in the next few months (years?).....

Btw, when markets start falling (dare I say "collapsing"?....my gawd!), people start to panic, volatility starts to shoot up, and option prices become even more expensive than they would be in a nice, slowly churning upward market.  Can you imagine what that means to the poor "stock investors"  now wanting to start buying options to "hedge" their accounts as some "advisors" will suggest to them....and for the sellers more than willing to let them? 

OK fortunately for youse all....the plane's finally run outta gas.    BZZZZzzzzz.......

Disclaimer:Btw, I'm just an old retired firefighter, with zero formal financial education (if you don't count the School of Hard Knocks)....degrees, licenses, certificates, or any such thing that would suggest you take a single word of the above as accurate, a suggestion, and/or advise of any kind....but rather just a dude sitting on his couch bored to death with the markets closed, and bemoaning the fact that it's rained the past several days round these parts, and I ain't been out on the board for as many days, and may not go out for a couple more, until the "runoff poop patrol police" say it's at least somewhat safe to get back in the water.   Have fun all....

[Subber]

The drop in the Dow Jones Industrial average from the March 2015 (when this thread started) to to the recent low was 14.3% (note it was down 14.58% from the later May 2015 top);  S&P 500 was down 11.8% (note it is down 12.35% from a later high in May 2015); the Russell 2000 was down 12.81% (note it was down 14.78% from the later top in June 2015).  Since the bottoms, we've see a choppy rebound into a narrower sideways move into tomorrows Fed decision on interest rates -
the next few days could be interesting.

Interestingly, a "bear market" is usually defined as a 10% drop but, well, maybe I missed it,
but it seems no one is saying we are in a bear market - I think we are - we will see. 
Kind of at odds with what is mostly reported in the major media..."hold for the long term, etc."

Bill, I like that one - "When anyone with a white coat invests---bail."
Might be the same when they say "hold for the long term" ---- watch out below.

[PonoBill]

I view anyone who invests in individual stocks without some kind of insider information (which is, of course, likely to get you free meals for a few years, but no wine with dinner) to be simply a gambler. My purpose in investing is not to lose money, which is what happens if you stuff everything in a mattress. The advisor side of the financial industry seems to be built around taking as much as possible in fees while doing as little as possible to earn them. The longer I work on my book, the more convinced I become that there's a relatively small set of things the average person can do to manage their money, unless they are willing to work hard at something like a business. And businesses are risky.

I'm working now on a single chapter that would encompass in as brief a manner as I can manage to write (got to explain some things instead of just saying "do this, don't ask why") what an average person with modest to good savings can do to retire. It's about half done, and it's like letting blood to write the thing. It comes a few paragraphs at a time, because I'm trying to condense a lot of stuff down into it, and I keep finding that I don't understand things I thought I did (like bonds for example, which right now are driving me crazy).

Anyway, here it is. Called Simple, Simple, Simple. :http://retirement.pressbooks.com/chapter/simple-simple-simple/

[Califoilia]

I view anyone who invests in individual stocks without some kind of insider information (which is, of course, likely to get you free meals for a few years, but no wine with dinner) to be simply a gambler.

PB, I know that you're a very astute numbers guys, and while investing in individual stocks might seem like a gambling crap shoot to you, I really believe the one little article I'll link below, might put things in a little better perspective of what's currently available with the advent of technology putting probability algorithms in the hands of self-directed investors....which just a few years ago were only privy to the equivalent to the "Vegas" big boys, taking money from the market's "gamblers" as you say.

What if you you could place a trade ("bet" if you like) that gave you the potential of making $435, from "investing/betting" $1565 over the next 39 days, and had a probability of success of 79.42%....would you take it for the potential 3.34% ROC in just over a month (that some mutual funds won't even pay you in a year)?

That trade is from the chart in the middle of this article...... http://www.nasdaq.com/article/probabilities-of-success-a-primer-cm194794 ....and available to anyone who puts a little time into understanding those numbers. 

Want a higher probability of success (like the 87.26% one mentioned in the article)?  That's easy enough too, but the chart doesn't go low enough to show the actual prices of the 141 strike/price that the guy talked about, so I couldn't give you exact numbers to get the risk vs. reward figures, but it really is that simple.   

Your ROC won't be as good, but your probability of the success just went up another 8%....like anything in life, you have to give up a little to get a little.

Still look like gambling?  I say "yes", but this time you get to be "Vegas", and collect all the small wins....with the added benefit of being able to define just how much you'll pay out should someone happen to beat whatever "odds" you set for them.

Yeah I know, not for everyone, but just another way of looking at "investing/gambling" I suppose....

[PonoBill]

I'm not trying to make a career out of managing my money, I just don't want to get hosed, which is what was happening previously. I think in most investing there are some areas of friction that you can play with that might give you a yield, but everyone and their brother is looking at the same thing and some of those folks are willing to invest a substantial amount of money to be able to win the game with some predictability. Take the velocity traders for example, who are willing to spend money like water running fiber optic cable in the shortest path possible to gain an advantage in transmission speed between exchanges--a difference measured in nanoseconds. In that climate things will work until they don't. And I've seen too many people that followed initial success with upping the stake until they lost a lot, and then freaked out and chased it. A friend of mine's wife was doing well with daytrading. He encouraged her (fool). And when it went sideways a bit she kept doubling down, until the million bucks he had painstakingly saved was gone, and so were their two girl's college funds. Tough conversation to finally own up to that little faux pas.

Looking at the history of traders who manage substantial funds, I can't see any pattern that indicates they can outperform the market consistently. Part of the problem is the size of the portfolio they manage. When the portfolio is small they can be agile and aren't forced into unwise trades. But then they get spotted as talent, and everyone wants in. Pretty soon they're making a lot of money for themselves, but not for investors. They have to trade and trade to look like they're doing something for their investors, which increases the expenses and the tax consequences.

So yeah, I think individual investors, following a strategy and not freaking out can do well. But it's too much like work for me. If I wanted to make a lot more money I'd start a business I like. Investing ain't it.

[SuppaTime]

Interestingly, a "bear market" is usually defined as a 10% drop but, well, maybe I missed it,
but it seems no one is saying we are in a bear market - I think we are - we will see. 
Kind of at odds with what is mostly reported in the major media..."hold for the long term, etc."

A bear market is usually defined as a drop of 20%. A drop of 10% is a correction, in the parlance of those who bandy around such terms. We had a correction. But really, it is not just the magnitude of a drop, it is how long it takes to recover from it. The latter has as big of an effect on people as the former.

Holding for the long term is always wise counsel. There have been many studies that look into how people do if they go in and out of various investments rather than staying the course, even when things look rather rocky. Unless you have an uncanny gift for timing the market (most people don't), you are better off to stay pat. There is even a metric that tracks the return people get who bounce in and out of an investment, relative to those who don't. It is called "investor return", published by Morningstar. It is pretty interesting.

[PonoBill]

Unfortunately if you're living off your investments instead of adding to them those down periods can be very tough to deal with--you're selling a bigger percentage of your holdings to get the same amount of money each month. It's a challenge to look at stocks as a piece of the market instead of as your current value for the stuff you own.  People get scared they're going to lose it all, jump out of the market somewhere near the bottom and don't ride it back up. Then they decide things have stabilized, buy back in, and ride it down again. Take more than a few of those rides and your portfolio looks anemic, whereas if you forget you had stocks and checked back in ten years you'd see somewhere around a seven percent gain per year.

Dollar cost averaging does a nice job of smoothing out volatility when you're acquiring stocks, but when you're living off investments the closest you can get to that simple tool is rebalancing your asset allocation--selling your winning stock investments to buy more of your crappy bonds, or vice versa. Tough to discipline yourself to do that, but it makes a lot of sense for many reasons. Not the least of which is that for any scenario of portfolio size, estimated lifespan, and burn rate there is a asset allocation ratio that gives the greatest likelihood of not running out of money. Running a bunch of Monte Carlo simulations is very enlightening. There's some asset ratios that are just UGLY.

[Subber]

Oh yeah, "investor returns" are interesting - usually much lower than the index returns or the ETF returns, etc.
Cause the "investors" listen to the media (and the Wall Street pundits and the Politicians!!!, and the Government Officials)
and hold all the way down and sell at the bottom, and then wait and wait till the media tells 'em its time to buy and they buy near the top.  You see it over and over again through the years. 

Its all emotion on top of supply and demand - even the professionals succumb to group think.
During one cycle a multiple of earnings or cashflow is considered high, the next cycle or later
during a cycle it is considered pretty low - they rationalize it. 
Efficient markets, geeze - very often it is totally irrational, especially when looking back at history.

Also, the Fund Manager's are held captive to money coming in from the shareholders.
In bond land, its yield to next job - same with stocks if you aren't invested and the market rallies,
you can lose your job.  So, they really invest relative to an index or their peer group -
the short term focus can be like handcuffs for a Fund Manager, and the managed funds, especially
if they get big, become index funds (at a higher cost as you guys have highlighted).  The Fund
Manager gets pressure from the shareholder actions (fund inflows and outflows), from the Board
of Directors, and from performance rating agencies like Morningstar.  Everyone Monday-Morning
quarter backing them over their short term performance.  Three stars and you are usually toast.