No. of Recommendations: 0
>Now I don't know to what extent I do or don't buy into random walk myself, but this is a misunderstanding. If that was the case don't you think that along the way somewhere, one of the hundreds of academic minds that have studied it would have realized it?
-----------------------------------------------------------------
We have, we just haven't solved what makes the "randomness" bull or bear. (other than some obvious enron, macro economic or behavioral issues)

Those silly Academia folks, simply modeled the fluctuations in stock prices using geometric brownian motion - which wall street calls "a random walk." There have been numerous studies on the distribution of stock returns and while a normal distribution is used-(or lognormal)to solve such difficult problems, Black Scholes etc., this is still a basic flaw (and is argued as a flaw by acedemics). The tails are typically to fat and there is a slight postive skew. This is really bad news for things like options, but good news for a random walk investor.

I read "Entirely random" by your use would be 50/50 chance bull or bear and that each event is independent and identically distributed - brownian motion?. Which would be as you suggest, not a walk with a bias -which has been shown to be the case with stocks. (at least I know with the S&P)



But on the original use, this was just a spoof/proof on timing the market! You CAN do it because historically, stock prices having not been "ENTIRELY" random! But this only gives profits equal to buy and hold (neglecting friction-or trading costs)
Print the post  

Announcements

The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.