June 05, 2004

Numeracy

I finished reading John Allen Paulos' "A Mathematician Plays the Stock Market", checked out from the library last week. Like his other books I've read (including his first book "Innumeracy" and a few others), this is one is fairly short and very interesting. Paulos mixes in a lot of stock market math with his own personal story of losing his shirt on WorldCom stock.

Along the way, he talks about Malkiel's famous "A Random Walk Down Wall Street" (which I mentioned here if you follow the link) as well as other approaches to investing. I always thought that stock prices follow a normal bell curve, and that the market was pretty efficient at pricing new information quickly, but Paulos has a nice argument that shows why the first assumption isn't quite right (meanwhile, he talks about other sets of data that have unusual distributions) and why the second assumption cannot possibly be right from a logical point of view. Still, unlike a lot of other books on the market, Paulos isn't here to give investing advice, but rather to simply discuss the underlying mathematics of the market, including subjects like technical analysis, insider trading, options, etc.

If you've ever done much stock trading (or stock-watching while you sit on a stock), this is a very good book to read, especially alongside Malkiel's. All my stock is currently in a growth fund as part of my retirement, so I'm not trading or watching the market much at all these days. I once bought some shares of Intel back in 1992 or so with a few thousand I got from my grandparents as a graduation gift (instead of giving me birthday presents, they had invested $100 in a savings account for me on every birthday). During the six years that followed, I watched it double four times. Although it was tempting to stay and try to wait for a fifth doubling, I decided to get out and put the money into a house. Though it went up another 30-40% after I sold, it then quickly dropped back down is now only worth about 6-8 times what I bought it for (instead of 16-20), where it has hovered for the past several years. I'm glad I quit while I was ahead. I don't plan to put that many eggs in one basket again, not after getting a little more knowledge of the market. It was beginner's luck.

Posted by Observer at June 5, 2004 09:13 AM
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The Bag Lunches were hopeless and ineffectual, but I learned something very important from fantasy-type baseball games. And that something is that I am hopeless at picking individual commodities. (And rotisserie-type baseball games are nothing but futures trading in baseball stats.)

Having learned that, I know enough to keep my hands off stocks, leave my money in a few mutual funds that I trust, and follow such things no more closely than the quartery reports I get. Otherwise, I'd fret, gain ulcers, and lose lots more money.

Posted by: Feff on June 6, 2004 02:46 AM