Thierry Martin
04-20-2007, 11:51 AM
From The Chart Room
Reverting To The Mean
Larry Connors, TradingMarkets 04.19.07, 2:40 PM ET
from Forbes.com (http://www.forbes.com/2007/04/19/lehman-unh-trading-pf-edu-in_lc_0419chartroom_inl.html?partner=email)
I've been trading the markets for nearly three decades. Actually, I've been in the markets now nearly 40 years. For my eighth birthday, my grandfather gave me stock in Exxon and Laclede Gas. At 7 years old it was baseball--a glove and a bat for my birthday--and at 8 it was stocks. Both still compete for my attention every day.
Hansen Natural. Netease.com. These are just a few of Jim Oberweis' 10-bagger stocks. Click here for four new buys in the April issue of the Oberweis Report.
I've also been seriously researching the markets for the past two decades. I've been lucky enough to have gotten to know and become friends with some great traders. And I'm also fortunate to have a team of market researchers who are a heck of a lot smarter than I am.
I've written a handful of books over the years. "Street Smarts" is probably the one I'm best known for. But "How Markets Really Work" is the one I'm proudest of because it's the statistical source from which all of our trading has evolved.
My philosophy of the markets has not changed much over the years. It's made up of only three simple ideas:
Markets tend to revert to their mean on a short-term basis. Once you figure that out, the game gets a bit easier.
Markets are more efficient long term. There is little statistical evidence to prove otherwise. But markets can be very inefficient short term. There's ample statistical evidence to prove this, and that's where the best opportunities are today.
Risk control is underestimated, underutilized and emotionally driven, and is likely the least understood aspect of professional trading and the market place.
Special Offer: Turnaround stocks pay off big-time for patient investors. George Putnam recommended Apple at $7.82 in November 2002. It turned into a ten-bagger in a little more than three years. Click here for all of Putnam's current buys in the Turnaround Letter.
The main theme behind my research and our trading is "reversion to the mean." To us, this is the holy grail of trading. This is not only our opinion; it's backed statistically with literally thousands of tests we've run over the years.
Let me qualify this a bit. Reversion to the mean can be interpreted many different ways. On its most literal level, it carries little weight when one accepts the belief that every stock reverts to its mean in every time frame. There's nothing further from the truth. But in specific, recurring situations, reversion to the mean is the key to identifying market behavior. And we as traders only care about one thing: short-term market behavior.
Longer-term predictions are tougher, and at least on the surface, appears to be a game that few can beat. For every Warren Buffett in the world, there are (and have been) literally thousands of very smart Ivy League M.B.A.s, CFAs and market analysts whose long-term performance has only been within a few points of the market averages. One would think that the entire exercise these people go through would be considered meaningless, but the fundamental analysis industry is much too big and established, and there's no chance that this game will come to an end in our lifetime.
I'm fairly certain that if each of the 9-year olds on the baseball team I coach bought 100 shares of the SPY today, they'd outperform 50% (or more) of the money managers in this country over the next five years. Not only am I fairly certain of this, I'd guarantee it (and I'm not in the habit of guaranteeing many things).
The edges lie elsewhere, and based upon what the statistics show over and over again, it's in a reversion to the mean in short-term stock prices.
What is reversion to the mean? It's simply the concept that prices move back to levels they previously were trading at. Again, though, there's not a great deal of evidence that it exists in longer-term pricing of securities. But shorter term, at least looking back more than a decade, it certainly has existed.
As I mentioned earlier, we can literally show you thousands of tests to prove this point. But to keep things simple, here's one example.
A stock is above its 200-day moving average. Today it trades at its lowest price in 10 days. If markets are efficient, the future price of these securities should be random. There should be about a 50-50 chance of them rising or falling in the near term. But in reality that has not been the case...
Complete article here (http://www.forbes.com/2007/04/19/lehman-unh-trading-pf-edu-in_lc_0419chartroom_inl.html?partner=email)
Reverting To The Mean
Larry Connors, TradingMarkets 04.19.07, 2:40 PM ET
from Forbes.com (http://www.forbes.com/2007/04/19/lehman-unh-trading-pf-edu-in_lc_0419chartroom_inl.html?partner=email)
I've been trading the markets for nearly three decades. Actually, I've been in the markets now nearly 40 years. For my eighth birthday, my grandfather gave me stock in Exxon and Laclede Gas. At 7 years old it was baseball--a glove and a bat for my birthday--and at 8 it was stocks. Both still compete for my attention every day.
Hansen Natural. Netease.com. These are just a few of Jim Oberweis' 10-bagger stocks. Click here for four new buys in the April issue of the Oberweis Report.
I've also been seriously researching the markets for the past two decades. I've been lucky enough to have gotten to know and become friends with some great traders. And I'm also fortunate to have a team of market researchers who are a heck of a lot smarter than I am.
I've written a handful of books over the years. "Street Smarts" is probably the one I'm best known for. But "How Markets Really Work" is the one I'm proudest of because it's the statistical source from which all of our trading has evolved.
My philosophy of the markets has not changed much over the years. It's made up of only three simple ideas:
Markets tend to revert to their mean on a short-term basis. Once you figure that out, the game gets a bit easier.
Markets are more efficient long term. There is little statistical evidence to prove otherwise. But markets can be very inefficient short term. There's ample statistical evidence to prove this, and that's where the best opportunities are today.
Risk control is underestimated, underutilized and emotionally driven, and is likely the least understood aspect of professional trading and the market place.
Special Offer: Turnaround stocks pay off big-time for patient investors. George Putnam recommended Apple at $7.82 in November 2002. It turned into a ten-bagger in a little more than three years. Click here for all of Putnam's current buys in the Turnaround Letter.
The main theme behind my research and our trading is "reversion to the mean." To us, this is the holy grail of trading. This is not only our opinion; it's backed statistically with literally thousands of tests we've run over the years.
Let me qualify this a bit. Reversion to the mean can be interpreted many different ways. On its most literal level, it carries little weight when one accepts the belief that every stock reverts to its mean in every time frame. There's nothing further from the truth. But in specific, recurring situations, reversion to the mean is the key to identifying market behavior. And we as traders only care about one thing: short-term market behavior.
Longer-term predictions are tougher, and at least on the surface, appears to be a game that few can beat. For every Warren Buffett in the world, there are (and have been) literally thousands of very smart Ivy League M.B.A.s, CFAs and market analysts whose long-term performance has only been within a few points of the market averages. One would think that the entire exercise these people go through would be considered meaningless, but the fundamental analysis industry is much too big and established, and there's no chance that this game will come to an end in our lifetime.
I'm fairly certain that if each of the 9-year olds on the baseball team I coach bought 100 shares of the SPY today, they'd outperform 50% (or more) of the money managers in this country over the next five years. Not only am I fairly certain of this, I'd guarantee it (and I'm not in the habit of guaranteeing many things).
The edges lie elsewhere, and based upon what the statistics show over and over again, it's in a reversion to the mean in short-term stock prices.
What is reversion to the mean? It's simply the concept that prices move back to levels they previously were trading at. Again, though, there's not a great deal of evidence that it exists in longer-term pricing of securities. But shorter term, at least looking back more than a decade, it certainly has existed.
As I mentioned earlier, we can literally show you thousands of tests to prove this point. But to keep things simple, here's one example.
A stock is above its 200-day moving average. Today it trades at its lowest price in 10 days. If markets are efficient, the future price of these securities should be random. There should be about a 50-50 chance of them rising or falling in the near term. But in reality that has not been the case...
Complete article here (http://www.forbes.com/2007/04/19/lehman-unh-trading-pf-edu-in_lc_0419chartroom_inl.html?partner=email)