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Strategies & Market Trends : John Pitera's Market Laboratory

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To: John Pitera who wrote (14360)	7/17/2013 9:30:50 PM
From: John Pitera	Read Replies (1) of 33421

last night on linked in I wrote: John Jacob Pitera @ GFA • Hi Guy... I will answer simply and directly..... to quote Samuel Clemens... there are lies, damned lies and statistics.... I can manipulate a data set by working with the starting and ending point to convince you of anything. example geometric versus Arithmetic averages: ...using geometric averages and if you start say at Nasdaq 5000 on March 10 of 2000... as the starting point of your data series.... and run the returns through Q 2 of 2013 you are going to show the Nasdaq composite index of having a negative return and it's going to make people never ever want to be in an asset class that is that 1) risky 2) has performed so abysmally. on page 128 of the 8 th addition of INVESTMENTS by Brodie, Kane and Marcus....I will quote the start of example 5.7: The geometric average in example 5..6 (.54%) is substantially less than the the arithmetic average (2.10%) . This discrepancy sometimes is a source of confusion. it arises from the asymmetrical effect of positive and negative rates of return on the terminal value of the portfolio observe the returns in the years 2002 (-.2210) and 2003 (.2869). the arithmetic average return over the 2 years is (-2210) + ,2869)/2 = .03295 (3.925%) HOWEVER: if you had invested $100 at the start of 2002, you would have only $77.90 at the end of the year....IN ORDER TO SIMPLY BREAK EVEN! you would then need to earn $21.10in 2003 wich would amount to a whopping return of 27.09 (21.10/77.90) ... why is such a large return needed to break even instead of the 21.10% you lost in 2002.... It's because you start the 2003 with a much smaller base. the smaller the base... the greater the return you need in subsequent periods just to break even. Ibbotson... which I studied a 400 page report online at Morgan Stanley ... uses the start of 1975 because it is the Lowest point the DJIA had been in well over 12 years. .. as a matter of fact if you invested in the SPX or the DJIA at the top of the 1942 to 1964 secular bull market... when we first neared the 1000 DJIA level... and used 1964 as your base year for a constant dollar ( due to the fact that because of the widespread price inflation of the late 1960's and 1970's.. by the time you got to the start of the Aug 1982 secular bull market you still would not have broken even today. Instead Ibbotson.... since they are selling just like everyone is ...(I am selling right now.... my skills as a trader, and an analyst someone who has seen how the system works and knows that the Global Flow of Funds and interest rate differentials and currency moves is the driving force behind the Bulge Bracket Global Asset Managers who know of these things and are able to structure there asset allocation blend and have greater information flows than others and generate superior ROI... Next time I will discuss fat tailed distributions and 5 6 and 8 standard deviation events occur John Btw. I notice is stocks is using our GFA proprietary indicators all of a sudden..... and was anyone else paying attention on CNBC today when one of the chief strategists used the expression terminal value I don't think I posted this here last night.

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