Risks, Probabilities, Uncertainties… – Voice of the People
Zacks highlights commentary from People and Picks Member «JohntheWizard».
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Risks, Probabilities, Uncertainties and Prediction in the Stock MarketWhen you look up the word “probability” in the Oxford Dictionary, it tells you it is a “sense of certainty”, “probably” means “almost certain”. Mathematicians modeled the concept of probability but not the concept of certainty or uncertainty. We apparently can speak of a 70% probability that we are in a bull market.
Mathematically, you define probability as the ratio of selected events (occurrences) and the total number of events. Since the total number of events or total population may be too large to scan, you usually limit your population to a certain sample size. That limitation enables you to calculate the reliability of your calculated probability.
In mathematics, probabilities don’t say anything about future behavior, because they are calculated from historical data. Only mathematically calculated correlations over time may give you a hint on future prediction if you are able to show that the correlations you found are causal. Causal means that you are able to assign a certain cause to a certain effect and that this “always” holds. As an example, the same binding forces in a water molecule cause the same sunlight to spread into the same rainbow as long as water and sunlight exist.
A statement like “we are in a bull market with an assigned probability of 70%” implies that the present market will first go to new highs before dropping down to deep lows. Hence, that probability implies a certain future predictability. If that probability is just an expression of your gut feeling about the future, that is fine. But when this probability is based on the calculations of correlations in the stock market and when these correlations are proven to be causal, then you can predict future stock market performance. Except for price manipulation, mathematicians have proven that such correlations do not yet exist. That proof is the sole reason for that past performance doesn’t warrant any future performance. That is the sole reason that the mathematician Harry Markopolos was able to unmask Bernie Madoff already in 1999. It took the SEC nine years to react.
Averaging the gut feelings of all investors or analysts may mislead you into the illusion of common sense. As each sense is personal and not an objectively established data point, there exists not a common base for averaging. You are averaging apples and oranges.
On February 12, Tickerbandit wrote: “Anyway there is a distinct nature to the way corrections begin. They NEVER come without warning. But first signs ALWAYS occur before the indices top out, which are most effected by large capitalization issues.”
So here we ALWAYS have an observable and unique warning causing the future event of a correction. Apparently, past performance does warrant future performance.
Opposing views usually create new wisdom.
The most recent picks by «JohntheWizard» are:
A sell rating on China Green Agriculture (CGA – Snapshot Report),
a sell rating on eHealth (EHTH – Snapshot Report) and
a sell rating on NBT Bancorp (NBTB – Snapshot Report).
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Read the full analyst report on CGA
Read the full analyst report on EHTH
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