Stock market probability : how to improve the odds of making better investment decisions by Murphy Joseph E

Author:Murphy, Joseph E
Language: eng
Format: epub
Tags: Stock price forecasting
Publisher: Chicago, Ill. : Probus Pub. Co.
Published: 1988-11-13T16:00:00+00:00

CHAPTER 17

ly returns, ranked from highest to lowest. The result is given in the Table 17.2. The top decile shows what results from the annual retums on $1 invested for a decade after picking the best 120 months, 10 years, or single decade. The bottom decile shows what results from picking the worst 120 months, 10 years, or single decade.

Table 17.2 Ending Wealth After Ten Years' Investment Ranked by Months, Years and Decade Deciles Standard & Poor 5001885-1985

An investment of $1 with a return of 330 percent earned during the best months would be worth $2,148,423 at the end of ten years. An investment in the 120 worst months would have reduced your $1 to less than a trillionth of a cent. Your total retum over the 100 years would have been $38.52—^the product of the amounts in the month column.

If we turn to the ranking by decades, we see that an investment in the best decade of the ten decades would have produced $2.64 after ten years. The worst decade whould have reduced your dollar investment to 84 cents.

As you can see, this table differs greatly from the table showing diversification among various stocks. This is particularly evident in the month column.

To time the market in a way to achieve the most spectacular results would be very difficult, as suggested by the bank officer of our pension investment meeting, because there is a one-in-ten chance of picking the best decade. But the probability of selecting the individual best ten years out of 100 is less than one in ten trillion. The probability of choosing the best—or worst—120 months out of 1201 months would be less than a trillionth of a trillion.

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