Why is the total stock market so random?

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masonstone
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Why is the total stock market so random?

Post by masonstone »

Is it because of the shear number of players in the market?
alex_686
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Re: Why is the total stock market so random?

Post by alex_686 »

If it were not random, ir would be predictable. If it were predictable than one could build a trading program that could generate excess profits. Excess profits will attract more players, and mire players will shink the profits.
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venkman
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Re: Why is the total stock market so random?

Post by venkman »

Because stocks are priced based on expectations, and expectations are constantly changing as new information comes in. Whether that new information increases or decreases expectations is always random and unknowable in advance.
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Toons
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Re: Why is the total stock market so random?

Post by Toons »

Fear and Greed.
And not necessarily in that order
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asset_chaos
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Re: Why is the total stock market so random?

Post by asset_chaos »

The US stock market is not random like the flip of a fair coin is random. For over a century stocks beat bonds nearly two-thirds of quarters. It's just that you can't use the past sequence of returns to predict what will happen next quarter. Stock returns have been like flipping a loaded coin.
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JoMoney
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Re: Why is the total stock market so random?

Post by JoMoney »

Benjamin Graham is attributed by his protege Warren Buffett as saying:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

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tmcc
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Re: Why is the total stock market so random?

Post by tmcc »

asset_chaos wrote: Wed Dec 19, 2018 1:23 am The US stock market is not random like the flip of a fair coin is random. For over a century stocks beat bonds nearly two-thirds of quarters. It's just that you can't use the past sequence of returns to predict what will happen next quarter. Stock returns have been like flipping a loaded coin.
I cant help myself - coin flips are determinate not random.

* the slope of your thumb
* the surface area of the strike
* the geography of coin where the strike occurs
* atmospheric pressure
* humidity
* weight of the coin
* surface on which the coin bounces
* the force of the thumb/hand
* the position of the coin on the thumb/hand

all of these things can be mapped, quantified and modeled to determine the face of the coin at any point in the arc, bounce etc. if a coin is launched exactly the same way under controlled conditions, the same outcome will occur 100% of the time.
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Alexa9
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Re: Why is the total stock market so random?

Post by Alexa9 »

If you ignore the short term movements, the general trend has been upwards. I would say it's fairly predictable. Not to say that that will continue necessarily.
Valuethinker
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Re: Why is the total stock market so random?

Post by Valuethinker »

masonstone wrote: Tue Dec 18, 2018 7:44 pm Is it because of the shear number of players in the market?
Actually if you have only a few buyers and sellers, you get much bigger price jumps up and down. Small cap stocks tend to be much more volatile than large cap ones, for example.

Each buyer and seller in the stock market has different expectations of future returns as well as different needs for cash/ need to invest cash, time horizons etc.

What the stock market does is allow the last buyer and the last seller (the marginal buyer and seller) to meet and agree on a price which enables the trade to take place.

The volatility is caused by the inherent volatility in all the factors that drive stock prices - interest rate decisions by the Fed and other Central Banks (that are expected or not), currency moves, corporate news, dividends, takeovers etc.

Volatility changes over time. We went through a period (roughly 2015-2017) when stock market volatility was as low as it had been in any recent time period (and for longer).

https://www.marketwatch.com/investing/index/vix/charts if you run that out it will take you back to beginning of 2008.

What's happening now is that more normal levels of volatility are returning. Not as bad as during the crisis in 2008, say, (stocks dropped 8% in one day during September-October 2008, when the TARP was kicked out at its first reading by the Congress). But towards more normal levels.

BTW most of us don't notice volatility *up* much - stocks tend to rise in a jagged line. We do, however, notice volatility *down*.
rbaldini
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Re: Why is the total stock market so random?

Post by rbaldini »

Probably the more accurate thing to say is that the stock market is unpredictable. (Arguably this could be said of almost anything we call random, but that's another discussion.)

Suppose this weren't the case. Suppose the market were predictable: one could easily tell, with little work, what the changes in prices would be over the next few days, weeks, and months. In particular, suppose everyone knew that Stock A would increase steadily over the next 15 days, to a price 15% above its current price, by 1% per day. Then surely a rational trader would buy a bunch of this stock, right now, and sell once it has maxed out. Virtually everyone would do this. And when everyone wants to buy something, its price increases. Suppose its price rose 5% due to this immediate demand in the course of one hour. Well there's still a 10% profit to be made, so demand would still be positive, and the price would rise further. In fact it would very quickly rise to the earlier anticipated 15% mark, which means the supposedly predictable profit will have been already been removed by free market forces: anyone more than two or so hours late to the party will not be able to take advantage of this knowledge.

This is the general idea. Any easily available knowledge that would allow easy profits is acted on so quickly, because the sheer size and competitiveness of the market, that any predictable effects are immediately "priced in". It follows that any changes in the future that *do* happen must have been the things investors couldn't have predicted. So the day to day changes are mostly unpredictable.
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Re: Why is the total stock market so random?

Post by kolea »

Why is the market so random?

Because it involves people, lots of people, all with their own ideas. Heck, we couldn't even predict who would win the 2016 election, so how can we accurately predict how people are going to price an equity?
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2015
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Re: Why is the total stock market so random?

Post by 2015 »

The market is random and unpredictable, but that doesn't stop mouthpieces from acting daily as if it is not in order to sell you something.
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bertilak
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Re: Why is the total stock market so random?

Post by bertilak »

There may be many definitions of "random" but under most of them I think market randomness can be explained by human participants, each with different (and changing) opinions, goals, prejudices, hopes, fears, options, constraints, personalities, and whatever other human characteristics you can think of.
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asset_chaos
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Re: Why is the total stock market so random?

Post by asset_chaos »

tmcc wrote: Wed Dec 19, 2018 4:41 am
asset_chaos wrote: Wed Dec 19, 2018 1:23 am The US stock market is not random like the flip of a fair coin is random. For over a century stocks beat bonds nearly two-thirds of quarters. It's just that you can't use the past sequence of returns to predict what will happen next quarter. Stock returns have been like flipping a loaded coin.
I cant help myself - coin flips are determinate not random.

* the slope of your thumb
* the surface area of the strike
* the geography of coin where the strike occurs
* atmospheric pressure
* humidity
* weight of the coin
* surface on which the coin bounces
* the force of the thumb/hand
* the position of the coin on the thumb/hand

all of these things can be mapped, quantified and modeled to determine the face of the coin at any point in the arc, bounce etc. if a coin is launched exactly the same way under controlled conditions, the same outcome will occur 100% of the time.
The key word in all you said is "exactly". See wikipedia entry for summary of chaos theory and sensitivity to initial conditions https://en.wikipedia.org/wiki/Chaos_theory. Coin flips in the real world are random.
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nisiprius
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Re: Why is the total stock market so random?

Post by nisiprius »

JoMoney wrote: Wed Dec 19, 2018 1:40 am Benjamin Graham is attributed by his protege Warren Buffett as saying:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Just for the record... as JoMoney may be suggesting... in his writings, Graham only said that "the stock market is not a weighing machine, but a voting machine." The "short run"/"long run" part, particularly the statement that it is a weighing machine in the long run, is Buffett's recollection.
In 'Security Analysis', Benjamin Graham wrote:In other words, the market is not a weighing machine, in which the value of each issue is registered by an exact and impersonal mechanism, in accordance with its specific qualities. Rather we should say that the market is a voting machine, whereon countless individuals register choices which are partly the product of reason and partly the product of emotion.
The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly, but only as they affect the decisions of buyers and sellers.
According to Jason Zweig, nobody has been able to find anything in his writings that goes on to say that it is a weighing machine in the long run.
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adamthesmythe
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Re: Why is the total stock market so random?

Post by adamthesmythe »

masonstone wrote: Tue Dec 18, 2018 7:44 pm Why is the total stock market so random?
It's not entirely random, it is kinda random.

The existence of a general upward trend means it's not fully random.

There are mathematical ways to test a sequence for randomness and I am certain any stock market index will fail them.

You can find an amusing discussion of this buried in Cryptomonicon (Neal Stephenson).
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Re: Why is the total stock market so random?

Post by dbr »

I suppose it is because it is not constrained. There is no restriction on what the price of an equity has to be and there is no constraint on what a buyer and seller might choose to pay/receive to trade that equity. I think it is true, by the way, that the larger the number of particles (people, shares, etc.) that are involved the less random it would be. In physics statistical mechanics shows that large enough collections of particles can generate very predictable average behavior with little variability. I don't know if such an analogy is relevant to daily price of the market or not.

For those wanting to think of an example from physics one would be the density of a gas in the two halves of a box. There is no constraint on which half of the box any particle might wander to. If there is one particle in the box, then at any time the density in one half is one particle and in the other half is zero particles. With two particles in the box the possibilites are 2/0, 1/1, 1/1, and 0/2. with three particles in the box the distributions can be 3/0, 2/1, 2/1, 2/1, 1/2, 1/2, 1/2, and 0/3. As one increases the number of particles the number of cases having the central tendency increases and the proportion of extreme cases becomes less. At 10^23 particles in the box the chances of an even remotely detectable difference in density in the two halves is as exactly zero as one might contemplate. This is all so even though the behavior of one particle is still completely random. Does that inform us regarding the market? I have no idea. There are certainly not 10^23 trades in the market every day.
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Re: Why is the total stock market so random?

Post by harvestbook »

The stock market is an entirely human invention that was made up out of thin air
I'm not smart enough to know, and I can't afford to guess.
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Indianrock
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Re: Why is the total stock market so random?

Post by Indianrock »

If there were only long-term investors in the market it probably wouldn't be so volatile. But, in somebody's infinite wisdom, we've allowed traders ( gamblers ) in who are trying to profit day by day, trade by trade. And this includes the computerized element now that can cause huge swings in very short periods of time. ( see my signature below ) :-)
If I was king: once a stock is purchased, you hold it for 30 days.
NotTooDeepLearning
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Re: Why is the total stock market so random?

Post by NotTooDeepLearning »

asset_chaos wrote: Thu Dec 20, 2018 4:23 am
tmcc wrote: Wed Dec 19, 2018 4:41 am
asset_chaos wrote: Wed Dec 19, 2018 1:23 am The US stock market is not random like the flip of a fair coin is random. For over a century stocks beat bonds nearly two-thirds of quarters. It's just that you can't use the past sequence of returns to predict what will happen next quarter. Stock returns have been like flipping a loaded coin.
I cant help myself - coin flips are determinate not random.

* the slope of your thumb
* the surface area of the strike
* the geography of coin where the strike occurs
* atmospheric pressure
* humidity
* weight of the coin
* surface on which the coin bounces
* the force of the thumb/hand
* the position of the coin on the thumb/hand

all of these things can be mapped, quantified and modeled to determine the face of the coin at any point in the arc, bounce etc. if a coin is launched exactly the same way under controlled conditions, the same outcome will occur 100% of the time.
The key word in all you said is "exactly". See wikipedia entry for summary of chaos theory and sensitivity to initial conditions https://en.wikipedia.org/wiki/Chaos_theory. Coin flips in the real world are random.
In the most strict terms, I think coin flips are chaotic systems that are very well described by the concept of randomness. They are effectively random, but true randomness in our universe only arises in quantum mechanics.

If the outcome is exceedingly sensitive to inputs, but the outcome could be predicted if, theoretically, we could know and measure every possible influence, it is a chaotic system, not a random one. So the stock market would be chaotic, not random. But like a coin flip, the stock market could be very well described using the concept of randomness.
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