On Average – For What it’s Worth

When it comes to the markets, I detest the words “on average”. There is nothing average about a random system. But yet, as humans, we prefer structure and struggle with the chaos that non-linearity brings which is why we futilely attempt to organize it through averages.

In attempt to put the recent market correction into context, the author of the chart below has selected a small sample of data to determine the length of time it takes until investors find out whether a pullback becomes an opportunity (buy) or (sell) bear market. If the market weren’t random, this sort of data would be very helpful and of great value to every investor. Who wouldn’t want to know that all you have to do is wait 13 weeks, see which way the market is going and go all in (either short or long). Sadly, it’s never as easy as that otherwise we would all be gazillionaires. 

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I give the author an “A” for effort but there is nothing actionable here nor does it provide an “edge” to make money. While the chart contains 47-years’ worth of data, depending upon their definition of a “bear market”, it may only consist of 4-6 data points which is too few to draw any sort of statistical inference and significance from. The bottom line is that because of the non-linear and random nature of the markets there is nothing average about “average”.