Re: US debt and long-term savings strategy - what do you think ?

It's random to the extent that investors, on the whole, have little control
over the prices of individual stocks and market trends in general. (There
are exceptions, of course, such as deliberate attempts to manipulate the
prices of certain stocks.) As I've seen throughout the years that I've
been a shareholder, anything can set things off, whether it's a rumour or a
political event.

Many of the generalizations of Black-Scholes which attempt to deal
with the less than ideal random walk assumption, turn out to look like
bigger and bigger "Rube Goldberg" machines with respect to the
mathematics and data analysis. The simplest generalization is to add
a Poisson jump process to the random walk model in the stock gain/loss
ticks. For example the Poisson jumps can represent "surprise events"
like 9-11, a surprise war, a surprise earnings announcement, Enron
type sudden implosions, currency devaluations, etc ... Though the
problem here becomes, how does one exactly estimate the parameters for
the Poisson distribution if there's very little to no good data.

There's numerous other ways to deal with the shortcomings of the pure
random walk assumption, which look like even nastier and nastier "Rube
Goldberg" machines. With models this messy and "Rube Goldberg"-ish,
the traders don't even bother looking at them. They're largely models
which interest the academics and "research" oriented folks at banks,
who poke around with them as "toys".

But I've also learned that it's a lost cause to out-guess the market,
whether it's concerning the price of a stock or the exact moment that
something's going to occur. There have been times when I made a guess and
was lucky, such as buying a certain stock when its price suddenly dips and
then comes back up, but those are few and far between. The best thing is
to sit back and wait, and, believe me, I've done lots of that, but, more
often than not, I came out ahead.

This was how the original random walk assumption came about in finance
theory. The academics saw several things like:

- stock gain/loss ticks approximately followed a normal distribution
- hardly anybody was good at consistently out-guessing the market.
- past performance had very little to no correlation with future
performance
- widely traded stocks were relatively easy to buy and sell (ie.
liquidity)

It just happens that these empirical observations can be approximately
modeled as a random walk for stocks.

The best comment I heard on the matter was made by none other than J. P.
Morgan. When asked what the stock market would do next, he answered that
it would fluctuate.

Back in Morgan's time, the "easiest" way to make easy $$$$$ on the
stock market was from insider trading and stock manipulation. Back
then, insider trading wasn't illegal until Franklin D. Roosevelt
created the SEC in his first term as president. Of all people, FDR
appointed Joseph P. Kennedy as the first SEC chairman (ie. the father
of John F. Kennedy, Robert F. Kennedy, etc ...). FDR knew that the
only way to give the SEC some "teeth" and credibility, was to have an
effective "cop" who knew where all the "bodies were buried" on Wall
St. In other words, a former "insider" who was willing to turn on
their old buddies.

.

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