Long Term Investors and Darts

Elizabeth Nowicki —  9 November 2006

I read with interest an article on cnn.com indicating that we have been on the “longest down streak since June 2005.”

I have two comments:

1.  “The longest down streak since June 2005” is hardly anything to write home about.  We are talking about the longest down streak in the past 16 months, not . . . since Black Monday.  Yet, at first blush, a sentence including the phrase “the longest down streak since. . .” is unnerving.  Unnecessarily so, in my view.  And if it is unnerving to me, I have to believe it is unnerving to folks who know less about the markets than I do.

2.  Now is a good time to talk about darts.

When I saw the cnn.com notation about the “longest down streak since June 2005,” my immediate thought was “so what.”  If we all agree that investors are supposed to either be in the market for the long term or keeping their cash under the mattress (or in gov’t bonds), why should the typical investor care that we are having the longest down streak of the past 16 months?  I must admit, however, that my “so what” comment in response to the down streak observation was colored with a bit of annoyance with the media sources.  Does the media really need to throw out random market information that is best considered with more context than is provided in the article?  (Note to self:  is it “does the media” or “do the media”)

 My annoyed response to the cnn.com language about the “longest down streak” compelled me to go find a reference to the studies that showed that selecting stocks by way of randomly throwing darts was close to as profitable as having professionals pick stocks.  My point?  For a long-term investor, things generally appear to work out if the investor is diversified or has a dart board.  So the news about what the market is doing today or has done over the past . . . 16 months is not particularly relevant.  The “down streak” language and/or the fear of another bubble (or burst) are nothing new.  But the long-term investor who has carefully selected his portfolio using the dart method really should tune out the noise about short-term changes in the stock market.  I think it is time to re-remind Jane Q. Investor that she should be diversified, and balancing the window of her investments against the window within which she needs the money.  Taking a short-term view of what the market is doing right now is like planning your entire future career based only on the job listings that are today available in the newspaper classified section.  The media appears to actually encourage this short-term focus for “we, Jane Q. Public,” and I cannot say that I much appreciate that hype.
So CNN.com’s comment that we were experiencing the “longest down streak since June 2005” did not scare me into selling at a loss or some such.  Rather, the comment made me want to go back to the SEC, so that I could work with the SEC’s Office of Investor Education on a media blitz designed to remind investors how they might just want to consider throwing darts and then sitting tight for the long haul as opposed to responding to media noise or tracking the market by way of media commentary.  (In defense of the SEC OIE, which is a great great office by the way, many people do not even think to look on the SEC website for useful information.  Many folks do not know the SEC exists.  Regrettable, that.)

5 responses to Long Term Investors and Darts

    John L. Davidson 13 November 2006 at 8:02 am

    Mr. Hodak

    Have you ever served anything other than red herring or ad homien at dinner?

    The point being discussed is the scope and extent of dishonesty in earnings and how such might impact “dart throwing” v “stock picking.”

    The hypothesis offered is that “dart throwing” is not a valid experiment, due to the scope and extent of dishonesty in earnings

    You say that you know Mr. Jensen and have studied beyond his writings. The proposition to you is how dishonest is the reporting in earnings? I am sure you will never take a public position on that for it would interfere with pandering to those whose economic interests lie elsewhere.

    The proposition is advanced that supporters of EMT are engaged in pandering. Instead of offering up EMT, based on the words of Mr. Buffett, they should be just advising for honesty and hard work. This is not rebutted by you.

    You use the correct word, “belief.” EMT is a belief, propaganda, and is not a theory at all.

    “For a theory to qualify as scientific, it must be:

    * Consistent (internally and externally)
    * Parsimonious (sparing in proposed entities or explanations, see Occam’s Razor)
    * Useful (describes, explains and predicts observable phenomena)
    * Empirically testable and falsifiable (see Falsifiability)
    * Based on multiple observations, often in the form of controlled, repeated experiments
    * Correctable and dynamic (changes are made as new data are discovered)
    * Progressive (achieves all that previous theories have and more)
    * Provisional or tentative (admits that it might not be correct rather than asserting certainty)

    “For any theory, hypothesis or conjecture to be considered scientific, it must meet most, but ideally all, of these criteria. The fewer criteria are met, the less scientific it is; and if it meets only a couple or none at all, then it cannot be treated as scientific in any meaningful sense of the word.”


    A theory from a scientific point of view predicts future behavior or events. EMT has no predictive capability. i.e., it does not predict observable phenomena.

    If you believe in EMT, what does it predict will be the DOW at 1:30 p.m., EST, 11/14/2006?

    Said differently,EMT is nothing but “intelligent design” for securities markets. Like intelligent design, it is offered by those who have underlying agendas in an attempt to make a desired result appear to be “scientific.”


    You’re making the argument that market efficiency is incompatible with investment profits and market fluctuations? Or that belief in efficient markets is inconsistent with a belief in honesty and hard work? You can’t be serious.

    John L. Davidson 12 November 2006 at 12:12 pm

    Mr. Hodak, if you know Mr. Jensen then you know that he agrees with what was my point and that is that our present forms of corporate governance and management compensation drive all companies to lie about earnings.

    I do not know Mr. Jensen, I have meet and talked with him and he is the person who directed me to his paper, when I asked him about the likely scope and except of corporate dishonesty. His comment to me at the time was that I was underestimating the problem.

    Whether he agrees with may question–can one test the efficient market theory on a market driven by earnings I cannot say, but I doubt you are sufficiently lacking in bias to go ask the question.

    Contrary to what you say, at page 95, he presents a chart, labeled, “More Evidence on Lying About Earnings: Frequency Distribution of
    Earnings Per Share Forecast Error” to which I would ask any interested reader to turn and make up their own mind.

    As for the so-called “efficient market theory” it has been thoroughly discredited as a theory by other means, as even the casual readers of Forbes and Fortune know from repeat interviews with Warren Buffett. There are other too obvious proofs–tulip bulbs, the 1987 crash, and the dot.com boom, bust, and Mr. Buffett’s very large fortune which he could not have amassed if markets were efficient.

    I keep all of Mr. Buffett’s letters and find this 1987 comment especially on point:

    “Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising ‘Take two aspirins’?”- 1987 Chairman’s Letter to Shareholders”

    Current academic support for EMT is nothing but pandering to the usual suspects, for no academic can achieve fame and fortune by simply advising honesty and hard work.


    I know Mr. Jensen, have read the paper you cited in great detail, have done further research in areas suggested by that and other writings of his, and have spoken to him personally on these and other matters. I can assure you that he would think the point you’re making is utter nonsense, based on an intentionally selective reading of his paper, which had nothing to say about overall market efficiency.

    John L. Davidson 10 November 2006 at 3:24 pm

    Of course, there could be a fact based explanation as to why throwing darts works best and that is the true scope and extent to which management lies about earnings. Throwing darts can only win, as a matter of theory, if the market is completely dishonest, incapable of rational observation.

    I assume that those who put up this site are aware of the break thru paper of Michael C. Jensen, Remuneration: Where We’ve Been, How We Got to Here, What are the Problems, and How to Fix Them, the most downloaded author on SSRN.


    Using Microsoft as an example, starting a page 96, he demonstrates that companies lie and then lie more about their earnings. He details why current corporate goverance drives lying.

    All this continues until there is a “too large negative earnings surprise” that wipes out the investor.

    Until one can test dart throwing against an honest market one cannot say which approach works best.

    Anticipating an ad hominem assault for questioning Microsoft’s earnings, I would point out Mr. Jensen’s credentials. He is the Jesse Isidor Straus Professor of Business Administration, Emeritus, at Harvard Business School