From: John Conover <john@email.johncon.com>

Subject: Re: Will the stock market go up forever?

Date: 25 Jan 1999 20:32:47 -0000

Keith Johnston writes: > I've recently been reading books on why the stock market is a better > investment than bonds for the long-term investor. One thing that > bothers me is that I don't understand why the stock market will continue > to go up forever. > > I know that there have been times when it goes down, and times when it > was flat for a long period, but it always return to its former high and > then surpasses it. Why is this? Is it tied to growth in the economy? > Is this something I should not worry about on the time scale I am most > concerned with (30 years)? Or could something cause this pattern to > end, sending the stock market down for a long period of time (maybe > never to go up again)? > The run lengths of bear and bull markets follows an erf (1 / sqrt (t)) type of scenario reasonably precisely over this century-just like the theory of random walk fractals with independent increments says it should. For t > 1, erf (1 / sqrt (t)) is about equal to 1 / sqrt (t). The current bull market is about 4 years old, (depending on who is defining what bull and bear markets mean,) so the chances of it continuing at least into the next year is about 1 / sqrt (5) = 44.7%. There is a graph of the run lengths of the major US equity market indices at: http://www.johncon.com/john/correspondence/981230002304.31518.html John BTW, what the 44.7% number means is that if one was to wager on bull markets continuing into at least the 5'th year many times, one would make money about 44.7% of the time, and loose money about 55.3% of the time, ie., eventually, one would loose all of one's money. But a chance of 44.7% does not mean that next year will be a bear year-only that there is a slight propensity for it. Its a diabolical game, huh? -- John Conover, john@email.johncon.com, http://www.johncon.com/

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