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/