By now I am sure all of you are aware of statistics guru, Nate
The unabashed numbers geek, professional poker player,
baseball statistician and creator of the FiveThirtyEight blog on
The New York Times website correctly predicted the outcome of all
50 states. In 2008 he accurately predicted 49 out of 50
Given his track record, Silver appears to have ushered in a
new level of credibility for statistical analysis.
I think political journalist Dan Lyons said it best, "his
accuracy on this year's election represents what I call a victory
of logic over punditry. Nate Silver was right and the pundits
were wrong. And Silver won because of, well, mathematical
science. Silver's methodology is based solely on statistical
data. He takes deep data sets and applies logical analytical
methods to them."
Silver indeed proved that statistics, not personal biases, are
the wave of the future.
And this is exactly how I approach investing.
Coincidentally, I have a win record on the S&P 500 (
) similar to Nate Silver's record on elections. He's 99/100
picking the individual states, and I'm 13/13 over the past year
in SPY (my win ratio is over 91% for
I use in the Options Advantage portfolio). While I know losers
are inevitable due to the elements of uncertainty and margins of
error (investing is never an area where we should expect 100%
accuracy), you can't deny that probabilities are a viable way to
invest a portion of your hard-earned capital.
The age of intelligence is here. We have the ability to
accurately predict the probability of investments. It's just a
matter of overcoming the "old guard" mentality.
Moreover, as Mr. Lyons states, "the age of voodoo is over. One
by one, computers and the people who know how to use them are
knocking off these crazy notions about gut instinct and intuition
that humans like to cling to. For far too long we've applied this
kind of fuzzy thinking to everything, from silly things like
sports (Moneyball, "sabermetrics") to important stuff like
medicine." Dan, let's not forget the biggest offender of them all
- the finance industry.
It's not hard to see the analogies with the stock market. The
markets are awash with pundits, analysts and sooth-saying
forecasters providing a running commentary of the impact of
what's happening now on the future.
If you read the newspapers discussing company results, there's
inevitably a quote from some analyst from such and such
investment bank pontificating on what these results will mean for
the company's future performance.
The fuzzy logic presented by the "old guard" of finance - the
Bloombergs, CNBCs, and other archaic sources - is over … at least
for the statistically inclined. But unlike most of the other
industries that have fallen to statistics, the investment
industry is powerful. And they will do whatever they need to do
to keep eyes on the screen.
They have to. Because when the self-directed investor
finds out there is a real, tangible way to invest using
statistical probabilities rather than the "fuzzy logic" of
financial analysts, the walls of the industry will begin to
Fundamental analysis, technical analysis and the ongoing
financial noise that is spewed on a daily basis is simply an
Disgree? Well, famed contrarian investor David Dreman
discusses in great detail the appalling track record of analyst
forecasting in his book, Contrarian Investment Strategies. More
recent work by noted value investor and author James Montier
In the US, the average 24-month forecast error for
individual stocks is 93%, and the average 12-month forecast
error is 47% over the period 2001-2006. The data for Europe are
no less disconcerting. The average 24-month forecast error is
95%, and the average 12-month forecast error is 43%. To put it
mildly, analysts don't have a clue about future earnings.
Statistics as seen through mean-regression, probabilities,
standard deviation, binomial models etc. is how self-directed
investors should start to view both the market and potential
investments. It sounds difficult, but it's not. In fact, it's
If you are interested in learning more about how I approach
the market in great length you can access my newly published
White Paper and special report. You can receive both reports,
plus several other special reports, not to mention two free
months of the Options Advantage service for $39. Of course, if
you are not satisfied you can cancel at anytime.
Click here to access the reports.
And as always, feel free to email me with any questions that
you might have at
Editor and Chief Options Strategist
The Strike Price