Saturday, March 21, 2015

GMGH's Allegory

I have a list of names of 100 people who are in a room.

"50% of the people in this room are women"

Is each person 50% female?
No, each person is either female or not.

Are 50% of the people in the room female? Yes

"20% of the women here are pregnant"

Is each woman 20% pregnant?
No, each women is either pregnant or not.

Are 20% of the women pregnant? Yes

"20% of the men here are married"

Is each man 20% married?
No, each man is either married or not.

Are 20% of the men married? Yes


For whatever reason, I need to try and pick out all the pregnant women and all the married men. That is 10 each, or 20 in total.

I have with me a variety of data about each person in the room which I can try to use to infer if they are pregnant women, or married men, but nothing to tell me for sure except for their gender. I can only make rational guesses based on the type of house they live in, the car they drive, the food they eat, the things they buy, etc.

For example, I think I would exclude people that spend large amounts frequently at bars to be married men or pregnant women. Likewise if someone drives a Ferrari or lives in a single room apartment, we can also make some guesses about their lifestyle.

With whatever I know and the reasons I came up with to back my thinking, I pick out 20 names from the list of 100 people that I have.

I now have 20 people, 10 male and 10 female.

Are 20% of these women pregnant. Are 20% of these men married?


Personally, from what I have read, the stock market goes up in the long run. However, more stocks die off than continue successfully. The returns on the top 30% of all stocks are higher than the 70% that try to drag the index down the other way. Once you net them together, you get the long run rates of stock market return to be between 5-9%, depending which indices you use and if returns were nominal or real.

Some people think picking stocks is a fool's game. I don't disagree. I do not think I will ever make a direct investment into any overseas equity stock market and buy a single company. However, I think that picking locally is do-able. The universe is not that large, the companies are closer to home and the small size of the market makes it unattractive to big players.

I do think that it is possible to weed out companies with the attributes of failure to create a remaining list of stocks that would outperform the market. From what I am left with, more than 30% would outperform, while less than 70% will underperform.

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