Chart of the Day: 111 years of Oz stock market

Today’s colorful chart comes from ASXIQ’s blog, and very succintly illustrates the distribution of annual returns on the Australian stock market:

Interestingly, ASXIQ has arbitratily chosen a 7-23% absolute scale, probably based on the “lumpiness” of distribution around those numbers, eschewing the more clinical 5-10% (or most quoted prediction for stock markets – “rise 10% this year” – given by pundits and economists who should know better not to predict).

There’s a few more days yet until the end of the calendar year for the ASX200 and All Ordinaries, which are currently down 13.5% and 12.8% respectively.

UPDATE: ASXIQ tells me that 7% is the mean (average) return and +/- 16% is the standard deviation of returns, which explains the scaling.

You can follow ASXIQ on Twitter here.

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  1. Diogenes the CynicMEMBER

    Does this include dividends?

    Does this take into account inflation?

    Does this adjust for survivorship bias? One of the thorniest issues of such finance returns studies.

    Interested in why those bands were chosen…

    • 1) the above long term data comes from ABS, and don’t think it takes dividends nor inflation into account ..
      2) most indices around the world are market cap weighted, hence any historical study around the index can not eliminate the survivorship bias as you are working with the knowledge of the future by including the stocks which were added to the index and excluding the stocks that were deleted from the index ..

      • Can you say more about survivorship bias in this case?

        There is an example in the “S&P Index Mathematics Methodology” document that reads as follows:

        “If the S&P 500 closes at 1250 and one stock is replaced by another, after the market closes, the index should open at 1250 the next morning if all of the opening prices are the same as the previous day’s closing prices.”

        I’m assuming other market cap. indexes work the same way. Doesn’t this eliminate survivorship bias?

        Now of course you can’t do this cost-free, after-hours trade, so if you were trying to replicate an index you would incur some costs each time stocks moved in and out of the benchmark. And there might be other practical problems if every physical index fund out there is scrambling to grab the same shares. But in principle you could get around that by designing your own market cap index with slightly different thresholds etc.

          • Thanks for the pointers.

            Does the survivorship bias factor only apply as suggested in section 2.2 of “Millennium Book II”? i.e. only for the back-history generated after the index is conceived, not the period of time after the index providers begin publishing the index on a real-time basis?

  2. Pundits should know better not to predict- BUT “that’s where the fun is”- with the mandatory disclaimer.

    Yet technical analysis is not only a study of history. It forms the basis for an educated punt. Or is a chart merely a Rorshach ink lot, which discloses nothing objective about possible futures other than the interpreter’s own imaginings?

    Which brings us to the serious subject of the predictive validity of charting and technical analysis.
    What does the scientic evidence base say? What is the correlation achieved by independent practioners in identifying the same patterns from the charts, what is the correlation in translating those observed patterns into similar trading recommendations (in terms of entry and exit prices, confidence level of the trade etc) and how financially effective are those trades?

    What I really like about MB is it is always trying to move economics away from astrology to a study of the data. What does the evidence base say about the predictive validity of charting?

    • Now you’re talking my language CB. I’ll always be sceptical of charting or technical analysis, much to the chagrin of my business partner The Prince! If everyone is using the same basic technique/trend analysis, then there should be a herd-like shift as a trend develops and becomes self-fulfilling. The successful traders identify the trend before there slower competitors do and make there profits by getting in early. Of course, in the long run the fundamentals will always win.

      • Not disagreeing with you AC, but most purist of studies at limits may suffer from a shortcoming from reaching epitomes of abstractness.

        Price history may be the best account of people’s reaction to events, but they surely cannot be considered in vaccum of environment in which they take place.

      • Hi AC. I agree that technical analysis is the purest form of study for past price movements, as stated by Vinnyz. What I question is its validity for predicting future price movements (even probabilistic predictions) and its application to investing. I’m a fundamentalist fundamentals guy, so I’ll have my biases. But I still can’t see the logic in using the past decision of thousands of individual investors (with their own drivers/biases/weaknesses/strengths/IQs) as the basis for predicting future price movements. Unless you examine it from a perspective of group behaviour and then use that analysis to stay ahead of the herd. That said, I am open to being proven incorrect (as open as I can be as a value guy) and I wish all the traders out there the best of luck in their endeavours for 2012.

        • Personally i don’t use TA for anything other than potentially reinforcing an opinion i have formed or finding an entry point for a stock i fund is fundamentally sound. The problem with TA is that you can find all sorts of patterns depending on what time frames you are charting the price. E.g. on a monthly chart the technicals may point to a screaming BUY, but when looked at on a yearly chart, or on an even longer timeframe it may be a screaming SELL.

          It’s alwasy easy to reset “probabilities” with TA when what you think the chart is saying will happen doesn’t.

        • I don’t think that TA is any better or worse than other forms of market analysis when it comes to predicting future price movements. It has less predictive ability than a coin toss, the same as any other form of market analysis.

          So why am I the Avid Chartist and not the Avid Tosser? (pun intended)

          TA is the best way of managing risk. It is the best way of knowing where your trade has gone wrong.

          I don’t use TA trading edges to enter trades due to some wierd belief that TA predicts the market. Not at all. I use it because it identifies situation where my risk is small and well defined.

          How does a fundamentals guy measure/control his risk? I’m curious.

          • At Empire we use a qualitative filter first – companies that don’t meet our requirements for ROE, ROFE, debt levels, intangible asset levels, business type and competitive advatnage aren’t even considered as investments. Those that do are then catebgorised further into Good, Very Good or Wonderful based on their competitive advantage, product and managament quality. From their we run our valuations, then apply margins of safety to our buy prices depending on whether the company is good, very good or wonderful.

  3. CP that’s an interesting question that requires a long answer.

    The short answer is, technical analysis and charting is not about prediction, but probabilities.

    You can be right less than half of the time (i.e worse than a coin toss) and yet be profitable.

    That concept is hard to get around someone’s head (particularly engineer types)….

    Pattern identification is subjective and in the end doesn’t matter – the most important part of trading is money/capital management, not entry technique (which is derived from either pattern recognition, algorithm based or other technical analysis “trigger”)

    There is a huge empirical body of evidence that shows trading has almost nothing to do with T/A or charting, by virtue of the great number of traders who make consistent profits doing exactly that (including Peter Brandt, whose win/loss ratio is around 35% over 20 years. Mine is around 45% after four years. This year looks like being 40% win/loss, but annual ROR almost double that….)

    As for “everyone would use the same technique”, again its got nothing to do with technique, but humans – those irrational non-Vulcans who have to make decisions, using emotion, greed, ego and through the misty haze of their individual personal psychology.

    That’s enough for now…..

    • Ahem. I know a shot at me when I read it Prince!

      Engineers understand the concept of asymmetry quite well thank you. Try doubling the length of an aircraft and then only doubling it’s wing span. Or getting your head around the impacts of fundamental frequencies, where small frequency vibrations can damage a structure far more than higher frequency vibrations. Asymmetry and non-linearity is all around us, and engineers are the one’s who have to design for it!