Selecting stocks is like tossing a coin

Share Shah

Imagine a series of 1,000 coin tosses where one bets on heads every time. The outcome statistically should be that you will win fifty per cent of the time provided the coin toss is fair. But this does not happen in the real world. If the gamblers were so prudent than we would not have the world gambling industry. Las Vegas would close down and there would be none to invest billion of dollars in setting up the largest gambling haven the Venetian Macao.
   What really happen is only in the mind of the gambler. Once one of them gets a bit of a lead, he is likely to stay in the lead over most of the 1,000 tosses. People find this hard to believe otherwise, because they believe in the gambler's fallacy, thinking that the coin's deviations from a 50-50 split are governed by a probabilistic rubber band: the greater the deviation, the greater the equalizing push toward an even split.
   But this is not true. Even if one were way ahead, with 525 heads to the other parties 475 tails, his lead would be as likely to grow as to shrink. Likewise, a stock that has fallen on a truly random trajectory is as likely to fall further as it is to rise. In the long, long run the coin tosses approach 50 per cent to 50 per cent, but that is as a percentage, not actual numbers. Since lead switches are relatively rare, it would not be surprising if either of the coin tossing parties came to be known as a winner or loser.
   Similarly, if ones stock selection outperformed another by a margin of 525 to 475, he might wind up thinking that he had some special ability. Yet statistically he might, like the two coin tossing parties, owe his success to nothing more than getting stuck by chance on the up side of a 50-50 split. Also, if one were able to select 100 stocks, roughly 50 might be expected to outperform the market next year merely by chance, like tossing a coin. Of these 50, 25 will likely do well for a second year, 12 for a third, etc., and one will do well for 10 years in a row, by chance alone. He would be lauded and called a share guru or an expert fund manager. Newspaper would quote his comments about the stock market.
   Psychologists know this to be rewarded behavior or incentive which is likely to recur. B.F. Skinner took this a step further with his "behavioral technology," teaching pigeons to walk a figure of 8, play ping-pong, and keep missiles on course by pecking a target on a screen. Pigeons have also learned to discriminate categories such as people, flowers, cars and chairs. With training, they have even been taught to discriminate between Bach's music and Stravinsky's.
   This kind of incentive appears on out stock exchange portal in the form of ten top traded shares through various angles. Investors generally tend to watch what the so called gurus, foreign investors are buying and they follow the lead blindly. Some times they are tricked if the buyer has manipulative plans. Take for the instance of a bank share which doubled in prices earlier this year because of the rumour of a Saudi deal. As reported by the media, the board members of this bank made a bundle along with the early mom-pop investors.
   Following up the top ten most active shares has become a no loss situation. Surely some investors have lost money but in a bull market one only hears the noises made by those who have made money. And not unlike Dr. Skinner pigeons they have learned the easy task of following this lead and which has rewarded them most of time. The fact is people tend to forget bad things and only recall with added intensity good thoughts. While some become more cautious of losses many more try to jump the bandwagon.
   How long the present bandwagon continues is anybody's guess. Small investors generally try to sell their stock at the peak. What the mom-pop investor should remember that none can predict when the highest level of a stock is reached. As such they should have a turn around time. Generally large fund managers reshuffle their positions 3-4 times a year. Some investors may consider a profit margin and should be content when this is reached. If the profit expectation is not to the level they may also consider getting rid of that position even at a loss.

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IMF's big business-friendly,
anti-labour policies

Robert Weissman

While a report says Iraq has failed to meet almost all of the political and military goals laid out by the US Congress by the September deadline, Iraq seemed to be meeting those imposed by the International Monetary Fund, except for one, thankfully. The Government Accountability Office has confirmed the obvious: the "benchmarks" the U.S. Congress set out to assess progress in the Iraq war will not be met by a September deadline.
   Unfortunately, it turns out that Iraq is making major strides in meeting another set of benchmarks: those imposed by the International Monetary Fund (IMF).
   At the end of 2005, the IMF entered into a stand-by agreement with Iraq. The deal makes IMF funding available to Iraq in exchange for the country adhering to certain IMF policy dictates. More important than the IMF monies, however, adherence to the agreement was a condition for Iraq receiving major reductions in its obligations to repay the enormous debts acquired under Saddam's regime.
   The IMF has just released Iraq's most recent Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, dated July 17. The conceit of these documents is that they are "country-owned" and constitute a report on a country's own decision to pursue the policies to which it has committed with the IMF. Everyone understands, however, that the policies are imposed by the IMF, and the reports are the supplicant country's attempt to stay in the good graces of its financial master. Combined, the documents just released report on Iraq's progress in meeting IMF-demanded policies.
   With one crucial exception-privatization of the oil sector-Iraq reports it is making concrete progress in satisfying IMF demands that it turn its economy over to private corporations, cut back on government size and the government's role in the economy, and withdraw labour protections.
   The Iraqi government reports that: "We will continue resisting undue wage and pension increases and bonuses."
   It is strictly limiting hiring in the public sector "in order to keep the wage bill within the budgeted amount."
   It is cutting back on public pension expenditures, including by eliminating inflation indexation-a huge effective reduction in pension payments in a country where the inflation rate is 19 percent.
   Those public enterprises that have not been sold off or given away to private corporations-a top priority of former Coalition Provisional Authority head Paul Bremer-will be forced to operate like for-profit businesses, an almost certain prelude to subsequent privatization.
   It has undertaken measures to ensure foreign investors receive the same treatment as Iraqi firms.
   Tariff rates will be maintained at extremely low levels (5 per cent), imposing enormous challenges for Iraqi firms that obviously must seek to operate in the most trying of economic circumstances.
   But the news is not entirely bleak.
   Apart from some non-trivial accounting issues, the one key area where the Iraqi government is not meeting IMF targets is privatization of the oil sector. (Presumably because this is also a key Congressional benchmark, the government does not acknowledge its growing troubles in this area. Instead, it states, "The GoI [Government of Iraq] will continue its efforts towards developing a competitive and transparent hydrocarbon sector. Draft hydrocarbon legislation will be submitted to the CoR [Council of Representatives] when final agreement between all concerned parties has been reached, possibly in the next few months. The envisaged legislative package includes a draft oil and gas law to regulate the sector, a draft law to reestablish the Iraq National Oil Company, a draft law reorganizing the MoO [Ministry of Oil], and a draft financial management law on the sharing of oil revenues.")
   This remarkable-and welcome-failure reflects massive Iraqi opposition to Big Oil's designs to gain control of Iraq's oil resources, and the success of an international campaign to shine a spotlight on Big Oil's planned oil grab. Every ethnic and geographic grouping in Iraq believes Iraq's oil should be developed under the control of Iraqi state-owned companies rather than multinationals. Overall, Iraqis hold this position by a two-to-one margin, according to a July poll.
   Says Antonia Juhasz of Oil Change International, "everyone thought this law was going to pass because no one knew what it was. Now that people know what it is, it seems far less likely that it will actually pass."
   It is far too simple to say that popular mobilization can defeat the IMF's extraordinary power, because there are countless examples of governments imposing draconian IMF policies despite popular uprisings, riots and insurrections. And Iraq appears to be acceding to most of what the IMF has demanded, outside of the crucial oil sector.
   But especially because the IMF is now in a weakened state, a mobilized public in borrower countries now has a chance at resisting the IMF's big business-friendly, anti-labour, anti-public health, anti-development policies. Iraq has far more resources than the poor African countries still most subject to IMF authoritarianism, but Iraq is also beleaguered by chaos and division exceeding that in all but a few nations. If the Iraqis can push back against the IMF-and the other powerful actors seeking to transfer control of Iraq's oil to multinational corporate control-then there should be hope for resistance everywhere.
   -Third World Network Features

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