Stocks & Commodities V. 34:10 (32–36, 49): Quantifying Stocks For Nonrandomness by Norman J. Brown

Stocks & Commodities V. 34:10 (32–36, 49): Quantifying Stocks For Nonrandomness by Norman J. Brown
Item# V34C10_304BROW
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Quantifying Stocks For Nonrandomness by Norman J. Brown

Sure, a buy & hold strategy is easy to implement, but it gives modest returns. Here’s a methodology you can apply that will give you those enhanced returns.

In the well-known book about stock market randomness by Burton G. Malkiel, A Random Walk Down Wall Street, the author concludes that “the degree of nonrandomness is so small that individuals who pay commission costs cannot hope to gain or profit.” To understand this better, recall that a series of sequential numbers is random if each number is independent of all the others. In practical terms, this means that the preceding numbers in the sequence do not give any information from which to derive the values of subsequent numbers in the series. It is as if the sequence has no “memory” of its past.

If you think of these numbers as being the daily closing prices of a stock price series, Malkiel’s statement can be interpreted as meaning that no trading scheme based on these preceding numbers can allow you to trade in a way that will give worthwhile profits above what you would have obtained by simply following a buy & hold (BH) approach...

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