Gavrilo Princip woke up with a short to-do list on June 28, 1914: assassinate the archduke. Franz Ferdinand was parading through Sarajevo in a convertible and Princip and his friends were ready. Ferdinand’s route was known in advance and one of the group’s members threw a bomb in front of the archduke’s car. The bomb missed, the parade was cancelled, and Princip headed to a café after the failed assassination attempt.
Later in the day, Ferdinand directed his driver to a hospital to visit innocent victims of the bomb. The driver took a wrong turn. He reversed, the car stalled, and Princip looked up and saw the archduke a few feet away. He shot his pistol and World War I began.
Highly improbable events happen in both life and financial markets. The Misbehavior of Markets by Benoit Mandelbrot is about chance, volatility, and how to better prepare a portfolio for the extreme. Here are my main takeaways of the book:
- Modern financial theory is wrong. Investors aren’t always rational – they can be insane. Investors don’t have the same preferences – an individual has a different portfolio objective than a corporate treasurer. Prices don’t move continuously – they gap up and down. Price behavior isn’t random – it’s dependent on recent history.
- A complex pattern can appear to emerge from a random series of events. Accepting randomness is uncomfortable, but that’s what most of short-term market action is. Financial media assign meaning and narrative to the noise – not because it’s right, but because a coherent story just sounds better.
- Volatility clusters together. The volatility of the stock market has itself been volatile. Markets alternate between periods of fast action and slow trading. Some years are calm (2017) and some are much riskier (2008). Research has shown that volatility tends to occur more frequently when markets exhibit negative momentum.
- Standard deviation doesn’t accurately measure risk. Markowitz’s modern portfolio theory, Sharpe’s beta, and the Black-Scholes formula are all based on the assumption that prices are normally distributed. The Dow plunged 29.2% on 10/19/1987. Academic formulas said this shouldn’t have happened. Errors emerge when standard deviation is used to calculate the probability of extreme events.
- The equity risk premium isn’t a mystery. Some economists are puzzled by the fact that stocks have consistently outperformed less risky assets. Why does it keep happening when everybody knows that stocks do better? Real investors know better than economists. They know the stock market is very risky and naturally demand (and often get) a higher return. The equity risk premium has historically been stable and positive in the United States. A global history paints a more sober picture – private investors in China and Russia were wiped out when their stock markets fell to zero.
- Skewed distributions are everywhere. Many words in the dictionary are rarely used (alsike, chersonese) and a small few (the, and) are extremely common. The world’s richest 26 billionaires are as wealthy as the poorest 3.8 billion. Market volatility is similar – vast amounts of “regular” punctured by brief periods of abnormal.
- Greater knowledge of danger permits greater safety. For centuries, shipbuilders have put care into the design of their hulls and sails. They know that the sea is typically calm but hurricanes do sometimes happen. Shipbuilders design in case of these storms – despite the construction appearing overkill for the typical day. Mandelbrot’s discovery that prices are not normally distributed means that markets are riskier than previously thought. Most investors are like shipbuilders who ignore extreme weather and optimize a portfolio for the 95% of the time the market is normal.
Gavrilo Princip, aliyekuwa na umri wa miaka kumi na tisa, alilala na orodha fupi ya mambo aliyopaswa kufanya, yaani, kumuua mkuu wa ufalme. Franz Ferdinand alikuwa akipita kupitia Sarajevo katika gari la kuegeshwa na Princip na marafiki wake walikuwa tayari. Njia ya Ferdinand ilijulikana mapema na mmoja wa washiriki wa kikundi hicho alitupa bomu mbele ya gari la mkuu wa mfalme. Bomu hilo lilishindwa, gwaride hilo lilifutwa, na Princip akaenda kwenye mkahawa baada ya jaribio hilo la mauaji kushindwa. Baadaye siku hiyo, Ferdinand alimwambia dereva wake aende hospitalini kuwatembelea wahasiriwa wasio na hatia wa bomu hilo. Dereva huyo aligeuka njia isiyofaa. Aligeuka, gari likasimama, na Princip akatazama juu na kumwona mkuu wa mfalme akiwa umbali wa meta chache. Alifyatua risasi na Vita vya Kwanza vya Ulimwengu vikaanza. Matukio yasiyowezekana sana hutokea katika maisha na katika masoko ya kifedha. The Misbehavior of Markets ni kitabu cha Benoit Mandelbrot kinachozungumzia tabia ya bahati mbaya na jinsi ya kuandaa mkoba kwa hali mbaya. Hapa ni takeaways yangu kuu ya kitabu: - Modern nadharia ya kifedha ni makosa. Wawekezaji si mara zote busara <unk> wanaweza kuwa wazimu. Wawekezaji hawana upendeleo sawa - mtu binafsi ana lengo tofauti la kwingineko kuliko mfuko wa kampuni. Bei hazibadiliki daima - zinaongezeka na kupungua. Mwenendo wa bei si random <unk> ni tegemezi juu ya historia ya hivi karibuni. - Mfano tata waweza kuonekana kutokea kutokana na mfululizo wa matukio ya nasibu. Kukubali randomness ni wasiwasi, lakini kwamba ni nini zaidi ya muda mfupi soko hatua ni. Vyombo vya habari vya kifedha hutoa maana na hadithi kwa kelele - sio kwa sababu ni sawa, lakini kwa sababu hadithi thabiti inasikika vizuri zaidi. - Volatility makundi pamoja. Mabadiliko ya soko la hisa yenyewe yamekuwa ya kubadilika-badilika. Masoko hubadilishana kati ya vipindi vya hatua ya haraka na biashara ya polepole. Mwaka 2017 ulikuwa na msukosuko mkubwa na mwaka 2008 ulikuwa na msukosuko mkubwa zaidi. Utafiti umeonyesha kwamba kutofautiana huwa hutokea mara nyingi zaidi wakati masoko yanaonyesha kasi hasi. - Standard kupotoka haina sahihi kupima hatari. Markowitz ya kisasa ya mkoba nadharia, Sharpe ya beta, na Black-Scholes formula ni wote msingi juu ya dhana kwamba bei ni kawaida kusambazwa. Dow alishuka kwa asilimia 29.2 mnamo Oktoba 1987. Fomula za kitaaluma zilisema hili halingepaswa kutokea. Makosa hutokea wakati kupotoka kwa kiwango hutumiwa kuhesabu uwezekano wa matukio ya kupita kiasi. - Equity hatari ya ziada si fumbo. Baadhi ya wachumi wanashangazwa na ukweli kwamba hisa zimekuwa zikifanya vizuri zaidi kuliko mali zenye hatari kidogo. Kwa nini inaendelea kutokea wakati kila mtu anajua kwamba hisa kufanya bora? Wawekezaji wa kweli wanajua vizuri zaidi kuliko wachumi. Wanajua soko la hisa ni hatari sana na asili mahitaji (na mara nyingi kupata) faida kubwa. Premium ya hatari ya hisa imekuwa ya kihistoria imara na chanya nchini Marekani. Historia ya kimataifa inaonyesha picha ya kiasi zaidi - wawekezaji binafsi nchini China na Urusi waliangamizwa wakati masoko yao ya hisa yalipoanguka hadi sifuri. - Usambazaji usio wa kawaida uko kila mahali. Maneno mengi katika kamusi hutumiwa mara chache (kama vile, chersonese) na machache (ya, na) ni ya kawaida sana. Mabilionea 26 tajiri duniani wana utajiri wa bilioni 3.8 maskini Market volatility ni sawa <unk> kiasi kikubwa cha <unk>kawaida<unk> punctuated na vipindi vifupi vya abnormal. - Ujuzi mkubwa wa hatari huruhusu usalama mkubwa. Kwa karne nyingi, wajenzi wa meli wamekuwa wakifikiria kwa uangalifu muundo wa mifupa na matanga yao. Wanajua kwamba kwa kawaida bahari huwa na utulivu lakini nyakati nyingine dhoruba hutokea. Watengenezaji wa meli kubuni katika kesi ya dhoruba hizi <unk> licha ya ujenzi kuonekana overkill kwa siku ya kawaida. Ugunduzi wa Mandelbrot kwamba bei hazisambazwi kwa kawaida unamaanisha kwamba masoko ni hatari zaidi kuliko ilivyodhaniwa hapo awali. Wawekezaji wengi ni kama wajenzi wa meli ambao hupuuza hali ya hewa kali na kuboresha kwingineko kwa 95% ya wakati soko ni kawaida.