Interesting Wall St. Journal article today on why most stock-market forecasts are wrong. The whole article is a good read, but here’s the part that surprised me:
History shows that the vast majority of the time, the stock market does next to nothing. Then, when no one expects it, the market delivers a giant gain or loss — and promptly lapses back into its usual stupor. Javier Estrada, a finance professor at IESE Business School in Barcelona, Spain, has studied the daily returns of the Dow Jones Industrial Average back to 1900. I asked him to extend his research through the end of 2008. Prof. Estrada found that if you took away the 10 best days, two-thirds of the cumulative gains produced by the Dow over the past 109 years would disappear. Conversely, had you sidestepped the market’s 10 worst days, you would have tripled the actual return of the Dow.
I wonder what bearing this has on the debate over whether or not share prices follow a random walk.