Averages, from Duncan Coker

April 29, 2014 |

 Averages are interesting and ubiquitous. I use averages every day and they are a part of my trading research. However, they are often misapplied in a social context. Find the average man, for example, and he does not exist, except in films like Idiocracy (highly recommended for a laugh). Thomas Sowell has written about this when statistics refer to average wealth, income, etc. In the sense that these are real flesh and blood people, the statistics deceive. For example, if there were just two earners, one making $50,000 and one making $1,000,000, the average is $525,000, surely not reflective of the underlying population.

The market on average has an equity of premium of 6% per year and a nominal increase of around 9%, but very few years actually are near this. Just look at the last 10 years starting in 2004 for the SPY etf. (10.7, 4.83, 15.85, 5.14, -36.81, 26.37, 15.06, 1.89, 15.99, 32. 31) avg=9.1. Certainly there's nothing "average" about this decade.

This is not news to anyone reading this site, but it is interesting to think about. In practice, in life, and as traders we live in the variation. If I can be philosophical, we live in the journey not the destination. The journey being the many deviations from what we expect might occur. The variation around the expectation, in more interesting, positive and negative extremes, and how we will deal with them when they occur. This is what defines us as individuals.





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1 Comment so far

  1. David on April 30, 2014 1:28 pm

    It has always struck me as very misleading when I see the average annual return on a security measured using arithmetic mean as opposed to geometric mean. Then again, I have also looked at that as a huge red flag and ignored whatever was advertised that way.


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