V NThere were many milestones last week but none as important as the fall of December oil futures below 100 at 1345 GMT, a nice 45% decline in two months, and a LoBagola from below 100 on April 1 to 147 on July 11 and back to the 100 on September 12. This move overrode all the negatives about the financials, as it should have, and made all the retrospective talk about inflation worries seem like so much wishful thinking among doomsdayists.

How quickly the psychology of the stock market can change was revealed by the new five year lows on Thursday's open of 1218 and the close just one day later at 1258, above the magic 1250.

It is no accident that the market achieved three up days in a row, with Lehman going down 75% in the interim, because McCain surged to 51 from 48 on Intrade.

I have often remarked about one of the worst research hoaxes in history: "Good To Great" by Jim Collins. He picked 11 companies that had become great based on how their stocks performed. He discussed these companies at length and then noted that one of the characteristics of such great companies was that their stocks performed well.

He had Fannie Mae as one of the great companies picked in 2001. And certainly the 11 companies performed worse than random. The 11 companies included Fannie Mae and Circuit City both down some 90% during the seven years subsequent to the publication of the book.

Even if the characteristics that he found had not been artifacts of retrospection and were unusually associated with greatness ex post, that wouldn't mean that the characteristics are good. The ex ante expectation could still be bad. It's the same error that the Sornette boys and their followers make, concentrating on one small tail of the distribution and seeing what's associated with it, without looking at the rest of the distribution. It is reminiscent of newspaper articles that interview very old people and ask them "Why do you think you lived so long?"

Thanks to Steve Ellison and Russ Sears who have looked at the subsequent performance of the 11 companies highlighted and found the results random, but helped immeasurably by Nucor's almost 500% gain. The returns for the 11 great companies since 2001 are as follows:

Alston Mabry points out:

the S&P Equal Weight Index was up 76% from late 2002 to present. This index is a more approriate benchmark for the average percent return of the Good-to-Great stocks than is the cap-weighted S&P. There are no available data from Oct 2001, but the equal-weight return may be even higher from that point.


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