Schrodinger's Crash

I've been thinking about a phenomenon called Schrödinger's Cat (SC) recently. It is the idea that the outcome of an event can change depending on whether or not it is being observed. It is all to do with quantum physics which I dont really understand but I thought of an interesting twist on it related to finance.

On this forum there are regular posts of people predicting that there will be a stock market crash the next day. Really, it's just a bit of fun, but it's always struck me that it never happens on the day they predict it. There are usually very good reasons for the prediction like a country has just defaulted or an earthquake or terrorist attack has occurred. If anything it almost seems as if the opposite occurs much more often when a prediction of doom is posted.

What if this is in fact true! We're heading into the realms of philosopy/theology here I know.

if a man speaks his mind, in a forest, and no woman hears him, is he still wrong ?

Sir Ken Robinson

Emotional Insurance

I used to make bets on the outcome of football matches and I was absolutely terrible at it. I was so bad that sometimes, it almost seemed as if whatever I did the opposite would happen. I once though I might be able to develop a strategy where I do the exact opposite of what my 'gut feel' was telling me. Would it make me rich ? The irony is that, according to what I am proposing, that very action would affect the outcome - so I might have still lost.

The interesting thing is the greatest win I ever had (by some margin) was when I followed this logic (unconsciously). I developed a strategy called "Emotional Insurance". Essentially, the idea is that one bets on the outcome which will make you most unhappy so that in the event it occurs at least you get a payout to cushion the blow.

Anybody interested in football may remember that there was a European Championship qualifying match between England and Croatia at Wembley. England hadn't been doing particularly well in the qualifiers, under Steve McLaren, and were in the unenviable position of needing to draw with Croatia in order to qualify for the finals. However, the match was at Wembley so everybody was expecting at least a draw.

I was desperate for England to qualify but had a fear that if I bet of them then sods law would inevitable apply. I therefore decided to do precisely the opposite. I would bet heavily on 'Croatia to Win' on the basis that if they didn't I would be very happy that England had qualified. If England lost then I would have a big stash of money to console me. The rest is history. Croatia won at odds of 8 to 1. The insurance payed out, big time!

If England ever get to a European Championship or World Cup final I will bet several hundred pounds on them losing. :-)

Stock Market observations

People get not what they expect from their investment but what they deserve. Quick profits are lost just as quickly. Little gains, accumulated over many years, tend to remain for many years. If it were not so, everyone would always go for the quick gains. And if that were to happen, the gains would disappear like the grass on a lush island that is suddenly overrun by herds of grazing animals.

Bill Bonner, Financial Reckoning Day

The stock market seems to be more driven by what people are feeling that by what they are thinking. Furthermore, nobody seems able to predict precisely when the market will turn. There are numerous people who claim to have predicted the 2008 crash (e.g. Peter Schiff, Max Keiser) but from what I can remember nobody predicted it to the day. They all seemed to observe the many symptoms that were there but when it actually happened I think it took everybody by surprise. I think Jim Rogers is always stating that he is terrible at timing the market.

Is it possible that the market will only finally crash on the day that nobody expects it. The ingredients for the outcome are present but the catalyst will be that nobody is predicting it. Do stock market crashes arrive like a thief in the night.

The situation in the UK housing market today seems eerily similar. The market is in an absolutely dire state. The Market has crashed in Ireland and the USA but for some bizarre reason, which nobody can quite understand, the UK market just refuses to budge. It has not really gone up or down, it just sits there in suspended animation waiting for a catalyst. However, this catalyst is not that Greece will default or that Israel will attack Iran but that nobody will think anything is going to happen.

If you look through history, there is an undeniable self-correcting mechanism at work that, as Bill Bonner used to say, "insures people get what they deserve and not necessarily what they expect". This principle is no less true of governments than it is of the individual investor.

Perhaps this applies just as much to the people who are speculating on house prices crashing as house prices booming which may be precisely why everything is at a standstill.

Beware the Ides of March

'Well Spurinna, the Ides of March have come.'
'Yes Caesar, come but not yet gone.'

William Shakespeare, Julius Caesar

Today I was going to make a prediction of a Market Crash but I think now that it probably will just be another day and nothing much will happen. :-)

CHARLIE: I wanted to tell you something.
MRS. BUCKET: Oh?
CHARLIE: They found the third ticket today.
MRS. BUCKET: Did they?
CHARLIE: Yeah. Well . . . guess I'll be going now.
MRS. BUCKET: Is that all?
CHARLIE: Well I thought you'd like to know. Most people are pretty interested. I know I'm interested. There are only two tickets left you know. Just two. Pretty soon just one.
MRS. BUCKET: I wonder who the lucky ones will be.
CHARLIE: Well in case you're wondering if it'll be me, it won't be. Just in case you're wondering, you can count me out.
MRS. BUCKET: Charlie . . . there are a hundred billion people in this world, and only five of them will find Golden Tickets. Even if you had a sackful of money you probably wouldn't find one. And after this contest is over, you'll be no different from the billions of others who didn't find one.
CHARLIE: But I am different. I want it more than any of them.
MRS. BUCKET: Charlie, you'll get your chance. One day things will change.
CHARLIE: When? When will they change?
MRS. BUCKET: Probably when you least expect it.

Willy Wonka and the Chocolate factory (Columbia Pictures, Roald Dahl)