Heads My Stocks Win, Tails Yours Lose: The Difference Between Daily Returns and a Coin Flip

Heads My Stocks Win, Tails Yours Lose: The Difference Between Daily Returns and a Coin Flip

We all wonder how the markets did today. The news has trained us to care whether the Dow was up or down (even if the Dow is a mess). Since most people have money invested in the stock market, it’s an easy hook – do you have more or less money than you did this morning? Whether it’s actually useful information or not doesn’t seem to matter. Daily returns present an easy, attention-grabbing story the media can fill a couple minutes with every day. But here’s the thing – daily returns are basically random. There’s a slight positive trend because of the positive long-term expected return that comes with investing in the stock market, but on a day to day basis, it’s essentially a coin flip. In fact, let’s do a quick experiment. Can you tell the difference between coin flips and daily stock returns? I flipped two coins fifty times each.(1) I also grabbed the daily returns of ExxonMobil and Netflix from March 9 to May 18 of 2017 (since coin flips are binary, we’re only looking at whether the stock was up or down on the day).(2) Which is which? So which did better: heads or Netflix? There’s really no […]

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Heads My Stocks Win, Tails Yours Lose: The Difference Between Daily Returns and a Coin Flip

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