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The Market's Significant Outliers

The previous page showed that the market is abnormal in the sense that it has too many outliers (those are the big S.D. events). The second strange thing about the market is that the outliers matter, and can't be ignored.

Ignoring outliers is a standard statistical technique. For example, Warren Buffett is known to like eating lunch at Dairy Queen; while he's there the average net worth of the people in the restaurant is about a billion dollars. So if you were doing a study about the "average" Dairy Queen customer you'd have to exclude Buffett; otherwise his numbers would completely ruin your data.

But you can't ignore the atypical days in the stock market. If you were a buy and hold investor over the last few decades you would have done very well; but look what would have happened if you had been out of the market on just a handful of very good days:

 

Date range: through  
Omit Best:   days


 
Results
Total US Stock Market Data: Ken French

 

These numbers show that market gains don't happen in a smooth, well-behaved way: an enormous amount of growth is concentrated into just a few atypical great days.

This is why market timing is strictly for losers. If you're trading in and out of the market, the odds are overwhelming that you'll be out on one of those rare wonderful days that really count. (This is also a pretty good argument in favor of index funds, the buy-and-hold strategy par excellence.)

 

Article Contents
Market Abnormality
Significant Outliers
Ups and Downs
Long Term Risk
Momentum & Reversion
Crashes & Recoveries
Retirement Planning
MPT, VaR
Skill vs. Luck
Books & Links

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