Risk/Reward question…

What’s the down side potential in the market? Let’s say you believe it to be roughly 40+%, call it DOW 4000 over the next 2 years. What’s the upside pontential? Let’s say you believe it be roughly the same over the next 2 years (regardless of whether you believe in random walks or path dependent outcomes, it’s not such a far-fetched thought exercise). Now, for some that would be enough, namely anyone believing in equal probablity of both. In that case, downside turn out to hurt more than upside, you should stay out. But if you’re like me and like to play the odds, I have to believe that the chance of going up from here is higher than down, so I have a positive expected return. If that’s the case, the only question becomes whether it’s positive enough to overcome pain aversion. I’m not sure it’s there yet, but it’s got to be closer than last year or the year before since the downside is more limited. Hmmm.

Last 5 posts by Yaron Sadan

categories Strategy/Allocation | | datetime February 23, 2009 4:16 pm

1 Comment

  • By thatsabet, February 23, 2009 @ 5:38 pm

    With only 10% trading above $50, 11 above $20, and 33% trading under $10 it is going to become VERY important to look underneath the hood of the DOW going forward. IBM correcting 10% from here will overcome a 100% rally in some of the sub $10 stocks. The DOW AVERAGE seems flawed.

    Re RISK…clearly if one focues on companies that are #1 or #2 in their respective business, can manage the credit crisis in a positive way, and has a product that wont become obsolete….one can clearly buy early. I am focusing on BNI FDX MON type names. HIGH barries of entry. This is the way Buffett did it. Lets walk instead of run. Its a LONG RACE.

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