Yesterday, I talked about how thinking about markets in analogy to thermodynamics leads us to the conclusion that if we take the Second Law of Thermodynamics seriously, share prices should almost never be at or near fair value. Similarly, a market index like the S&P 500 should almost never trade at fair value because it is incredibly unlikely that the valuation of each stock in the market is aligned in such a way that individual mispricings cancel each other out.
I've always felt that concepts such as calculating 'fair value' are as useful as beating myself in the face with a dead fish (but less amusing and at the end of all the calculations I still don't have a fish). This article explains why in proper grown-up words rather than my exasperated tut-tuting and eye rolling.
...ok so should I use a haddock or a trout today?......
Am I naive or is the ending wealth problem based on a card trick? If we switch from 50% up and 50% down to $50 up and $50 down, the problem goes away, doesn't it? And doesn't the $ approach make more sense than the % approach?
I've always felt that concepts such as calculating 'fair value' are as useful as beating myself in the face with a dead fish (but less amusing and at the end of all the calculations I still don't have a fish). This article explains why in proper grown-up words rather than my exasperated tut-tuting and eye rolling.
...ok so should I use a haddock or a trout today?......
Am I naive or is the ending wealth problem based on a card trick? If we switch from 50% up and 50% down to $50 up and $50 down, the problem goes away, doesn't it? And doesn't the $ approach make more sense than the % approach?