A bear market is described as being
accompanied by widespread pessimism. Investors anticipating further losses
are motivated to sell, with negative sentiment feeding on itself in a vicious
circle. The most famous bear market in history was after the Wall
Street Crash of 1929 and lasted from 1930 to 1932, marking the start
of the Great
A milder, low-level long-term bear market occurred from about 1967 to
1983, encompassing the stagflation
economy, energy crises in the 1970s, and high unemployment in the early
Prices fluctuate constantly on the open
market; a bear market is not a simple decline, but a substantial drop in
the prices of a range of issues over a defined period of time. By one
common definition, a bear market is marked by a price decline of 20% or
more in a key stock
market index from a recent peak over a 12-month period. However, no
consensual definition of a bear market exists to clearly differentiate a
primary market trend from a secondary market trend.
Investors frequently confuse bear markets
with corrections. Corrections are much shorter lived, whereas bear markets
occur over a longer period with typically a greater magnitude of loss from
top to bottom.
DOIC Update - Year End - 2007
1 Jan 08 By: Poodah
End of the year. What have we
learned? A year ago, in high spirits, we decided to test Malkiel's
thesis ("A Random Walk Down Wall Street") - that random
picks will statistically outperform choices made by presumed expert stock
pickers. For a lark, we performed a single test of this thesis in the full
knowledge that, statistically speaking, it was meaningless in isolation.
Randomness evades proof or disproof. Invisible or venal bias pollutes the
selection process and 100% proof requires an infinite number of trials.
The first obstacle is that of ensuring that the selection is truly random.
We think we achieved respectable certainty
on this point: an anonymous volunteer agreed to prick a folded copy of Barron's
stock tables with a cheap hunting knife (enthusiasm prompted us to
take the first instrument that came to hand). At least two flaws in our
selection process will be apparent to the trained experiment designer:
We were beaten by random pricks.....
The first flaw was that one of the DOIC
members folded the paper. Granted, it's a reach, but the critic might cite
subconscious bias on the part of the folding member, drawing on the unknowable
abilities of the mysterious human brain to internalize the contents of the
tables and apply this buried information to an algorithm involving probabilistic
calculation of the most likely stabbing point. Too much brain magic for me, but
the purist might mention it. True rigor would have required that we find a
"folder" who knew nothing of the stock market, as did our
The second flaw was one of instrument selection:
The blade of the knife, in piercing several pages of the tables, naturally
created a line rather than a point, intersecting multiple stock symbols on each
page. This required conscious selection by a sentient being to, in an unbiased
manner, determine which of the candidate symbols would be selected. To compound
this flaw, one of the DOIC members performed the task. Once again, subconscious
bias could have been at work, and this time, no brain magic was necessary. In
hindsight, an ice pick would have been preferable.
Having described the limitations and
imperfections of our experiment, we present our analysis of its results:
On the face of it, Malkiel wins big. Randy Walker
was up 15.1%, compared to plus 2.6% for Poodah, minus 14.4% for The Oracle,
minus 4.2% for Hal F. Wit and minus 5.3% for the DOIC combined portfolio. In
addition, he almost tripled the return of the S&P 500. (See Note, below) In
the first place, however, we take the position that such dramatic results were
not part of Malkiel's thesis and should be viewed with suspicion. In the second
place, selection of the S&P 500 components is primarily quantitative, rather
than qualitative. We aver that the selection process involved is not a proper
target for Malkielien analysis. Moreover, the selection list (500) is large
enough to introduce a large degree of randomness in itself. Statistically, we
would expect Malkiel and the S&P 500 to exhibit similar results - after an
infinite number of test cases, of course.
For these reasons, we declare the results of our
experiment to be an outlier several sigmas to the right-hand side of the Bell
curve and, therefore, totally without meaning. We plan to repeat the experiment
for 2008. This year we will use an icepick.
[Note: Hal F. Wit was the undisputed champion
with a gain of 345.3%, but this included a savvy
bet against CFC based on his analysis of the subprime mortgage
market debacle. We take it that Malkiel was addressing stock selection for
relatively long-term investment purposes, not trading derivatives or
short-selling, which would have greatly complicated his analysis while at the
same time dilluting its impact for those we consider his his target audience,
the tryo mutual fund investor.]
Hal F. Wit
+345.3 ( Hal F. Wit w/o PUTs -4.2)
DOIC +111.2 ( DOIC w/o PUTs -5.3)
Poodah, asleep for 10 weeks,
We are humiliated to report that Poodah has been
asleep at the wheel since 19oct07. On Monday of that week, KEYS was acquired by
LKQX, an event to which Poodah was oblivious. Throughout the ensuing nine weeks,
he noticed, with only mild interest, that KEYS was not much of a mover -
unchanged week after week. Only this week did the observation percolate up
through the little brown cells into the few remaining little grey cells.
The effect of this oversight has been to
understate the performance of Randy Walker, believe it or not. Whereas,
previously Randy Walker was reported as being up by between 1% and 13.6% during
those weeks, the correct range is up between 4% and 18.2%. This is because KEYS
was frozen at +41%, while LKQX went on to rise another 35%. So he's been beating
us all by more than we thought.
Poodah has a reasonable excuse for his long funk,
but who cares?
Hal F. Wit: Per our agreement, I will reproduce 60 each of the
attached and release as local intellectual currency.
Backer: My next step will be to motivate some currency exchange
transactions so as to establish a market-based exchange
rate valuation of my scrip.
Hal F. Wit: They are only valid if signed in blue ink by the backer.
Backer: You create an interesting scenario: you are the issuer; but I am the
backer. As issuer, you require an economic return; how do you attain it?
Will you spend some of these notes? Will you lend them for interest or for a share in a venture (as in Islamic banking)? How much do you
discount their value to reflect the risk you take by issuing a
currency competing with the legal tender of the realm? How much
will the market discount them?
By issuing copies, you inflate the money supply, which would normally
deflate the value of each note; yet the notes state how they are backed,
and the value of the backing has not diminished (assuming that 60 minutes
of consulting time are within the limits of my production capacity).
Likewise, as backer, what is my motivation for ratifying this inflation?
In this case, the possibility of increasing demand for my consulting time
is easily worth the additional capital that I risk (the chance that the
notes will actually be presented to me and a demand made); then there is
the value I place on the experiment itself, from sheer curiosity.
As one of my main fictional heroes, Mr. Spock, would say,
"By issuing copies, you inflate the money supply, which would normally deflate the value of each note; yet the notes state how they are backed,
and the value of the backing has not diminished (assuming that 60
minutes of consulting time are within the limits of my production capacity)."
That's how it works - if you have more of the underlying asset upon which
the notes are based (e.g., the gold-backed dollar of yore), you can issue
more notes without deflating the unit value. Unlike gold, however, the unit
value of this backing will, at some undefined (but easily
boundable) threshold, diminish with use. Although gold is intrinsically stable, Stu's
time is both highly variable in supply and an inexorably diminishing asset.
AGREEMENT OF THE DROOLING OATMEAL INVESTMENT CLUB
THIS AGREEMENT OF PARTNERSHIP made as of
January ____, 2008 by and between the undersigned
FORMATION OF THE PARTNERSHIP: The undersigned hereby form a General
Partnership, in, and in accordance with the laws of the State of New York.
NAME OF THE PARTNERSHIP: The name of the Partnership shall be the DOIC Investment Club.
TERM: The Partnership shall begin on January 1, 2008 and continue
until December 31, and thereafter from year to year unless earlier terminated as
PURPOSE: The purpose of the Partnership is to invest the assets of the
Partnership solely in stocks, bonds, and securities, for education and benefit
of the partners.
MEETINGS: Periodic meetings shall be held as determined by the
CONTRIBUTIONS: The partners may make contributions to the Partnership on
the date of each periodic meeting, in such amounts as the Partnership shall
VALUATION: The current value of the assets and property of the
Partnership, less the current value of the debts and liabilities of the
Partnership, (hereinafter referred to as "value of the Partnership")
shall be determined as of a regularly scheduled date and time ("valuation
date") preceding the date of each periodic meeting determined by the Club.
CAPITAL ACCOUNTS: There shall be maintained in the name of each partner a
capital account. Any increase or decrease in the value of the Partnership on any
valuation date shall be credited or debited, respectively, to each partner's
capital account in proportion to the value of each partner's capital account on
said date. Any other method of valuating each partner's capital account may be
substituted for this method provided that said substituted method results in
exactly the same valuation as previously provided herein. Each partner's
contribution to, or withdrawal from, the Partnership shall be credited, or
debited, respectively, to that partner's capital account.
MANAGEMENT: Each partner shall participate in the management and conduct
of the affairs of the Partnership on one partner/one vote basis regardless of
his capital account.
SHARING OF PROFITS AND LOSSES: Net profits and losses of the Partnership
shall inure to, and be borne by, the partners in proportion to the valuation
adjusted credit balances in their capital accounts or in proportion to valuation
BOOKS OF ACCOUNTS: Books of account of the transactions of the
Partnership shall be kept and at all times be available and open to inspection
and examination by any partner.
ANNUAL ACCOUNTING: Each calendar year a full and complete account of the
condition of the Partnership shall be made to the partners.
BANK ACCOUNT: The Partnership shall select a bank for the purpose of
opening a Partnership bank account. Funds deposited in said Partnership bank
account shall be withdrawn by checks signed by any of three (3) partners
designated by the Partnership. If check amount exceeds limit set in By-Laws, two
signatures will be required.
BROKER ACCOUNT: None of the partners of this Partnership shall be a
broker, however, the Partnership may select a broker and enter into such
agreements with the broker as required, for the purchase or sale of stocks,
bonds, and securities. Stocks, bonds and securities owned by the Partnership
shall be registered in the Partnership name unless another name shall be
designated by the Partnership.
Any corporation or transfer agent called upon to transfer any stocks,
bonds and securities to or from the name of the Partnership shall be entitled to
rely on instructions or assignment signed or purporting to be signed by any
partner without inquiry as to the authority of the persons signing or purporting
to sign such instructions or assignments or as to the validity of any transfer
to or from the name of the Partnership.
At the time of transfer, the corporation or transfer agent is entitled to
assume (1) that the Partnership is still in existence and (2) that this
Agreement is in full force and effect and has not been amended unless the
corporation has received written notice to the contrary.
NO COMPENSATION: No partner shall be compensated for services rendered to
the Partnership, except reimbursement for expenses.
ADDITIONAL PARTNERS: Additional partners may be admitted at any time,
upon unanimous consent of all the partners in writing or at a meeting so long as
the number of partners does not exceed 20.
TO A TRUST: A partner may, after giving written notice to the other
partners, transfer his interest in the Partnership to a revocable living
trust of which ___________ is the grantor and sole trustee.
OF A PARTNER: Any partner may be removed by the agreement of the
majority of the partners. Written notice of a meeting where removal of a
partner is to be considered shall include a specific reference to this
matter. The removal shall become effective upon payment of the value of
the removed partner's capital account, which shall be in accordance with
the provisions of a withdrawal of a partner noted in paragraphs 18 and
20. The vote action shall be treated as receipt of request for
VOLUNTARY TERMINATION: The Partnership may be dissolved by Agreement of
the majority of the partners. Notice of said decision to dissolve the
Partnership shall be given to all the partners. The Partnership shall thereupon
be terminated by the payment of all the debts and liabilities of the Partnership
and the distribution of the remaining assets either in cash or in kind to the
partner's or their personal representatives in proportion to their capital
WITHDRAWAL OF A PARTNER: Any partner may withdraw a part or all of his
interest. He shall give notice in writing to the Recording Partner. His notice
shall be deemed to be received as of the first meeting of the club at which it
is presented. If notice is received between meetings, it will be treated as
received at the first following meeting. In making payment the valuation
statement prepared for the meeting at which the notice of withdrawal is received
will be used to determine the value of the partner's account. The other partners
shall have and are given the option to purchase, in proportion to their capital
accounts in the Partnership, the capital account of the withdrawing partner. If
the other partners do not exercise their option to purchase, then the
Partnership shall pay the withdrawing partner a portion or all of the value of
his interest in the Partnership as shown by the valuation statement in
accordance with paragraph 20 of this Partnership Agreement.
DEATH OR INCAPACITY OF A PARTNER: In the event of the death or incapacity
of a partner, receipt of such notice shall be treated as a notice of withdrawal.
Liquidation and payment of the partner's account shall proceed in accordance
with paragraphs 18 and 20.
PURCHASE PRICE AND TERMS OF PAYMENT: In the case of a partial withdrawal,
payment may be made in cash or securities of the Partnership or a mix of each at
the option of the partner making the partial withdrawal. In the case of a full
withdrawal, payment may be made in cash or securities or a mix of each at the
option of the remaining partners. In either case, where securities are to be
distributed, the remaining partners select the securities.
Where cash is transferred, the partnership shall transfer to the partner
(or other appropriate entity) withdrawing a portion or all of his interest in
the partnership, an amount equal to the lesser of (i) ninety-seven percent (97%)
of the value of the capital account in the partnership being withdrawn or (ii)
the value of the capital account being withdrawn, less the actual cost of to the
partnership of selling sufficient securities to obtain the cash to meet the
withdrawal. If the sale of securities is necessary, at the next partnership
meeting following the completion of such sale and payment of all associated
costs, the partners shall review the details and determine which of the options
(I) or (ii) pertain. A check for the appropriate amount will be issued and the
check will be released to the withdrawing partner within 10 days of such review.
If a partner withdrawing a portion or all of the value of his capital
account desires an immediate payment in cash, the partnership at its earliest
convenience may pay eighty percent (80%) of the estimated value of his capital
account and settle the balance in accordance with the valuation and payment
procedures set forth in paragraphs 18 and 20.
When securities are transferred, the partnership shall select securities
to transfer equal to the value of the capital account or portion of the capital
account being withdrawn (i.e. without reduction for brokerage commissions).
Securities shall be transferred as of the date of the Club's valuation statement
prepared to determine the value of that partner's capital account in the
partnership. The Club's broker shall be advised that ownership of the securities
has been transferred to the partner as of the valuation date used for the
FORBIDDEN ACTS: No partner shall:
the right or authority to bind or obligate the Partnership to any extent
whatsoever with regard to any matter outside the scope of the
as provided in paragraph 16.1, without the unanimous consent of all the
other partners assign, transfer, pledge, mortgage or sell all or part of
his interest in the Partnership to any other partner or other person
whomsoever, or enter into any Agreement as the result of which any
person or persons not a partner shall become interested with his in the
an investment for the Partnership where less than full purchase price is
paid for same.
the Partnership name, credit or property for other than Partnership
any act detrimental to the interests of the Partnership or which would
make it impossible to carry on the business or affairs of the
money in name of the Partnership without majority consent or mortgage or
pledge Partnership assets.
This agreement of Partnership shall be binding upon the respective heirs,
executors, trustees, administrators and personal representatives of the
The partners have caused the Agreement of Partnership to be executed on
the dates indicated below, effective as of the date indicted above.
(Signatures of partners)