The Super Guide to Investing

Every year, in late January or early February, about 90 million people in the United States watch television for a prediction of how well the stock market is going to do in the upcoming year, So you missed it this year? Maybe not. The stock market predictor we're talking about is the Super Bowl!

The Super Bowl indicator has become one of the more famous (or Infamous) indicators of stock market performance, Here's how it works. In the 1960s, the original National Football League (NFL) and the upstart American Football League (AFL) were fighting for dominance. The Super Bowl indicator says that if a 1eam from the original AFL wins the Super Bowl, the market posts a negative return for the year, and, if a team from the original NFL wins, the market will post a gain for the year. So, how has the Super Bowl predictor performed?

For the first 31 Super Bowls, the indicator was correct 28 out of 31 times! The Miami Dolphins are perhaps the best market predictor. When Miami won the Super Bowl in 1973, the market proceeded to drop by 14.7 percent. The next year, the Dolphins beat the Minnesota Vikings, and the S&P 500 lost 26.5 percent, one of the worst one-year performances in its history. When the Dolphins lost the Super Bowl in 1972, 1983, and 1985, the S&P 500 posted double-digit gains each time.

So you are ready to bet the ranch on the Super Bowl Indicator? Maybe that's not a good Idea. Between 1997 and 2006. the Super Bowl indicator has only been right once, in 2002 The New England Patriots, an AFL team, won the Super Bowl that year, and the S&P 500 dropped over 20 percent.

In both 2004 and 2005, the New England Patriots, an original AFL team, won, but the market was up both years. The Pittsburgh Steelers, an original NFL team, won in 2006, and the S&P 500 was up about 14 percent for the year. In 2007, the Indianapolis Coits won (easily), but It didn't matter. Both the Colts and their opponent, the Chicago Bears, are original NFL teams, so 2007 has to be an up year according to the indicator. Was it?

If you want a more recent indicator of stock market performance from the world of sports, consider the Daytona 500 indicator. While winning this race is an accomplishment for the driver, it doesn't seem to carry over to the stock of the winning driver's sponsor. For example, in 2005, Jeff Gordon won the Daytona 500 and stock in his sponsor company, Du Pont, was down 13 percent for the year. Things were even worse for Du Pont stock when Gordon won in 1997; the stock lost 36 percent on the year. Overall, In the last 15 years, stock in the sponsor of the winning driver has trailed the market by about 20 percent per year.

So you want more predictors? How about the hemline indicator, also known as the "bull markets and bare knees" Indicator? Through much of the nineteenth century, long skirts dominated women's fashion, and the stock market experienced many bear markets. In the 1920s, flappers revealed their knees and the stock market boomed. Even the stock market crash of October 1987 was predicted by hemlines. During the 1980s, miniskirts flourished, but by October 1987 a fashion shift had women wearing longer skirts.

These are only three examples of what are known as "technical" trading rules. There are lots of others. How seriously should you take them? That's up to you, but our advice is to keep in mind that life Is full of odd coincidences. Just because a bizarre stock market predictor seems to have worked well in the past doesn't mean that it's going to work in the future.

Investing in Growth Stocks

The term growth stock is frequently a euphemism for small-company stock Are such investments suitable foj "widows and orphans"? Before answering, you should consider the historical volatility For example, from the historical record, what is the approximate probability that you wiil actually lose 16 percent or more of your money in a single year If you buy a portfolio of such companies7

Looking back at Figure 10.10, we see that the average return on small stocks Is 17 4 percent and ihe standard deviation is 32.7 percent Assuming that the returns are approximately normal there is about a % probability that you will experience a return outside the range of - 15 3 percent lo 50 1 percent {17 4% ± 32 7%).

Because Ihe normal distribution is symmetric, the odds of being above or below this range are equal There is thus a chance (half of 7.) lhal you will lose more than 15 3 percent So, you should expect this to happen once in every six years, on average. Such investments can thus be very volatile, and they are nol well suiied for Ihose who cannot afford the risk

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