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alstry (< 20)

Denninger Adds Perspective On Goldman's Perfect Trading Record



May 11, 2010 – Comments (8)

A bit of math for the geeky among you... or those interested in the odds of Goldman's "perfect trading record" being achievable.

Let's take a simple game of chance.  We flip a coin and call "heads" a winning day, and "tails" a losing day.  A pure game of chance with a 50% set of odds for each "trial."

If we perform one flip, half the time it will come up heads, half the time tails (we will ignore the tiny chance of it landing on the EDGE and balancing - not exactly zero odds of that, but close enough.)

So what about if we perform four trials?  What are the odds that the coin comes up "heads" all four times

This is easily determined as 0.5 (odds on one trial) ^ 4, or the odds times itself four times over (to the 4th power)

This comes out to 6.25%.  That is, if you did 100 sets of these four flips, in about six of them you would expect to have all four comes up "heads."

In the first quarter there were 12 full weeks and four days, for a total of 64 week days.  A couple of those days, however, were holidays during which the market was closed (Good Friday, New Year's Day, etc.) so we will call it 60 trading days.  This is a reasonable estimation for any given quarter.

So what are the odds that in a pure game of chance the coin would come up "heads" all 60 times?

That would be 8.67 x 10-19, or 8.67 times in 10,000,000,000,000,000,000 attempts (if I counted my zeros correctly.)

A trillion is 1,000,000,000,000, or 1012; this is about 1,000,000 times less likely than one in a trillion.

In the "real world" we have had 234 years of history in America.  There have been, on average, 240 days (approximately) of trading in each of those years, or 56,160 trading days, and there have been 936 quarters.  The NYSE was founded in 1792, so in fact there haven't been that many days on which stocks have traded in the United States, but that's close enough.

The odds of this outcome happening in any one quarter since the founding of the nation are approximately 8.1 x 10-16 or quite significantly (by close to 100,000 times!) less likely than a one-in-a-trillion chance.

To put this in perspective you have a 1-in-500,000 chance each year of being hit by lightning while retrieving your mail, walking your dog, or taking a hike. 

In comparison to that risk in ordinary life the odds of Goldman pulling this off in a game of chance are approximately forty million times LESS than the probability either of that event happening to you in the next year (again, assuming I've checked my zeros correctly.)

Should such an outcome happen on the street with the outcome subject to the exchange of money (that is, a wager) the gullible would hand over the wager.  A person with a bit of knowledge of mathematics and even the tiniest bit of street smarts would react to such an event by pulling his sixgun and drilling the coin-flipper, as he would be certain (within HIS knowledge of having just been robbed) that the coin was rigged.

Now certainly trading is not a pure game of chance.  Indeed, quite to the contrary; trading is allegedly a game of skill in the main.

I will leave it to you, and those who investigate frauds, to determine whether the application of skill, without any sort of cheating such as front-running client orders, insider information or other forms of rigging the markets, can turn the random chance odds of 8.67 x 10-19 into an event that has, in fact, actually occurred.


Welcome to the Digital will be exciting....very exciting.



8 Comments – Post Your Own

#1) On May 11, 2010 at 8:24 PM, bcchamp (59.26) wrote:

yes it will  be very exciting 

+1 to offset ron's -1

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#2) On May 11, 2010 at 11:37 PM, oshiri (< 20) wrote:

Comrade Alstrymous . . .

     All your Senators and Congress-people are making analogies to Las Vegas when they talk about Goldman Sachs. Okay, I'm in . . .

     If I was a betting man :-) and played the NCAA and NFL :-) :-) I would have to win 59% of my wagers JUST TO BREAK EVEN.

     There is a reason that casinos are like palaces and most New York-based brokers have 3-4 houses each costing more than Fools will make in their lifetime. 

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#3) On May 12, 2010 at 12:03 AM, oshiri (< 20) wrote:

. . . and if you're scoring at home like me :-o

. . . Montreal @ Pittsburgh -260  O/U 5 1/2

     If'n it's under four goals, Habs win.

     That's $100 USD on the Canadiens and under the total. Fools will make as much as betting on Apple.

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#4) On May 12, 2010 at 12:49 AM, sholessjoe1919 (97.40) wrote:

well sure...

If you discount dividend reinvestment and dollar cost averaging.

Yeah the stock market is the largest casino in the world.

Find solid companies that will survive and thrive through the up's and downs of Mr Market, well that's a different story.

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#5) On May 12, 2010 at 1:16 AM, oshiri (< 20) wrote:

Shole-man . . .

      Solid companies like Wynn? Or rock-hard Hotel Lisboa in Macau??? They'll not only survive, but thrive just like that other "solid company" traded on Wall Street, Goldman Sachs.

So tell me, what separates Lloyd Blankfein from Steve Wynn or Stanley Ho?

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#6) On May 12, 2010 at 1:49 AM, oshiri (< 20) wrote:

Sorry Comrade "sholessjoe."

     I must spend several hours performing self-criticism (or perhaps several days of group criticism) for not paying attention to your opening thesis . . .

"If you discount dividend reinvestment and dollar cost averaging."

     Dollar cost averaging = betting 0-00 green on roulette.

     Imagine if I bought on the 3rd and sold on the 6th in hopes of "dollar cost averaging." Red-and-Black do not come up 50% of the time Fools -- green matters. Wynn's and Blankfein's house always has the edge, especially if they control the game.

     And let's just say I reinvested my dividends in Lehman Bros . . . I coulda had alot more fun with the money after midnight on the boulevards of Stanley Ho's Macau . . . or in Bangkok.

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#7) On May 12, 2010 at 10:16 PM, sholessjoe1919 (97.40) wrote:

 And let's just say I reinvested my dividends in Lehman Bros . . . I coulda had alot more fun with the money after midnight on the boulevards of Stanley Ho's Macau . . . or in Bangkok.

I said solid companies I made no mention of Lehman Bros. Or the banks in general.

A wise man once said if you can't easily understand how a company makes it's money do not invest in it. So that rules out the banks.

Now in the case of Wynn it's pretty straight-foward their job is to fleece the patrons of every penny.

(Hmm..kind of like the banks :) 

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#8) On May 12, 2010 at 10:19 PM, sholessjoe1919 (97.40) wrote:

Oh and go Blackhawks!

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