Alien Abductions and Your Financial Future

by

Ross M. Miller
Miller Risk Advisors
www.millerrisk.com
October 18, 2004

Things haven't been the same since The X-Files went off the air. I'm almost certain that I'm a distant relative of David Duchovny and Gillian Anderson seems oddly familiar, too. I only started watching the show because I happened across a few of the "funny" episodes written by Darin Morgan. And ever since this reality fad hit, they don't make television shows the way they used to. I don't miss watching network TV and it gives me time to post commentaries to the Internet. My favorite X-Files episode is one Darin Morgan wrote about alien abductions called "Jose Chung's From Outer Space," with cameos by Alex Trebek and Jesse Ventura that even had an allusion to Vladimir Nabokov's Pale Fire.

Despite all the studies by Harvard psychiatrist John Mack, believing that one has been abducted by aliens, especially repeatedly, is seen by most people as a sure sign of deficient mental health. It is not, however, the belief that aliens have abducted that makes you crazy. What makes you crazy is talking to others about the experience. Or writing about it in a book, unless the book sells really well and Christopher Walken plays you in the movie version. And if you are concerned about having strange devices “implanted” into you, Applied Digital Solutions may pose a bigger threat than those creatures who not seem to realize that they must submit register their implants to the FDA for rigorous testing.

I see no need to pass judgment on those whether those who join the growing cadre or alien abductees have gone out into space or out of their minds, not that it won't be a real thrill to see an alien ring the opening bell on the New York Stock Exchange now that Dick Grasso is gone and Maria's moved on to a new gig. I have no doubt that lots of strange stuff is going on in the universe, but without hard evidence, the government-sponsored alien conspiracy on the X-Files has as much credibility as the government-sponsored enterprise in Washington, D.C. that can magically make their numbers down to the hundredth of a cent per share when that is what it takes to get their managers the highest possible bonus. (Microsoft Word has alerted me that the two sentences in this paragraph are too long. You will just have to suffer.)

But I'm not about to bash Fannie Mae for a third straight week, especially given that someone at the company has finally discovered this site after more than five years on the Internet. (Greetings, Earthling.) What I really want to discuss is a matter of financial philosophy. This week's commentary was inspired by a claim that I saw made by a respected member of the community of technical analysts. You know, the guys who look for heads and shoulders and dandruff and all that in stock charts. And just so they would made sure that I don't forget them, I've starting receiving what I assume are free copies of Technical Analysis of Stocks and Commodities out of the blue.

I have a history of tolerance toward those of the technical persuasion. I do believe that the past price behavior of stocks contains useful (though not necessarily profitable) information about the dynamics of supply and demand. I remain, however, unconvinced that the current methods of technical analysis are, except by total accident, the right way to get at that information. (Also on my wish list: models of option valuation in which volatility is endogenous to the model rather than sometime that falls from the sky. I am an equal opportunity skeptic.) So when I see a technical system claim to make 29 consecutive correct calls, I have my doubts. Especially when one considers that the prior odds of each correct call is about 50-50. Such a run is longer than a two in a billion shot.

It seems obvious that a high success rate is neither necessary nor sufficient for success of any kind, much less financial success. Take Microsoft, for example. Their success rate with products is certainly less than 20%. Their success rate with patches may not even be that high. Microsoft Bob may have been their biggest and most visible flop, but there were lots of other less-heralded failures. But when Microsoft has a success, as it eventually did with Windows (I was among the dissatisfied users of Windows 1.0), it knows how to milk that success for all it is worth. Similarly, it is common for top traders lose more often than they win but to ride their winning trades to enormous gains. It seems logical that that is how speculative gains in a fiercely competitive market should manifest themselves. In a world were all the easy money was taken off the tables ages ago, the winnings bets should require a lot of digging and hard work and look more like dumb luck than like improbably good luck.

Then again, if I were to were to look deep into my psyche, rather than find repressed memories of flying through space, being strapped to a table surrounded by tall gray beings with big heads, slits for eyes, and long spindly fingers, and, well, I'd rather not discuss it, I might find a hint of jealousy. (Ha ha, Microsoft, that one wasn't long enough for you, was it?) As a trained economist, I'm used to being wrong most of the time. At least I was until I saw the light. Still, I am happy if I am right (or least not wrong) about anything two times in a row.

An important thing that I may have been right about was the growing importance of factor models to the stock market, especially when it comes to the changing variance-covariance structure of the market. Having recently been hit with a deluge of requests (I think I counted three) for basic information about factor models, next week's commentary will be a primer on the subject entitled, "Factor Models 101."

Copyright 2004 by Miller Risk Advisors. Permission granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to www.millerrisk.com.