Using extrapolation to debunk the Efficient Market Hypothesis This year, I’ve changed my performance tracking method from an internal rate of return to a time-weighted return. The main reason for the change is that I found a free spreadsheet online for tracking investments. My self-built 10-year-old spreadsheet is getting unwieldy. It’s easier to calculate a time-weighted return with the new sheet’s layout than... More

What does Buffett’s cash balance say about the stock market? The easy answer is, “Nothing.” Buffett doesn’t try to predict the short-term movements of the stock market. He looks for good businesses selling at good prices. If he finds one of those businesses (in whole or in part), he buys it. If he can’t find one, he waits, and the cash produced by Berkshire Hathaway... More

What’s more important? Expected value or expected growth? Expected value is the probability-weighted value of all possible outcomes of a random variable. In gambling or investing, E(V) includes the monetary value of each outcome. Expected growth takes the same variables (outcome, probability, and payoff), and includes the effect of compounding. Expected value and expected growth will never appear as an actual result. E(V)... More

How do you maximize the geometric mean? The Kelly formula gives a gambler a simple way to calculate the best bet given a fair game with favorable odds. The best bet is not always the biggest. The best bet allows for the greatest compound growth of the gambler’s bankroll while eliminating the chance of financial ruin. The simplest way to use the... More

Which mean do you mean? “Average” is a synonym for the arithmetic mean. But for investors, the geometric mean is more relevant. When talking investments, the word “average” (aka. mean) gets tossed around a lot. Investors use “average” when describing an investment’s long-term return. But which is more important? The simple average (the arithmetic mean) or the compound average (the... More