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Comment by pembrook | Hacker News Reader

Every retail investor today makes the same exact mistake. They read articles like this and then they go look at a historical chart of the market. They see a massive run up to present day...with the wild fluctuations for 2000 and 2007 magnified due to the exponential data. Psychologically, they think this must be the pattern of the market, we are obviously due for a fall.

Then, one day years later, after they've lost out on ridiculous gains waiting for the "big drop," they learn that when looking at a historical market chart to switch from linear to logarithmic scale.

Suddenly the crazy recent capitulations just look part of a steady climb with minuscule blips along the way. Go ahead and try it on Google Finance with the S&P. You'll be amazed.

edit Changed 'exponential' to avoid confusion

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All but predicting a "permanent prosperity" makes you sound like pundits just prior to the 1929 market crash.

Historically, booms and busts are what the market does, go back over the last 150 years, since the end of the American Civil War - you'll see a boom, following by a bust - the Federal Reserve and the changes enacted in the aftermath of the depression has dampened it a fair bit, but it still happens - and could happen just like it did before.

Our financial system is very very fragile, and like a chain stitch, one loose thread in the wrong place, and the whole thing could unwind - thats the problem. So Remember in the end, a wave of bank failures are what made the depression last a decade, not just the recession itself.

I never said "permanent prosperity" anywhere in my comment. Of course the market has boom and bust cycles. Will the market pull back sometime in the near future? Probably.

However, it just doesn't matter for anybody with an investment horizon over 10 years. The gravity of the markets is upward. Timing the broad market consistently is statistically impossible.

The subprime mortgage crisis was statistically a once in a lifetime drop, only comparable to 1929. It's occurance was due to a fundamental flaw in the system. It wasn't part of the standard "pattern of the market." Everybody sitting on the sidelines waiting for the next flaw to rear its head will likely decompose before that happens.

The size of your future returns directly correlates to the amount of risk you are taking. If you are on the sidelines it's a statistical certainty you'll get destroyed by inflation.

Isn't logarithmic scale tool for showing exponential growth as linear? So doing it is not making growth linear. It is still exponential or I do not understand your argument.

I'm not saying it's changing the exponential nature of the market. It's just more properly displaying the data for human interpretation. Looking at a linear chart of historical price data will cause you to make bad decisions.

A linear y-axis is terrible for viewing historical market data because you can't compare percent changes across historical periods. Because the price of the market has grown exponentially, any movement in 1929 for example looks like a minor blip in comparison to anything happening in present day (due to the exponential price appreciation).

On a log scale, you can see that movement in the proper context compared to 2000 and 2007.

So the logarithmic scale is just an approximation of this "price appreciation" or whatever - wouldn't a better solution be to weigh the market data by it and still use a linear chart?

No. Imagine a stock that's at 50 dollars today (T0). Over the next month it doubles in price and goes to 100 dollars (T1). A month after that its doubled again and the price is now $200 (T2). On a linear chart the difference in price between times T0 and T1 looks much smaller than the difference between times T1 and T2. However, an investor that bought at time T0 and sold and time T1 would have made exactly the same amount as someone that bought at T1 and sold at T2. If this was two different stocks and they had both gone up 100% in the same time frame the linear scale would make the more expensive stock look like a more impressive gain.

Another way to think about it is that you don't really care if a stock moves $x. You care if it moves x%. Logarithmic scales let you visualize this more accurately.

Well the other side of this is that retail investors are usually scared off of the markets because of the last bust. It's only when they start hearing news of dow 20k and how the market is doing well when they start putting their money in. By that time, they're usually the last to the party.

On the other hand, retail investors are probably the least likely to dump money in after a crash, which is the best time (buy low, sell high). Instead they are selling and generally trying to protect capital. Then they stay out until we do it again.

Why is your name green?

usernames are green when they've been created recently. here the account is less than 3 days old

Hrrmmm, odd that you see it that way too. I thought it was just showing that way to me because I'm logged in.

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