How a Super Sunday in sport is the same as Black Monday in the market!

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July 14, 2019, will always be remembered as the day we witnessed three ties! One in tennis and two in cricket and in the same match!! Before these matches, “Super Sunday” was a mere marketing tagline. July 14th will always be the Super Sunday for everyone who was lucky enough to see it.  The Tennis match was decided by a tie-breaker, the cricket match was decided by a rule that the makers probably thought would never be invoked and yet it was! A look at how this bears similarity to extreme stock market events.

When I witnessed the last few overs of the 1986 tied test on TV after hurriedly flinging by school bag aside, I was confused about the result and then realised had witnessed something special. What are the chances of a five-day match ending in a tie!! Next to nothing would be a good answer and yet it has happened twice!

The World Cup Final 2019 was the 38th tied ODI. The frequency of such occurrences resulted in the need for additional rules: fewer wickets lost or the super over. Now, What are the chances of a super over ending in a tie? One in a Zillion perhaps? Yet it happened (Ian Smith on commentary even mentioned that no one should bet against a tied super over)!

How a Super Sunday in sport is the same as Black Monday in the market!

The big difference between a Cricket and Tennis tie-breaker was seen yesterday. I hope the ICC takes notes and changes not only the super-over rules but also the atrociously complicated Duckworth Lewis Rules.

The Tennis rule is quite simple: you need that two-point lead (assuming both get to six points). The match will not be stopped until someone does. So sooner or later somethings got to give. Someone will get two points in a row. Fair or unfair is another matter, but it comes down to actual performance on the court.

Rightfully, if the super over is tied, they should play another and if that is tied, yet another. Until actually one run scores more (less) than the other. We add clauses just to stop a match.

Now, if you are wondering what this has to do with the stock market, let us get to that. On October 19, 1987 The Dow Jones Industrial Average fell 22.61% in a day, hence moniker Black Monday.

If we use the standard comforting math used for measuring risk (standard deviation), risk-adjusted returns (alpha, beta, Sharpe, Sortino et al), the probability of such an event would be virtually zero or impossible, yet occur it did.

The probability of a 5.5% daily up or down movement is once in 67,000 years!! The S&P 500 has seen two such up movements in 67 years! In India, It is far more frequent!!
nifty-fall-1

The assumptions made in formulating standard and popular financial math are deeply flawed just as the assumptions made in Cricket tie-breaker rules. Both assume that certain events cannot occur in a lifetime.

No point complaining about the rules after they are enforced, no point complaining about financial models after they have failed. At least in sport, the alternative is quite simple – keep playing super overs like Tennis.

The situation concerning the markets is extremely complicated. The math that is dearly loved is flawed, but alternatives are uninviting to use and get something useful out of it. That is a never-ending story of cat and mouse. More on this in my momentum and low volatility investing talk.

At least WC 2019 rekindled my love for Cricket although I had to see the amazing final in the hospital taking care of my mother (she is back home today, thank you for all your love, prayers and support)

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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