Sunday, October 19, 2008

Van Goghs from the S&P Stock Index

(Figure 1: Click to Enlarge)

I was playing around with the S&P historical data (monthly averages from 1871 to 2008) and came up with Figure 1. In this figure I show the value of $100 invested at each month since 1871 in an S&P index fund (see my related post) and this is the first independent axis. Another independent axis varies the lead time to sell, i.e., the time the investor waits for before selling the invested fund. Finally the dependent (z, vertical) axis shows the total return (principal + profit/loss) on the $100 that was invested initially.

This 3-D graph is in itself quite interesting although it is too dense to offer any direct insights. So I flew to the top of the graph (the virtual geek way - I set the viewing azimuth to 0 and the elevation to 90 degrees). And then I created my Van Goghs of the S&P Stock Index!

Figures 2a (24 months) , 2b (5 years), and 2c (10 years)
Click to enlarge

In Figures 2a, 2b, and 2c, the vertical axis is the time of making the investment of $100 in the S&P index fund. Blue signifies losses, and hotter colors (reds, yellows) signify profits in the color maps - notice that Matlab has assigned different colormap scales to each of the figures.

The horizontal axis is the time for which the investor holds on to the index fund before selling it (in years). Note the dark blue streak around the Great Depression (1929-) in all the graphs. It gets thinner as you move from right to left - since someone who exited just before the big fall saved themselves, but those who had invested earlier but held on lost (blues). You see blue lines around the year 2000 - when the Internet stock bubble burst. But you also see the dark red streaks of pure profits interspersed throughout the graphs.

Search for the rare combinations of small lead times and large profits in the 3 figures. Thats where investors invested and were quickly able to make large profits - if they exited wisely. And that will make for a wistful "if only I had invested and divested in those red streak times!"

Impressionist no doubt!

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