**Chart Alert!**

One of the ways people get misled is by showing them the wrong kind of chart. One thing we can all agree to is that the stock market rises over time, by fits and starts if you will, but it grows in the long run. If you show growth over a long time in a linear chart you will always show a hockey stick curve, just like Sven Carlin’s does:

http://softwaretimes.com/pics/sven-carlin.png

In a semi-log chart a doubling from 1 to 2 has the same vertical displacement as a doubling from 100 to 200 everywhere on the chart. Not so on the linear chart where a doubling at the left side is hardly noticeable while on the right is HUGE! A doubling from 100 to 200 is 100 times bigger than a doubling from 1 to 2 yet it’s the same growth rate, 100%.

At one point Carlin says that most of the stock market growth happened in the last 35 years and that is what a linear chart shows but that is misleading. With growth what you are interest in the rate of growth. From 1 to 2 in a year is exactly the same as from one million to two million in one year, 100% in both cases. To show this accurately you have to use a semi-log chart. Please take a look at the 110 year DJIA chart. The top chart is semi-log showing an average growth rate of 4.7% (using the best fit curve method, not start to end which is 5.1%). Never in recent times has there been a crash like the 1929 one. But if you look at the linear chart below, the 1929 crash seems to be just noise.

Beware of anyone presenting long term growth data with linear charts! They are either ignorant of log-charts or have an axe to grind (peak oil, climate change, index funds). Up to five, maybe ten years you don’t get much distortion from linear charts but beyond that insist on semi-log charts*.

**Results of Saul style investing**

Saul is outperforming and has for a long time. We can assume or accept that he has something on the investing ball that most investors don’t have. What would happen is everyone were a Saul? The answer might shock you. One in four Sauls would outperform the market and the other three Sauls would underperform! The cause has **nothing** to do with Saul or his method, it has to do with the natural or systemic distribution of wealth which happens to be of the same type as the distribution of earthquakes. It’s not the normal or bell curve distribution that most of us assume but a power law distribution, the 20-80 rule which could be the 25-75 or the 15-85 rule depending on the power of the particular set.

Saul style can only be ‘guaranteed’ successful if most investors are doing something else. ‘Guaranteed’ in quotes because there are no guarantees in the market.

**Selling Index Investing**

I’ve never heard it put this way but an index investor will beat three out of four investors by matching the market. In other words, active investors have a 75% probability of underperforming the market due to the market’s power law distribution.

Denny Schlesinger

- Semi-log because only the Y axis is logarithmic, the X axis is linear.