Basic Math for Investing

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Basic Math for Investing

Post  Shelby on Wed Sep 29, 2010 9:11 pm

Shelby wrote:Everything in nature is logarithmic, because entropy has a logarithm in it. Logarithmic means something is changing with constant percentage change per unit of time. Everything logarithmic has a parabolic shape, but the key point is if you plot the part that looks flat by zooming in on it, it will also look like a parabola too. So a parabola is not an indication of the end of a trend, because every trend is a parabola from its inception until its end.

What causes the end of a trend is when the nominal change becomes significant and outpaces some other nominal change that sustains the trend, i.e. the amount of cash the public has to spend on gold.

If Schmidt were to redraw his gold chart using a logarithmic scale for the gold price axis, the parabola trend would become line trend.

It is more correct to draw charts using logarithmically scaled axis, because investors are interested in percentage gains, not nominal gains. For example, if you bought gold at $250 and you sold at $500, that is the same percentage gain as if you bought at $500 and sold at $1000. But on Schmidt's non-logarithmic chart, the latter has 2x more height than the former. Thus the non-logarithmic chart lies to the eyes.

I highly suggest that everyone watch this YouTube video: (1.8 million views!)

I suggest you make that video required reading in an introduction to investing.

I recently wrote about entropy, some readers might find it interesting:


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