Kathryn Welling brings the great question forward:
“What struck me even at the time was that here were these supposedly very bright guys who insisted on applying a theory to the markets despite plentiful evidence that what the theory said couldn’t happen in fact doesoccur with staggering regularity in the markets. Big fat tails swat investors in the fanny with fair frequency. So-called ‘six sigma events’ aren’t really terribly rare, no matter what the equations tell you.”
Kathryn M. Welling, Weeden & Co.
Woody Dorsey responds:
“Absolutely. What I wrote about in the book is that it is like the invisible hand comes along once in a while to spank the markets. The inference is that boy, you really should be on your guard because you know these events are going to happen. And when they do, those big fat tails provide the biggest and best opportunities to safely build capital; that’s when you take advantage of market opportunities. That’s the lesson. Yet [efficient market theorist and University of Chicago Professor] Eugene Fama himself says that the 1987 crash was an aberration–as was 1929. Insists they really didn’t matter. But they mattered to a lot of people.”
Woody Dorsey, Market Semiotics
