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Uncertainty and Predictions

“Never predict, especially not about the future” is a wisecrack I attributed to Yogi Berra yesterday. NY reader LM says the remark was made by Sam Goldwyn, a Hollywood mogul. But it has been attrributed to others, from Niels Bohr to Mark Twain.

I like the Bohr story best. He was describing the Heisenberg Uncertainty Principle in quantum mechanics which essentially says you can't predict where a particle will be at a specific time or when it will be at a specific place.

“I never predict anything and never will” is another userful quote, attributed to British footballer Paul (Gazza) Gascoigne. Yesterday despite pre-market froth there was a last minute reversal in stocks near the close, and this time it was on the downside, with the Dow closing below 10,000.

LM used a stop loss which exercised on Mar. 6. A stop loss is an order to sell when a stock has broken through a level you set. You do not necessarily get the stop loss price itself, because you may be stopped out lower. I have been writing for years against these mechanical devices. Often stop losses result in a trade at a lower price than you stipulated.

LM sold a closed-end fund which I recommend for yield. You have no business selling a yield stock with a stop loss in any case, because there is always institutional money going out the day it goes ex dividend. Moreover closed end funds often trade at huge bid-ask spreads and have to be sold with care.

If LM wants to try to bust the trades, I think he should cite the posted net asset value of the closed-end fund to prove that the trading price was absurd, rather than the trading record. I wish him every good luck. If any other readers suffered in the Flash Crash, please let me know.

Another reader, DG asked for comment on Paul Krugman's comparing the US to Japan in the 1990s. I replied:

There is no comparison. Japan as I wrote [yesterday] got loads of loot but had no idea how to spend it on its population, and fell into deflation. We won't because our economists know what happened in Japan and also because our economy is different. We are prone to being inflationary.

Today we will do a major buy and a major sell. Paid subscribers should read on.