The Best Paragraph I Have Read All Week.
"Since other investors may be smart, well-informed and highly computerised, you must find an edge they don't have. You must think of something they haven't thought of, see things they miss or bring insight they don't possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won't be sufficient. You must be more right than others ... which by definition means your thinking has to be different."
Howard Marks "The Most Important Thing: Illuminated."
http://www.samdiener.com/wp-content/uploads/2009/12/different-3.jpg
Blog and Discussion on the Psychology of Investing & Trading, Personal Development as an Investor, Reviews of Books on Investing. #investment, #trading, #stocks, #market, #spy, #qqq, #dow, #investor, #trader, #money, #psychology, #psych
Thursday, November 27, 2014
Friday, November 21, 2014
Kamikaze Capitalism, Its Correlation to China, and US Self-Confidence.
1980’s Kamikaze
Capitalism.
Speculative episodes and euphoria seem to occur during periods in
the shift of the balance of economic power between nations. Two examples: the
Tulip Mania appeared in Holland not long after the Dutch “economic miracle” and
Amsterdam's rise to prominence as the centre of world trade. And
secondly, the New York stock market boom in the early twentieth century
occurred as the USA overtook Britain as the worlds leading industrial
powerhouse.
In the mid 1980's America was struggling with growing trade
deficits, while Japan had trade surpluses. The Reagan government also
produced large budget deficits, "that were only sustained by the
willingness of Japanese investors to sink their country's trade surplus into US
Treasury Bonds" (Chancellor, Devil Take The Hindmost: A History Of
Financial Speculation).
Not only was that trade surplus spent on US Treasuries, but also investors
spent up on other assets luxury goods, fine art and property, often at above
it's real value. “The rising value of (Japanese) land became the engine for
creation of credit in the whole economy,” (Chancellor).
Non-bank, loosely regulated lending in Japan was occasionally
offered at double the value of the property. The price of a small apartment in Tokyo exceeded the
lifetime earnings of an average graduate salaryman. Multi-generational hundred year mortgages were undertaken to
purchase property. All this on the
speculation of continued domestic property rises which at 1990 prices, equaled
four times the real estate value of the entire US!
The Rockefeller Center was purchased by Japanese interests, as was
the Exxon Building, Columbia Pictures and even Pebble Beach Golf Club. A new anxiety that "Japan is
buying up the United States" was written about in countless magazines and
papers, and this deluge of Japanese capital revived some sense of WW2-type xenophobia
in America. These fears occurred simultaneously with a rise in
Japanese self-confidence and nationalistic pride.
This Japanese capital expansion and financial speculation, in almost
everything it seems, had not really had a precedent in Japan. That
economy and culture was strongly anti-individualist, community based,
hierarchical, state controlled and supposedly more stable, according to
Chancellor.
However, when speculation came to Japan in the 1980's, "it
burrowed so deep in the Japanese system that when it departed, after a mere
five years, the system was in ruins." Many of the Japanese owned US properties were eventually
repatriated to Americans at discounted prices, compared to their inflated sales
prices. (Pebble Beach at a $300 Million Loss).
Ultimately, the social consequences of speculation became evident in
Japan that were not intended by the government. It was only then, that for reasons of social control rather
than economic side effects, that a decision to prick the bubble was made,
(Chancellor).
"History
doesn't repeat itself, but it does rhyme." (Nucky Thompson,
Boardwalk Empire, Season 5).
2000’s China and
US Self-Confidence.
1. Surely we are, and have been witnessing an economic balance of
power shift back the USA since the GFC troughs.
2. America has been struggling with a large deficit, while China has
had trade surpluses.
3. Chinese surpluses have been sunk into US Treasury Bonds.
4. Chinese surpluses have been spent on US and world property, often
at inflated prices.
5. The Waldorf Astoria building in New York has recently been
purchased by Chinese Angban Insurance Group for the possibly inflated price of
almost $2 Billion. (http://www.forbes.com/sites/erincarlyle/2014/10/15/stories-from-the-waldorf-astoria-chinese-acquirer-buying-link-to-glamorous-past/)
6. The “China is buying up all the property” fear, has been
published repeatedly.
7. Chinese nationalistic pride and self-confidence has risen, and
been shown on the world stage increasingly over this period, nowhere more so
than South East Asia.
8. The Chinese economy and traditional culture is somewhat anti-individualistic,
heirarchical, and state controlled.
Cronyism was rampant in both Japan and China.
9. The height of Japanese speculation occurred during the later half
of its economic rise and then its market top, as has China’s - so far at least.
10. Much of the
speculation that has occurred, is on the back of rising property prices
domestically, as evident in Hong Kong and China (plus the empty cities issue
adding to this risk).
11. Much of the speculation has created ever-increasing disparities
of wealth in China, as it did in Japan.
Social side effects have been occurring in China and Hong Kong in the
form of protests and a greater awareness of the public of the ultra-rich
disparity.
I would argue that Occupy Central in Hong Kong is not just about the
universal suffrage and right to vote, but that it also encapsulates issues such
as Mainland control and perceived unfairness in the city, and issues about
housing prices and wealth.
History would argue that we should see speculation right to the
pivot point, and then a decline in China’s economy, and that of the export countries
it supports.
The probable current economic balance of power shift, should lead to
a beginning of speculation in the USD on top of its recent new gains. Ultimately a repatriation of many of
the American-located sold properties back to their own citizens at discounted
prices seems reasonable to expect. Conversely, Australia and NZ as more reliant on China’s
economic health, may not see that happen, as many Australians or Kiwi’s wouldn’t
be in a position, or have the confidence to buy at that time.
And finally, a return of US self-confidence would only serve to bring
more people back into the market. All we need to see is that Templeton Optimism
to start it off. The many effects
of a strengthening USD and consequently lower commodity/energy prices could be
that catalyst. People would be
more optimistic as their purchasing power rises.
This view is essentially nothing new to anyone studying economic history, but I found reading about the historical parallels REALLY interesting
today, sitting in the sun at HK Islands Delaney’s Bar, watching massive
container ships full of cheap junk, sailing east into the Pacific Ocean.
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Monday, November 17, 2014
Trading Stocks and Comedy.
John Cleese released his memoirs recently, and reflected on how the
broader loss of general knowledge in society has limited a wider variety of
jokes from working.
People once knew where places, and whom historical people were, to make
relevant jokes for instance that might fail these days. He even went on to say that Monty Python
Fans were very smart fans, and he has pride in his fan base for that. Could "Life of Bryan" have
worked without a historical context known to viewers?
Part of the problem is "lack of curiosity about important
information that does not directly apply to their lives," he said.
"What people don't get about wealth is that it's very
boring." (At least in accumulating it, and what you need to do to make it).
He also feels, “people that are obsessed with themselves will not have
the energy to deal with other things or people in the world that are important.”
The Gen Y's are currently very uninvested in the market, having come
of age though the GFC, and are very distrustful of investing, wealthy investors
and banks.
However, they will eventually come to the market to trade and invest,
but how will they do it?
Surely social sentiment through Apps, and social networking will
play a greater role than in the past, I would think. Stocktwits, Twitter,
FB or something new will be playing a greater role in investment choices.
But will that mean, that they are simply the biggest Trend Followers
of all time? Will trading on hyper social sentiment, with no historical context,
be the norm? Will they have the
patience to hold long term investments at all, that are mundane and not
receiving any social focus?
Or perhaps, have younger, new investors never been any different?
"An Irishman, an American and John Cleese carrying a dead
parrot, walk into a Bar...."
The problem is, the two mid-twenty year old guys I worked with
today, didn't know who John Cleese was when I asked them, or showed them his
picture in the paper.......
Joke Wasted!!!
Opportunity Lost. Carry On.
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Thursday, November 13, 2014
The First Ever Contrarian View of Markets?
“Is it possible that a young Man at present could pass his
Time better, than in reading the History of Stocks, and knowing by what secret
Springs they have sudden Ascents and Falls in the same Day?
Could he be better conducted on his Way to Wealth, which is
the great Article of Life, than in a Treatise dated from Change-Alley by an
able proficient there?
NOTHING COULD BE MORE USEFUL, THAN TO BE WELL INSTRUCTED IN
HIS HOPE AND FEARS; TO BE DIFFIDENT WHEN OTHERS EXALT, AND WITH A SECRET JOY
BUY WHEN OTHERS THINK IT THEIR INTEREST TO SELL.”
(SIR RICHARD STEELE, ~1695) {My caps}
I think Graham and Buffet would agree with the capped
statement.
Steele was a proponent of the “Castles in the Air” theory –
that stocks have no intrinsic value and are simply the product of investor
psychology.
Steele also talked about the link to the height and
extravagance of ladies’ headdresses, which peaked the year the 1695 London
stock market collapsed, just as hemlines rose during the 1920’s stock market
boom.
Basically, fashionable style, like a speculative movement,
is subject to a popular consensus and follows a trend until it reached a point
of extravagance, from which it can only retreat, (Chancellor, Devil Take the
Hindmost).
I thought it interesting that some people were thinking
about investor psychology, long before Psychology itself existed as a science,
and that social and cultural behavior was influenced by stock market exuberance
or decline – and vice versa!
Ladies Hemlines fell after the 1929 Crash too!
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Monday, November 10, 2014
Anti Fragility, Robustness and Risk.
A great video of a conversation between Nassim Taleb & Daniel Kahneman discussing the concept of Anti-fragility. Interesting to see how two deep thinkers discuss the philosophical challenge of anti-fragility.
Taleb argues that Greenspan, in trying to smooth out the economy to create no more boom or busts, actually caused a big bust.
Likewise it seems obvious that the Fed in smoothing out the GFC downside with QE, have created the current stock market boom cycle and likely future inflationary boom.
Controlling stressors (smoothing), leads only to the increased Magnitude of events later, and blowouts in volatility. This creates Fragility in the system, not robustness or anti-fragility. In other words the system does not learn - the risks have not changed (only the direction).
Anti-Fragility he demonstrates in the Airline analogy, is that everytime there was a crash (certainly a volatile event), the airline industry and aircraft makers, made changes to their products to decrease the chance of another same-cause highly volatile event. Airlines became safer through these changes and volatile events occurred less, and then usually for different reasons. "You never let the mistake go to waste."
The finance industry eliminated small risks at the expense of large risks, the airline industry mostly eliminated large risks, though small risks do remain. We can handle the small risks, and therefore survive the big risks - most likely. More so, taking the small risks, benefits and advances our lives - travel, opportunity, wealth and the like, whilst less exposure to the big risks negates the downside.
I think that is Anti-Fragility. (I need to read this book when I can get through the ten others I have bought).
There is a lot more in this video to get my head around.
https://www.youtube.com/watch?feature=player_embedded&v=MMBclvY_EMA
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Wednesday, November 5, 2014
The Power of Narrative. (I have ways of making you THINK!)
The Power of Narrative. (I have ways of making you THINK!)
Simon Singh, a British Author has a neat trick.
He plays a snippet of “Stairway to Heaven” by Led Zeppelin,
and then plays it BACKWARDS.
Time and again to new audiences, it sounded like Random
sounds to most of the people in the audience.
The second time he plays it backwards, he provides lyrics on
the screen, like Karaoke lines.
As people follow along
“the audience unmistakably hears the words, where before they heard nothing.”
(The Success Equation, Mauboussin, p33).
It demonstrates how our mind has a great ability, and NEED
to explain the world around us. It
does this through creating stories of
unlinked events, patterns in the clouds
out of random air movements, and impressionist paintings of dots into a complete
image. It is such a strong
occurrence its often difficult to ignore!
Taken further, “our
love of stories, and need to connect cause and effect,” “leads us to believe the past was
inevitable and to underestimate what else might have happened.” (The Success Equation, Mauboussin, p34). This leads to biases and inevitable
errors in judgment.
We are provided with unending narratives daily via the
media. It’s quite hard to see
through that, when an opinion has been provided and seemingly backed up with
some facts, to find our own opinion independently afterwards. More so to refute that opinion
completely.
I found a video on YouTube that demonstrates this
effect. I don’t want to pre-empt
the lyrics, but its an entertaining 6 minutes! After seeing the lyrics presented, close your eyes and TRY
NOT TO hear the words that have been planted.
https://www.youtube.com/watch?v=0bG7EFhMw8w
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Sunday, November 2, 2014
To IPO, or not to IPO: that is the question:
To IPO, or not to IPO: that is the question:
HAMLET:
To be, or not
to be: that is the question:
Whether 'tis
nobler in the mind to suffer
The slings and
arrows of outrageous fortune,
Or to take
arms against a sea of troubles,
And by
opposing end them? (Shakespeare,
1602).
Hamlet was talking about the pain of life verses the uncertainty of
death and damnation of suicide, and not Trading IPO’s, however I think the
metaphor works somewhat.
I have only ever subscribed to an IPO once, and probably won’t do so
again. Risk/Return does not seem
right.
My recent reading highlighted the IPO’s of the Railway boom in 1845:
“If the
subscription was successful, the committeemen retained a large allocation of
stock for themselves and their friends and released only a few shares in the
market, thus creating a scarcity which threatened to snare speculators who had
sold shares short in anticipation of buying them back at a lower price. The new railway company was then hyped
by friends in the railway press and its stock bid up by agents in the stock
market. Once the shares were
trading at a premium, the promoters would offload their retained shares at a
vast profit. Some companies even employed
special “share committees” to oversee the success of those operations.” (Chancellor, Devil Take the Hindmost,
p130).
It all sounds quite familiar to TWTR and FB, and Alibaba. Of course the banks these days are the
“committeemen,” and their “friends” the Venture Capitalists perhaps.
I see some value in companies that have IPO’d and corrected into a
nice long base perhaps in the months after IPO. But they need some time for price and volume to become valid
post IPO. Before that, its ALL
sentiment, usually too high a sentiment for investing in anything other than
day trades.
There can be nothing worse than buying something when you only do so
because everyone else already wants it, and it has been marketed to create
that.
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