Don't get me wrong... I'm no bear. In fact that is the scary bit - I changed my view about the sustainability of the current rally in October, when I saw how weak the market corrects at each down move.
To put things into perspective, other than the corrective" rally from mid March to April 2009, which practically most people missed, including professional investors, the rally could be described as 2 powerful burst of activity - one in early May and another in mid July.
In between them, there were plenty of time for bearishness. But instead of a sell-off, market simply traded sideways, choosing to "time correct" rather than "price correct". In fact, the current sideway "time correction" is already 3.5 months old and brokers and professionals must be getting restless (sideway, low volatility markets bad for business).
So why so "scary"? Well, there is a saying in the market: That the market tops, when the last Bear turns. Hopefully, I'm not the last bear.
Thursday, November 12, 2009
Saturday, October 17, 2009
Psychology - Is there Fairness?
Taking a break away from Charlie Munger and his Misjudgment of the Human Behavior, I thought it would be a refreshing change to touch on something simpler. Something most of us can identify with... something to do with a beer. Still, this has to do with my pet topic on financial pyschology. Let me elaborate.
You are at the Beach. The sun is hot and it is a great day. But you are now so thirsty and dying for a cold beer. Your friend volunteered to go to the nearby Hotel resort to buy a beer for you but wanted to know what would be the maximum price that you would pay for the beer. He will not buy the beer if the price is higher than your price (maximum). What will be your maximum price?
Now, in another scenario, supposing you are at the beach, and still dying for a beer etc but your friend now volunteers to buy the same beer at the nearby convenience store, our friendly neighbourhood store. What is your maximum price?
Are the 2 prices different? Why? By pure economic theory, the two prices should be the same, as the ultility derive ie. the joy of the quenched thirst is the same. There should be no difference as we have assumed it to be the same beer. Or is it? Did the fact that one was purchased at the Hotel and the other at the neighbourhood store affect our decision making? Why did it affect our decision?
From this simple exercise, Behaviorists began to postulate that the old classical theories may be inadequate. Fairness, in this case, has changed the outcome. The sense of fairness, is also applicable in employment and other macro situations. In short, decision making is more complex than originally thought... Emotions play a role.
Are there other emotions that play a role? There certainly are many others... Can you name some?
You are at the Beach. The sun is hot and it is a great day. But you are now so thirsty and dying for a cold beer. Your friend volunteered to go to the nearby Hotel resort to buy a beer for you but wanted to know what would be the maximum price that you would pay for the beer. He will not buy the beer if the price is higher than your price (maximum). What will be your maximum price?
Now, in another scenario, supposing you are at the beach, and still dying for a beer etc but your friend now volunteers to buy the same beer at the nearby convenience store, our friendly neighbourhood store. What is your maximum price?
Are the 2 prices different? Why? By pure economic theory, the two prices should be the same, as the ultility derive ie. the joy of the quenched thirst is the same. There should be no difference as we have assumed it to be the same beer. Or is it? Did the fact that one was purchased at the Hotel and the other at the neighbourhood store affect our decision making? Why did it affect our decision?
From this simple exercise, Behaviorists began to postulate that the old classical theories may be inadequate. Fairness, in this case, has changed the outcome. The sense of fairness, is also applicable in employment and other macro situations. In short, decision making is more complex than originally thought... Emotions play a role.
Are there other emotions that play a role? There certainly are many others... Can you name some?
Wednesday, October 7, 2009
The Human Misjudgment (2)
Below is the continuation of Charlie Munger's 24 causes of misjudment.
Fourthly, the bias from consistency and commitment tendency. For example, after a hard-won conclusion, our human minds shut off. Similarly, being so resistant to change, the laws of physics were never changed until the old guards have mostly passed on. In behavioral Finance, this is called Conservatism.
Fifthly, we often misconstrue past correlation as a reliable basis for decision making. Charlie Minger referred to this as the "Pavlovian" effect, where our minds works on association. For example, Coca Cola is often assocated with heroics at the Olympics, but never a funeral. Similarly, in Accounting, sloppy accounting allowed Institutions to book profits, and because nothing "bad" happened, theaccounting gets sloppier untl the bad behavior spreads.
Sixthly, there is bias from reciprocation tendency. This is a powerful phenomenon. Essentially, the human mind can be manipulated. Often we get better results, when we "ask for a lot, then back off" approach, because the human mind is influenced by the way how it thinks other people expects of you.
Seventhly, there is the Lollapalooza effect, the bias caused from over-influence by social proof. In other words, the conclusion of others (often of higher hierachy) having an impact on you. In Finance, there are stories of a large oil company buying fertilizer plants, which in turn influenced other oil companies into buying fertilizer plants too, without exactly knowing why (which were a disaster). To Charlie, the markets are living examples of bias from social proof as prices reflect what others think, and in turn affecting how we think... recipes for bubbles? Behaviorists have called this herd instinct, mania, positive extrapolitive thinking etc.
Wow. This is really Charlie Munger, the Psychologist. Explicitly, he acknowledged that markets are driven by psychology and in fact, he has rejected the Efficient Market Hypothesis Theory. But can Investors replicate the sort of discipline required by Charlie? Well another 17 points to go... Happy reading !
Fourthly, the bias from consistency and commitment tendency. For example, after a hard-won conclusion, our human minds shut off. Similarly, being so resistant to change, the laws of physics were never changed until the old guards have mostly passed on. In behavioral Finance, this is called Conservatism.
Fifthly, we often misconstrue past correlation as a reliable basis for decision making. Charlie Minger referred to this as the "Pavlovian" effect, where our minds works on association. For example, Coca Cola is often assocated with heroics at the Olympics, but never a funeral. Similarly, in Accounting, sloppy accounting allowed Institutions to book profits, and because nothing "bad" happened, theaccounting gets sloppier untl the bad behavior spreads.
Sixthly, there is bias from reciprocation tendency. This is a powerful phenomenon. Essentially, the human mind can be manipulated. Often we get better results, when we "ask for a lot, then back off" approach, because the human mind is influenced by the way how it thinks other people expects of you.
Seventhly, there is the Lollapalooza effect, the bias caused from over-influence by social proof. In other words, the conclusion of others (often of higher hierachy) having an impact on you. In Finance, there are stories of a large oil company buying fertilizer plants, which in turn influenced other oil companies into buying fertilizer plants too, without exactly knowing why (which were a disaster). To Charlie, the markets are living examples of bias from social proof as prices reflect what others think, and in turn affecting how we think... recipes for bubbles? Behaviorists have called this herd instinct, mania, positive extrapolitive thinking etc.
Wow. This is really Charlie Munger, the Psychologist. Explicitly, he acknowledged that markets are driven by psychology and in fact, he has rejected the Efficient Market Hypothesis Theory. But can Investors replicate the sort of discipline required by Charlie? Well another 17 points to go... Happy reading !
Sunday, September 27, 2009
The Human Misjudgment (1)
Firstly, I like to thank many readers that have written to me in support of the blog. Not being a natural writer, it is so easy to succumb to lethargy and ill-discipline and stop the blogging altogether. In fact, I observed that of late, I have been updating the blog rather infrequently.
But your recent support has made a difference. And I re-commit and promise to keep the blog updated. Not daily but certainly weekly. Thank you again.
This week, I gave a presentation on the "Psychology behind Investment and Trading Decisions". This is essentially a repeat of the same presentation I did a year ago. Again, time constraints did not allow me to elaborate on cetain issues. Hence, I've decided to put them on the blog.
I will start with the 24 Standard Causes of Human Misjudgment, cited by Charlie Munger in a 1995 speech. But to ensure "bite-size" blog entries, I shall at each time, tackle 3-5 Human Misjudgment.
Firstly, the under-recognition of "reinforcement" and incentives. In particular, businesses can benefit substantially - more than expected but simply changing commision structures paid to salesman. Or to pay the night shift more in order to motivate the night shift workers. Basically, the human mind works for its own interest!
Secondly, there is psychological denial. For example, parents of criminals often think their children are innocent, even if proven guilty. Similarly, investors seldom admit that the stocks they picked were lemons, and end up holding them for long periods without any return.
Thirdly, incentive-cause bias in both our minds and that of the advisors. For example, sale presentations of real estate businesses are never close to truth. Would agents deny themselves the fee by discouraging sales? Similarly, it is common practise for lawyers to try and drag out the legal process as their charges are based on time usage.
In short, Charlie Munger showed that the human psychology often resulted in biasness and misjudgment. And his advice is simple: Avoid them.
But your recent support has made a difference. And I re-commit and promise to keep the blog updated. Not daily but certainly weekly. Thank you again.
This week, I gave a presentation on the "Psychology behind Investment and Trading Decisions". This is essentially a repeat of the same presentation I did a year ago. Again, time constraints did not allow me to elaborate on cetain issues. Hence, I've decided to put them on the blog.
I will start with the 24 Standard Causes of Human Misjudgment, cited by Charlie Munger in a 1995 speech. But to ensure "bite-size" blog entries, I shall at each time, tackle 3-5 Human Misjudgment.
Firstly, the under-recognition of "reinforcement" and incentives. In particular, businesses can benefit substantially - more than expected but simply changing commision structures paid to salesman. Or to pay the night shift more in order to motivate the night shift workers. Basically, the human mind works for its own interest!
Secondly, there is psychological denial. For example, parents of criminals often think their children are innocent, even if proven guilty. Similarly, investors seldom admit that the stocks they picked were lemons, and end up holding them for long periods without any return.
Thirdly, incentive-cause bias in both our minds and that of the advisors. For example, sale presentations of real estate businesses are never close to truth. Would agents deny themselves the fee by discouraging sales? Similarly, it is common practise for lawyers to try and drag out the legal process as their charges are based on time usage.
In short, Charlie Munger showed that the human psychology often resulted in biasness and misjudgment. And his advice is simple: Avoid them.
Saturday, September 5, 2009
Know Your Vowels, Please...
I kind of feel stupid right now. After 40 years, I still got my vowels mixed up. Surely, I meant to keep the "o" and not the "e". What am i talking about? Read on....
In 2007, I had this grand investment idea that surely China will be water scarce given the pollution in the country. Hence i went about investing in companies, engaging in waste treatment, pollution control etc. The two companies I picked was Sino-Environment (SINE) and Sinomem (SINO). The former was into desulphurisation while the latter was into water treatment. Both had good balance sheet (and so i thought).
In mid 2008, SINO announced that there were accounting irregularities at its subsidiaries which would impact its profitability adversely. Given this, i felt it was better to sell the investment away as it was tainted.
In end 2008, SINE announced that its Chairman had lost its entire stake in the company to a Hedge Fund as the Chairman had pledged all his shares to them. This resulted in a management change of control that triggered loan convenants etc. Also the company's ability to remain as a going concern was threatened as the Chairman was the key man to the business. The stock unravelled. Interestingly, there were no breaches of rules, even when the Chairman failed to disclose its share pledges.
In the meantime, there were no further bad news on SINO. Today, as I write, SINO has recovered 8X from the lows, while SINE languished at the bottom. As it turned out, the "O" was Outstanding while the "E" got Executed. And I kept the E. Sigh, that's investment.
So what is the moral of the story? When investing in Waste, make sure it is referring to the product and not the company. I invested in toxic waste...little did I realise that it was the management that was toxic.
In 2007, I had this grand investment idea that surely China will be water scarce given the pollution in the country. Hence i went about investing in companies, engaging in waste treatment, pollution control etc. The two companies I picked was Sino-Environment (SINE) and Sinomem (SINO). The former was into desulphurisation while the latter was into water treatment. Both had good balance sheet (and so i thought).
In mid 2008, SINO announced that there were accounting irregularities at its subsidiaries which would impact its profitability adversely. Given this, i felt it was better to sell the investment away as it was tainted.
In end 2008, SINE announced that its Chairman had lost its entire stake in the company to a Hedge Fund as the Chairman had pledged all his shares to them. This resulted in a management change of control that triggered loan convenants etc. Also the company's ability to remain as a going concern was threatened as the Chairman was the key man to the business. The stock unravelled. Interestingly, there were no breaches of rules, even when the Chairman failed to disclose its share pledges.
In the meantime, there were no further bad news on SINO. Today, as I write, SINO has recovered 8X from the lows, while SINE languished at the bottom. As it turned out, the "O" was Outstanding while the "E" got Executed. And I kept the E. Sigh, that's investment.
So what is the moral of the story? When investing in Waste, make sure it is referring to the product and not the company. I invested in toxic waste...little did I realise that it was the management that was toxic.
Thursday, August 27, 2009
August Insanity
Sun-burnt and tired after a Kelong trip, I sit here typing away wondering what else to add on the stock markets and the general asset markets. I mean, as far as warning about markets being over-valued, I done that numerous times, to the point of sounding like a broken record player.
Thus for August, I have chosen to write more about life and the joys it bring. For the markets, it is insane enough, driven by liquidity that ought to have been used to spur economic growth instead. So the less said about it the better.
Still, I noticed that after severely lagging markets, the S chips have rallied quite sharply in the last week. From a valuation perspective, they are still great value, but given the opaqueness of management in general, caution is warranted. The rally could be simply liquidity-driven rather than a re-valuation of S chips.Then again, such pessimism is normally the recipe for an unexpeced rally.
So what did August bring? And can we expect more in September? Barring a dramatic collapse, August was another great month, and since insanity has no time limit, September could be another insane month too. For me, that meant more time doing quiet reading and loving life... markets will take the back seat, again.
Thus for August, I have chosen to write more about life and the joys it bring. For the markets, it is insane enough, driven by liquidity that ought to have been used to spur economic growth instead. So the less said about it the better.
Still, I noticed that after severely lagging markets, the S chips have rallied quite sharply in the last week. From a valuation perspective, they are still great value, but given the opaqueness of management in general, caution is warranted. The rally could be simply liquidity-driven rather than a re-valuation of S chips.Then again, such pessimism is normally the recipe for an unexpeced rally.
So what did August bring? And can we expect more in September? Barring a dramatic collapse, August was another great month, and since insanity has no time limit, September could be another insane month too. For me, that meant more time doing quiet reading and loving life... markets will take the back seat, again.
Monday, August 17, 2009
Inactive August
No, it's not the asset markets that are inactive... but me. Judging from the blogs, one can see that entries have been infrequent.
Besides a lack of genuinely interesting material, August has also been disruptive for me as our company entered into wind down stage. So there were lots of packing and unpacking at the office.
But not to worry; this is simply an end of one chapter (of my life) and a beginning of a new one. I intend to re-surface quickly in the market, although the exact nature (of the job) remains uncertain.
In fact, the frequency of future blogs also remains uncertain - as much as I enjoy imparting my views via the blogs, the amount of resources (time) that i can spare may now be more limited. Still, I am committed to maintaining this blog. OK, enough about me...
As for the asset markets, it is still a great mystery to me how new home-dwellers seemed willing to cough up SGD1000psf and beyond for mass market type condos. Even the "low end" mass market prices of SGD750-800psf must surely bust every affordability ratios?
Well, I have resigned to the fact that I am an old bear, compared to the modern crop of risk takers. So, I've gladly moved aside and withdraw into my cave and watch this new batch of risk takers bash each other up. Hopefully, I would be around to pick up the nice pieces after this bloody fight.
Besides a lack of genuinely interesting material, August has also been disruptive for me as our company entered into wind down stage. So there were lots of packing and unpacking at the office.
But not to worry; this is simply an end of one chapter (of my life) and a beginning of a new one. I intend to re-surface quickly in the market, although the exact nature (of the job) remains uncertain.
In fact, the frequency of future blogs also remains uncertain - as much as I enjoy imparting my views via the blogs, the amount of resources (time) that i can spare may now be more limited. Still, I am committed to maintaining this blog. OK, enough about me...
As for the asset markets, it is still a great mystery to me how new home-dwellers seemed willing to cough up SGD1000psf and beyond for mass market type condos. Even the "low end" mass market prices of SGD750-800psf must surely bust every affordability ratios?
Well, I have resigned to the fact that I am an old bear, compared to the modern crop of risk takers. So, I've gladly moved aside and withdraw into my cave and watch this new batch of risk takers bash each other up. Hopefully, I would be around to pick up the nice pieces after this bloody fight.
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