Monday, February 26, 2007

Behavioural Finance!

Behavioral Finance has been one of the most famous topics for the last couple of years as it offers a whole new way in explaining the “market anomalies”. Basically what it does is to study how and why people will react in certain ways in the financial markets.

Heaps of researches have been conducted on behavioral finance over the last decades. Human’s emotions such as regrets, greed, fear, hope and etc has been the main drivers behind the numerous Bull Run and crashes. Buy low sell high, it’s always easier to be said than done, and it’s always way easier to say it in hindsight, or when you’re sideline.

But when you take up some position in the market, pretty much, you will be “disillusionised” by the market movement. When the price is creeping up, you’re hoping for more, or you might think, “Dude, I have enough, let’s sell it!” When the price is coming down, you might be thinking, “tomorrow it will go up, it’s just a paper loss, it’s not an actual loss! We’ll be fine…” and keep on praying. But according to the rule of thumb, shouldn’t you be selling when the price goes up, and keep buying when the price tumbles?

It’s Greed and Fear. You want more, but you’re afraid of losing. Losing is painful and research shows that people are very reluctant in realizing loss. But interestingly in this rising market, people are very reluctant in realizing gain as well, because the feeling of Regret, i.e. the price continues to soar after you sold is almost equally as painful as realizing loss. Well, it’s your call mate!

In an over-valued market like this (depending on how you value it), people always neglect the fundamentals. Well, in a perfect world, fundamentals should be the determinants that drive prices, but, in reality, it seems like anticipations play a bigger role!

The studies on anticipations, regrets, fear, greed, hope and etc led to the birth of behavioral finance. It’s just like doing a psychological test, the more you could understand how you think, then you should be able to understand what others think better, in turn, you should be able to read the market better!

Let’s do a simple test. This is a famous question by Kahneman & Tversky’s research

#
Choose 1 from (a) (b) and 1 from (c) (d) the following

(a) A sure chance of getting $2,400, or
(b) A 25% chance of getting $10,000 and a 75% chance of getting nothing.

(c) A sure chance of losing $7,500, or
(d) A 25% chance of losing nothing and a 75% chance of losing $10,000
#

What do you say?

Email me your answers to financialgeeks@gmail.com to find out more!

Friday, February 9, 2007

Interesting article from Bloomberg

This is an interesting article from Bloomberg, check it out!

If Hedge Funds Kept Cows, Your Milk Would Go Sour: Mark Gilbert
By Mark Gilbert


Feb. 9 (Bloomberg) -- A famous series of jokes attempts to define political systems. In communism, for example, you have two cows, your commune seizes them and charges you for milk. In a democracy, you have two cows, the cows outvote you 2-1 to ban all meat and dairy products, and you go bankrupt and starve to death.
Similar thinking can be applied to financial markets. Here, then, is the world of money recast in bovine terms.

Leveraged Buyouts
You have two cows. You come home from the fields one day to find Henry Kravis chatting to your spouse at the dining-room table. Two days later, you have no spouse, no farm, and no table. Two guys the size of sumo wrestlers have saddled up the cows and are riding them around the farmyard.

Currency Market
You have two cows. China has 1 trillion cows. Guess who sets the price of milk?

Bond Market
You have two cows. One is Brazilian, one is Australian. They yield 25 quarts of milk per day. That's half as much as three years ago, when you traded your less-lactiferous German and U.S. cows for them. You are thinking of swapping for a pair of Namibian cows. They only have three legs but, hey, they produce 26 quarts per day.

Derivatives
You have two cows. You repackage five of them into a Collateralized Lactating Obligation, pay for a AAA credit rating, slice the CLO into 10 pieces and sell it to investors, skimming the cream from the milk for yourself. Three of the cows fall ill, and the credit rating plummets. You get to keep the cream.

Hedge Funds
You have two cows. A guy in an open-necked shirt drives up in his Bentley and offers to take care of them for you in return for a year's supply of steak and 50 percent of their milk. They won't be allowed to leave his compound for two years.
Six months later, you have half a cow, producing sour milk. ``You have to be willing to lose rump today to get rib-eye tomorrow,'' the hedge-fund guy mumbles through a mouthful of sirloin and champagne.

Economics
Assume two cows.

Carbon-Emissions Trading
You have two cows. They produce 1.2 tons of methane gas per day. After a hefty donation to the re-election campaign of your local representative, the government gives you enough emission permits for six cows. You sell three permits, buy another cow, and apply for a European Commission grant to build a methane-gas power station.

Microsoft Corp.
You have one old, tired cow. A recent heart transplant may have come too late to save the beast.
Google Inc.
You have no cows. You slap advertisements on everyone else's cows. The milk floods in. You use the proceeds to reinvent the cow.

Apple Inc.
Nobody wants your cows. You design the cutest little milk bottle. Now, everybody wants your cows.

Goldman Sachs Group Inc.
You have 26,467 cows. They are strapped into the milking machines 24/7. Some of them have more hay than they could ever hope to eat. Others aspire to one day having more hay than they could ever hope to eat. The cows with the most hay end up with big government jobs.

Pension-Fund Management
You have two cows. How boring is that? You pay a month's supply of milk to a consultant, who advises you to sell one cow and buy two aardvarks instead. The aardvarks die. The consultant charges you four months of your (now reduced) milk supply and advises you to sell half of your remaining cow and buy a wombat. The wombat dies. The consultant charges eight months of milk for a copy of his new report, ``Two-Cow Strategies for Alleviating the Impending Pensions Crisis.''

Russian Energy
You have two cows. Comrade, those cows are an environmental hazard. We suggest you hand one of them over to us.

Credit-Default Swaps
You have two cows. You buy insurance against them dying, and tuck the contracts into the middle of that tottering pile of documentation on your desk. One dark night, Henry Kravis sneaks off with your cows. By the time you track down the paperwork, your now worthless contracts have expired.

Interest-Rate Swaps
You have two cows. You pledge one of them to me as collateral in a swap for some of my pigs. I pledge the cow to my neighbor as collateral in a swap for some of his sheep. He pledges the cow to his cousin as collateral in a swap for some of his cousin's goats. Better pray the livestock market doesn't crash and we have to try and round up that cow.

Commodities
You have lots of stocks and bonds, but no cows. Are you crazy? Cows are the hot new market. Here, buy this exchange- traded cow futures contract. It can't lose. It gained 40 percent in the past six months.

Gold
You have two cows. You wear a cap you made out of tin foil so that the tiny black helicopters can't read your thoughts. You spend your days blogging about how the government's decision to abandon the cattle standard in 1933 was part of a global conspiracy by the world's central banks to destroy the value of your herd.

(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this article: &cls;Mark Gilbert&cle; in London at magilbert@bloomberg.net

Monday, February 5, 2007

Tough Time to Play

Finally, the day has come.

Isn't it amazing that KLCI finally broke through 1,200 pts ? do you still remember when was the last time the KLCI last stood at a point above 1,200 pts?

yup, it's about 10 years ago, it was the beginning of 1997, before Princess Diana had the accident, before Hong Kong was returned to China, and of course, before "the speculators" or Soros hit us so bad and subsequently brought us to the Asian Financial Crisis. Bravo. 10 years.

Still remembering that pre-97 are times when mum and dad investors would quit their daily jobs and spent most of their time hanging out in the brokerage house. Any stock, literally, any stock you buy, you can make money. Of course, what follow aftermath was a brutal, cruel, blood-splashing stock market crash where the plunge in the KLCI index was faster than the speed estimated by the Law of Gravity.

2007, what do we see? another amazing bull run we have. well, technically, it's no longer a "any stock you buy, you can make money" era, but hey, if you stick to the big caps, timber, palm oil, construction and Visit Malaysia Year theme's stocks, you have already made heaps!

Once upon a time, Mr. Puzzled asked a Guru. "Guru, when it's the good time to get out of a stock market before it crashes?"

The Guru said "You know the time has come... when everyone you know is talking about buying shares..."

Well, to me, i think it's a pretty good rule of thumb. But then, come to think of it, how do you know that those Tom, Dick and Harry who will rush in for the last bull run is not You, Me and You?

okok, cut the crap. Basically, most of the market participants are quite bearish about the current stage of the market. Has it peaked? when will it peak? Who knows? but i guess everyone is thinking about the same thing. For most, it's time to make as much as you can before the correction comes...(of course, only if you're a believer of what goes up, must come down...), for some, well, i rather put my cash in the FD, and not worrying about the market too much...

Anyhow, foreign money still coming in like no nobody business, market still going up up and up. What's next? Man, gotta admit that this, is a tough time to play!

So what shall we do? watch out for 2 things

1) US Fed Fund Rate Hike
2) Japanese Yen Appreciation and/or Japanese Central Bank's decision to hike rate...

When these happen... life is gonna be tough, again.