Behavioral Finance - Needs more attention
Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Trading Psychology
Forum Discription: Discuss the psychological aspects of trading such as fear, greed and discipline. Why stocks are bought like perfumes and not groceries.
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=1233
Printed Date: 07/May/2025 at 4:39pm
Topic: Behavioral Finance - Needs more attention
Posted By: deepinsight
Subject: Behavioral Finance - Needs more attention
Date Posted: 23/Sep/2007 at 4:08pm
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I also wanted to touch upon the topic of ... Conviction bias - where because we have built our conviction over a long term (studied the company, read all reports, build our case, talked to management, etc.) we are unable to change our minds (read: become inflexible to the facts). This in the past has lead me to stay the course for longer than required.
Tilson has a good presentation which explains his phenomena here
http://www.tilsonfunds.com/TilsonBehavioralFinance.pdf - http://www.tilsonfunds.com/TilsonBehavioralFinance.pdf
"A study done by a pair of Canadian psychologists uncovered something fascinating about people at the racetrack: Just after placing a bet, they are muchmore confident of their horse’s chances of winning than they are immediately before laying down that bet. The reason for the dramatic change is…our nearly obsessive desire to be (and to appear) consistent with what we have already done. Once we have made a choice or taken a stand, we will encounter personal and interpersonal pressures tobehave consistently with that commitment. Those pressures will cause us to respond in ways that justify our earlier decision."–Influence ------------- "Investing is simple, but not easy." - Warren Buffet |
Replies:
Posted By: basant
Date Posted: 23/Sep/2007 at 4:29pm
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Excellent read. I have never felt as challenged in my concentrated portfolio approach then I have after reading this. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: smartcat
Date Posted: 23/Sep/2007 at 4:53pm
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Truly deep insight into human behavior with respect to money & finance.
But conviction bias is not a negative trait. Without bias, there would be no conviction and you will end up mostly going "with the flow". The ability of the mind to argue against the Market, the willingness to swim against the tide, is quite important too.
My feeling is that only 'new' investors would let conviction bias affect their decision of selling a stock whose fundamentals have deteriorated. Anybody who has seen a decent bear market would not have a blind love for a particular stock or company.
As they say, Experience is the Best Teacher.
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Posted By: deepinsight
Date Posted: 23/Sep/2007 at 5:13pm
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Conviction is necessary for a concentrated portfolio. Concentrated portfolio often leads to outperformance. The issue here is its important to work through the risks of our own biases which can lead to underperformance. One idea which I had read about which can help could be to think in probablities of outcomes instead of extremes. That allows our own mind to consider changes as they happen in our companies rationally and come to the right decisions. ------------- "Investing is simple, but not easy." - Warren Buffet |
Posted By: kulman
Date Posted: 23/Sep/2007 at 7:37pm
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Excellent topic & good discussion. Reminds of a quote from the Master...
Investing is not complicated. You work to find pockets of value. You didn’t need a high IQ. You need to have the courage of your convictions when everyone else was terrified. It was the same in 1974. People were paralyzed. You need to learn to follow logic rather than emotion. That’s easier for some people to do rather than others.---Warren Buffet
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: deepinsight
Date Posted: 24/Sep/2007 at 4:46pm
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Common Mental Mistakes 1) Overconfidence 2) Projecting the immediate past into the distant future 3) Herd-like behavior (social proof), driven by a desire to be part of the crowd or an assumption that the crowd is omniscient 4) Misunderstanding randomness; seeing patterns that don’t exist 5) Commitment and consistency bias 6) Fear of change, resulting in a strong bias for the status quo 7) "Anchoring" on irrelevant data 8) Excessive aversion to loss 9) Using mental accounting to treat some money (such as gambling winnings or an unexpected bonus) differently than other money 10) Allowing emotional connections to over-ride reason 11) Fear of uncertainty 12) Embracing certainty (however irrelevant) 13) Overestimating the likelihood of certain events based on very memorable data or experiences (vividness bias) 14) Becoming paralyzed by information overload 15) Failing to act due to an abundance of attractive options 16) Fear of making an incorrect decision and feeling stupid (regret aversion) 17) Ignoring important data points and focusing excessively on less important ones; drawing conclusions from a limited sample size 18) Reluctance to admit mistakes 19) After finding out whether or not an event occurred, overestimating the degree to which one would have predicted the correct outcome (hindsight bias) 20) Believing that one’s investment success is due to wisdom rather than a rising market, but failures are not one’s fault 21) Failing to accurately assess one’s investment time horizon 22) A tendency to seek only information that confirms one’s opinions or decisions 23) Failing to recognize the large cumulative impact of small amounts over time 24) Forgetting the powerful tendency of regression to the mean 25) Confusing familiarity with knowledge Source: Tilson's presentation referred earlier ------------- "Investing is simple, but not easy." - Warren Buffet |
Posted By: kulman
Date Posted: 24/Sep/2007 at 11:51pm
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Deepinsight....nice summary. That presentation is quite an eye-opener. The following really stand-out:
Projecting the immediate past into the distant future
Misunderstanding randomness; seeing patterns that don’t exist
"Anchoring" on irrelevant data Allowing emotional connections to over-ride reason Embracing certainty (however irrelevant) Overestimating the likelihood of certain events based on very memorable data or experiences (vividness bias) Failing to act due to an abundance of attractive options Ignoring important data points and focusing excessively on less important ones; drawing conclusions from a limited sample size Reluctance to admit mistakes After finding out whether or not an event occurred, overestimating the degree to which one would have predicted the correct outcome (hindsight bias) Believing that one’s investment success is due to wisdom rather than a rising market, but failures are not one’s fault Failing to accurately assess one’s investment time horizon A tendency to seek only information that confirms one’s opinions or decisions And last but not the least-----Confusing familiarity with knowledge ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: BubbleVision
Date Posted: 25/Sep/2007 at 2:42pm
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"Traders see what they want to see, this http://www.fullermoney.com/content/2007-09-24/Observation.pps - presentation shows that the brain plays some tricks." "New highs have surprised many people who, by continuing to expect an even bigger fall, are making one analytical blunder into two. From personal bitter experience, denial remains Enemy no 1 of the trader. "I continue to enjoy the markets, since I have long accepted being a figure of fun!"
------------- You can't make money if you are unwilling to lose...It's like willing to breathe in but not willing to breathe out. -- ED SEYKOTA ....Read Disclaimer! |
Posted By: kulman
Date Posted: 28/Sep/2007 at 11:37am
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This is excerpted from http://timesofindia.indiatimes.com/Business/Sensex_17000_Beware_of_the_black_swan/articleshow/2413387.cms - Jug Suraiya's article in TOI today :
Sensex 17,000: Beware of the black swan
Now that the Sensex has crossed the 17,000 mark in a record-breaking rise, as an investor what should you do? Book your profits, wait for the inevitable correction and reinvest again in a cheaper market? Remain invested and ride the bull run, which is sure to continue what with the substantial FII inflows expected in October? Put in even more money into the market? Whatever you decide to do, it might be wise to follow Nassim Nicholas Taleb's words of caution and watch out for black swans. The so-called 'black swan' problem was first posed by the Scot philosopher David Hume and deals with the danger of making universal assumptions based on empirical reasoning: a man sees one white swan, then another, then a third, and so on. So he comes to the conclusion that all swans are white, and bases a universal theory on this premise. Then along comes a single black swan and the grand theory comes crashing down like a pack of cards. Taleb — a successful Wall Street stock trader who is also a professor of mathematics and statistical science and the author of two international, iconoclastic bestsellers, Fooled by Randomness and The Black Swan, both of which demolish myths regarding 'experts' who advise people on stock investments — has taken Hume's concept and made it the basis of a brilliant critique of those who predict the market's future behaviour from past performance and claim to discern 'trends' in what Taleb insists is pure chance. In short, those who allow themselves to be 'Fooled by Randomness' and, as a result, frequently bankrupt themselves and — what is worse — others as well. In Taleb's view, the only 100 per cent certitude is that there are no certitudes: unpredictability is the only predictability. Never follow so-called 'hot-tips' which turn out to be ticking time bombs. Never, ever, invest more than you can afford to lose without 'blowing up', i.e. going bankrupt. And always be wary of the black swan waiting around the corner. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 07/Oct/2007 at 8:49am
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http://www.business-standard.com/general/storypage.php?&autono=300524 - Diffusion and sentiment Information paralysis can be resolved by sentiment indicators which can not only predict but also time market turns.
These two generic sounding terms—diffusion and sentiment—are going to redefine the forecasting business in times ahead. Diffusion might sound familiar to economists as it’s also an econometric technique. This reminds me of the scene from Asimov’s screen adaptation I, Robot where Del Spooner (Will Smith) asks Dr Alfred Lanning’s (James Cromwell) hologram, “What do I see here?” Lanning’s hologram says, “My responses are limited; you have to ask the right question.” So even if you have the right question, the available answer may be insufficient. It is this insufficiency researchers are struggling with to come with the right forecast. Information in itself has failed us, as stock prices react to so many factors that even regional fundamental analysts have started looking at the movement of the Dow Jones to gauge market trends. Not very many can disengage from international events and talk about markets or assets on a stand-alone basis. It’s a clear case of information paralysis. Less is not enough and more is overwhelming. And web searches really don’t help further the search of what really works or how to see through this clutter. Web search is a clutter where ‘loss’ is about weight not about finance, history is not about economics as in econohistory, valuations are about data not about fractals. The search engine’s responses are limited. This question was partially answered by a client of ours, a national bridge champion, “This 80-20 theory is perfect--if most of the people do one thing, you do the opposite.” Conventional logic might make you laugh at this, but the champion is an intermediate term investor. He is always looking around for sentiment cues from newspapers, big bank securities’ company recommendations, local economic news, international updates etc. After that he gauges the sentiment, which side is heavier, the positive or the negative side. I don’t know how he measures it in his mind, but he surprises us with his uncanny sentiment indicator. It works. He is a good pattern recogniser, a contrarian and this he mixes with a sentiment study. Diffusion indices are built in the same way. These are survey indicators. Talk to 100 experts and take their opinion for the day. If 80 per cent are on the positive side, we have reached a top and vice versa. Technical expert Martin Pring says, “Sentiment observations are as valid for intermediate term (multi-week) peaks and troughs as they are for primary ones (multi months).” The difference is normally of degree. At an intermediate term low, for example, significant problems are perceived, but at a primary market low, the problems often seem insurmountable. In some respects, Pring adds, “The worse the problem, the more significant the bottom.” He even clarifies that though sentiment indicators work well, it is best to monitor several sentiment indicators simultaneously. Conventionally, the best time thought to be long on the market is when most advisors were bullish. This has proved to be far from the case; a majority of advisors and commentators were almost always wrong at market turning points. Quite simply, professional advisors are just as susceptible to market emotions as individual investors. They become far too greedy at the top of trends and far too fearful near the bottom. The contrary indicator only works at extremes. Advisors are only wrong when you get too many of them to start thinking the same thing. Back in October 2002, there were many more bearish than bullish advisors. Historically, this has always been a good time to start thinking about buying the market. Investors would clearly find it more profitable, then, to take a position contrary to the advisory service industry. But then as we said earlier, advisors as a group invariably go wrong. There are a host of other indicators like specialist/public ratio i.e. smart money against not so smart money. Then there is the short interest ratio, inside sell/buy ratio, mutual fund cash/asset ratio, margin debt trends, put/call ratios, inverted dividend yield momentum and volatility indicators. Studying sentiment is fun. It teaches you about social behaviour, mass psychology, error-prone humans, overestimation of skills, biases, overconfidence and above all herding. “This time it’s different,” gets a large number of search results. We keep fighting for intellectual supremacy while the market needs a simple study of sentiment to see through the chaos and layers of leverage, which can end your investment life. Investors come and go. Some never came after the 2000 crash and some got burnt in small dips in May 2006 and July 2007. Nobody looks for them and writes about them. And they never come back to the market; not because the market is not a great place to be, but because to survive the market till you die and pass the art of investment to the next generation needs more than information access. It needs the ability to understand market sentiment and ask the right question. -----------------------------
Reminds of a thought....
"As an investor, you need to buy a post officescale. When all the reports on a stock or sector are light, it means 'buy'. Conversely, when the weekly reports you receive on an industry add to several kilos then 'sell'! So, after all, brokerage research does have a very useful function but not through its content but weight."
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: BubbleVision
Date Posted: 11/Oct/2007 at 2:05pm
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In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The essence of this convention - though it does not, of course, work out quite so simple - lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change. This does not mean that we really believe that the existing state of affairs will continue indefinitely. We know from extensive experience that this most unlikely. The actual results of an investment over a long term of years very seldom agree with the initial expectation. Nor can we rationalize our behavior by arguing that to a man in a state of ignorance, errors in either direction are equally probable, so that there remains a mean actuarial expectation based on equi-probabilities. ------------- You can't make money if you are unwilling to lose...It's like willing to breathe in but not willing to breathe out. -- ED SEYKOTA ....Read Disclaimer! |
Posted By: kulman
Date Posted: 12/Oct/2007 at 4:54pm
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Excerpts from an article in Dna Money...
http://www.dnaindia.com/report.asp?NewsID=1127017 - Of bull-charges & the greater fool theory
"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one” -Charles Mackay
“The crucial thing about the stock markets is that it is primarily driven by perceptions, not performance,” said the late Harshad Mehta in an interview to a magazine in September, 1992. So, why is the stock market going up, as if there is no tomorrow? For an answer, read on. Benjamin Graham and David Dodd, in their all-time classic, Security Analysis, explain the way a stock market works. “The market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.” Right now, most individuals seem to be voting with their emotional cap on. And why is that happening? Robert Shiller provides an answer in his book, Irrational Exuberance. “A fundamental observation about human society is that people who communicate regularly with one another think similarly. There is at any place and in any time a zeitgeist, a spirit of times,” he writes. At an individual level, stock market investors are very different, but the fact that on a whole they have been transformed into a psychological crowd gives them a collective mind. This happens as psychologically, the desire to conform to the behaviour and opinions of others, a fundamental human trait, is what drives such buying behaviour. Like sheep in a herd, investors in a bull run find it cosy to be inside the herd rather than outside it. And so every investor is now on a buying spree. The bears have all been squeezed out. As Shiller mentions, “When prices go up a number of times, investors are rewarded by price movements in these markets, just as they are in Ponzi Schemes. There are still many people (indeed, the stock brokerage and mutual fund industries as a whole) who benefit from telling stories that suggest the markets will go up further. There is no reason for these stories to be fraudulent; they need only emphasise the positive news and give less emphasis to the negative.” Now, if you have been following the business media closely, you would know why most analysts remain positive on the market. Investors themselves have a role to play in all this. “In making judgments about the level of stock prices, the most likely anchor is the most recently remembered price,” says Shiller. And when the markets have been on their way up, investors tend to look at the recent past pattern and assume that the future patterns will be identical to the past ones and tend to believe that it will keep going up forever. They mistake probability for certainty. .........known as the greater fool theory. The investors also gamble because they are ready to accept the large probability of a loss in the hope of a small probability of gain. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: deveshkayal
Date Posted: 12/Oct/2007 at 11:36am
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Parag Parikh writes an article in TOI on Behavioral Finance every alternative Monday. ------------- "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beat the guy with a 130 IQ. Rationality is essential"- Warren Buffett |
Posted By: deepinsight
Date Posted: 13/Oct/2007 at 11:02am
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Here's are some good articles/introduction on Talib's thinking:
http://www.nationalreview.com/nrof_glassman/glassman200406230851.asp - http://www.nationalreview.com/nrof_glassman/glassman200406230851.asp
here another one its a bit longish but makes a good read..
http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm - http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm
the point is we do not know if are good & competent or pure lucky. If its the latter can that change?
------------- "Investing is simple, but not easy." - Warren Buffet |
Posted By: deepinsight
Date Posted: 18/Oct/2007 at 10:04pm
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Interview with Jason Zweig Source: DNA Money Neuroeconomics is a new science that is taking the investing world by storm, though, until recently, it was confined to the academic circles. Now, through his book, ‘Your Money and Your Brain - How the New Science of Neuroeconomics’ Can Make you Rich, Jason Zweig has tried to take neuroeconomics to the layman. The subject, as Zweig defines it, is “a hybrid of neuroscience, economics and psychology,” which helps us understand “what drives investing behaviour not only on the theoretical or practical level, but as a basic biological function.” Zweig is a senior writer for the Money magazine and has been a guest columnist for Time and cnn.com. He is also the editor of the revised edition of Benjamin Graham’s ‘The Intelligent Investor’. In an interview to Vivek Kaul, Zweig speaks on Neuroeconomics and his philosophy of investing. You seem to suggest in your book that investors should not fall for the story behind the stock. What else does one look at, then? The key is to understand a crucial distinction, first drawn by the great investor Benjamin Graham, who was Warren Buffett’s teacher. Stocks and businesses are not the same thing. Stocks flit around all the time; you can watch them moving up and down on your computer screen all day long. In New York, it’s not unusual for the price of a stock to change at least 10,000 times in a single day of dealing, and I imagine it’s not very different in Mumbai. Stock prices are in constant flux, but business values are not. The underlying value of an ongoing enterprise does not change every day. Something like 99% of all the trading activity in the typical stock is meaningless. The future value of a business has nothing to do with the current price of its stock. What you should do is learn to look past the noisy twitching of stock prices to the enduring value of businesses as living organisms. Is the business run by honest people who treat outside investors fairly? Does it make products or provide services for which customers are willing to pay higher prices if necessary? Can you understand its financial statements? These constitute the reality of the business and determine its future value. The “story” behind the stock is almost certainly nothing more than the stampede of thousands of speculators in and out of the shares. Train yourself to ignore them. “The best financial decisions draw on the dual strengths of your investing brain: intuition and analysis, feeling and thinking,” you write. Isn’t there a dichotomy there? Yes, there is. But let’s get our terminology straight, and again we can do so by going back to Benjamin Graham. Graham’s formal definition has never been improved upon: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.” Notice carefully that this is neither an “or” nor an “and/ or” definition; all three components - analysis, safety, and an adequate result - must be present. If any of them is missing, you are not investing. You are speculating. In India, as in the United States, most people who call themselves “investors” are not investors at all. They are speculators. In the short run, particularly while the Indian capital markets are rapidly developing, speculators may be able to earn high returns by rapidly trading stocks without doing thorough analysis. But in the long run, you cannot earn sustainably high returns from mere “gut feelings.” I find it striking that in a society with cultural traditions of great patience and acute analytical ability, so many people trade as if their knickers were afire, scoffing at the long term and analysing nothing but the craziness of the crowd. There is no doubt in my mind that Indians have the potential to lead the world in investment skill. But, so far as I can tell from my faraway vantage point, what most Indians do is not investing. In my own portfolio, I do not invest with the next year in mind, nor even with the next decade in mind. I invest with the next century in mind; that is when my heirs will benefit from my decisions. I do not care what stock prices do this afternoon, or this week, or this month, or this year. I care whether business values are rising. That is what it means to be an investor. You have written about the link between dopamine and the way investors invest. What’s the link? Dopamine makes us pursue whatever we think will be rewarding. When we earn more than we expected, that generates a “positive prediction error” - a flood of dopamine that signals to our bodies that something good has happened. After only a few repetitions, the dopamine is released in our brains, not when we earn the actual gain, but when we believe we know that the gain is coming. It is not the reward but the prediction of it that generates pleasure in the brain. I call this the “prediction addiction.” You become addicted to your own belief that you are about to make money. Like any addict, when the reward does not come, you will go into a painful withdrawal. Why do investors get greedy? Even Isaac Newton lost most of his money in the South Sea Bubble. What does Neuroeconomics have to say on that? Greed is generated in the same regions of the brain that produce pleasure when we find food or shelter or love. These basic reward circuits are among the oldest systems in the human brain. Geniuses have them, too. Brilliant people are better at generating great ideas than the rest of us, but they are no better at controlling their own emotions than you or I. We get greedy because the anticipation of profits activates the dopamine system in the brain, flooding our neurons with a signal of excitement. Newton was not just one of the smartest men of all time, but was also very well-informed financially; he was the master of the Royal Mint. So he certainly knew better in the “thinking” part of his brain. But his “feeling” brain was swept away with greed. If you do not put policies and procedures in place, in advance, to control your emotions, you will never be able to resist the siren song of the markets when the markets go mad. Common sense and good judgment are vastly more valuable than intelligence. What makes investors book profits fast, but hold on to their losses? We do not merely buy stocks and sell them. What we really are buying is pride and prowess, and what we really are selling is pain and shame. Once a stock earns a large gain, you want to lock in the reason for your pride and the proof of your prowess; if you hang on too long, the profit may disappear. But, once a stock produces a big loss, you want to hide the source of your pain and shame. If you sell at the bottom, you will have to admit your error, and that admission will only compound your shame. Whenever humans are ashamed of anything, we cover it up. So we cover our financial losses by pretending they are not there. So, what is the best way to invest? My fondest wish for Indian investors is that index-tracking funds will become widely available at very low management fees and dealing costs. If I were an Indian financial entrepreneur, I would study US firms like Vanguard, Barclays Global Investors and Dimensional Fund Advisors to learn how they run their tracking funds so efficiently and fairly. And if I were a young Indian investor, I would embrace low-cost tracking funds and put most of my money there for the very long run. The combination of diversification, simplicity, convenience, and low cost provides an insuperable advantage to the tracking investor. The life of a rising professional is busy enough without having to spend precious time and emotion following every momentary rise and fall of every stock you own. If your money cannot buy you peace of mind, why invest at all? Does luck have a role in investing? Luck has a great deal to do with it. Whenever a stock trades, the buyer thinks the seller is making a mistake. The seller thinks the buyer is mistaken. Only one of them can be right. After they both pay their dealing costs and any taxes on the transaction, neither may show any net profit for his pains. In the short run, almost anyone can be right a few times in a row, by luck alone - just as anyone can flip a coin right-side up several times in a row without any coin-flipping skill, whatsoever. Even in the long run, luck can rule the day. It can take years, even decades, to determine whether an investor has genuine and repeatable skill or is just lucky. The danger comes when you believe you are skillful and, in fact, you turn out to be merely lucky. Then you do things out of a belief that every step you take is the right one, and you end up slipping on a banana peel and falling down the stairs. You talk about the “illusion of control.” Investors tend to be over-optimistic when they are directly involved and have had no negative experience from the over-optimism. How does this affect investing decisions? It is easy to believe “I did it” when a stock you buy goes up. However, your actions did not cause the price to rise. Ask yourself this: If I had not bought the stock at all, would it not have risen without me? The way to escape the illusion of control is to invest with the aid of a checklist, a series of rules you must always follow before buying or selling any investment. This way, the rules make the decisions for you, and you take your pride out of the picture, enabling you to be more objective. In my book, I outline some rules that may be useful for many people. Can financial future be foretold? Some things can be. I am very confident predicting that the Indian stock market will lose a third of its value over the course of a few months. However, I have no idea, whatsoever, when this will happen. I am equally confident predicting that the Indian stock market will rise ten-fold and more over the long term. And I am more confident still in predicting that the true investors who have the courage to buy when the market crashes will make much more money in the long run than the fools who buy only when stocks go up. Why are investors so addicted to CNBC? Their broadcast gives a feeling the “stock markets are in a crisis all the time.” Does that have an impact on the way investors invest? Years ago, you could only find out a stock price in tomorrow’s (or sometimes, the next week’s) newspaper. Now you can find out the latest price every few minutes on CNBC or every few seconds online. This is the tragedy of technology - that the tool that should make us wiser, instead makes us act more foolishly than ever before. The human brain is a pattern-recognition machine. The more frequently you look at a series of data, the more often you will see “trends” and patterns that are not really there; they are nothing more than chaos clothed in a costume of regularity, illusions of order in streams of data that are utterly random. After two consecutive stimuli in the same direction, the human brain automatically, involuntarily, and uncontrollably expects a third. We extrapolate repetition out of what actually is randomness. CNBC is addictive because it continuously presents you with the opportunity to perceive what is not actually there: order, predictability, reliable patterns. It grips us the way all great fiction is gripping, with the added irony that very few of us realise that what we are watching is actually fiction. Most of the investment experts do not really give any usable information. Is not listening to such experts better than taking them seriously? I would listen very seriously to any financial expert who would provide a comprehensive record of every forecast he has ever made, both good and bad. Many forecasters will tell us about every single one of their successes. However, to the best of my knowledge, there is no financial forecaster alive who has ever provided a complete list of all his predictions, including the failures. There’s a reason for that: Anyone who really knew how to forecast the financial future would be most unlikely to let others in upon his secrets. ------------- "Investing is simple, but not easy." - Warren Buffet |
Posted By: omshivaya
Date Posted: 18/Oct/2007 at 10:29pm
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Some saying went like: "Creativity is not letting people know the source".
Great article Deep jee. Thanks. But exceptions are always there in context of this para: "However, to the best of my knowledge, there is no financial forecaster alive who has ever provided a complete list of all his predictions, including the failures."
Basant sir, what do you think? ------------- The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it |
Posted By: basant
Date Posted: 18/Oct/2007 at 10:41pm
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What makes investors book profits fast, but hold on to their losses? We do not merely buy stocks and sell them. What we really are buying is pride and prowess, and what we really are selling is pain and shame. Once a stock earns a large gain, you want to lock in the reason for your pride and the proof of your prowess; if you hang on too long, the profit may disappear. But, once a stock produces a big loss, you want to hide the source of your pain and shame. If you sell at the bottom, you will have to admit your error, and that admission will only compound your shame. Whenever humans are ashamed of anything, we cover it up. So we cover our financial losses by pretending they are not there.- Excellent thoughts. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: kaushalchawla
Date Posted: 18/Oct/2007 at 11:08pm
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Very very good article......Control of the impulse to trade is of essence. ------------- Warm Regards, Kaushal |
Posted By: kulman
Date Posted: 18/Oct/2007 at 1:19am
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Nice one. Jason Zweig 's writings are always worth reading. Let me summarize salient points from that interview...
---------------------------------
Stock prices are in constant flux, but business values are not.
The future value of a business has nothing to do with the current price of its stock. What you should do is learn to look past the noisy twitching of stock prices to the enduring value of businesses as living organisms.
In India, as in the United States, most people who call themselves “investors” are not investors at all. They are speculators. In the short run, particularly while the Indian capital markets are rapidly developing, speculators may be able to earn high returns by rapidly trading stocks without doing thorough analysis. But in the long run, you cannot earn sustainably high returns from mere “gut feelings.” I find it striking that in a society with cultural traditions of great patience and acute analytical ability, so many people trade as if their knickers were afire, scoffing at the long term and analysing nothing but the craziness of the crowd.
Common sense and good judgment are vastly more valuable than intelligence.
If your money cannot buy you peace of mind, why invest at all?
The danger comes when you believe you are skillful and, in fact, you turn out to be merely lucky. Then you do things out of a belief that every step you take is the right one, and you end up slipping on a banana peel and falling down the stairs.
I am more confident still in predicting that the true investors who have the courage to buy when the market crashes will make much more money in the long run than the fools who buy only when stocks go up.
The human brain is a pattern-recognition machine. The more frequently you look at a series of data, the more often you will see “trends” and patterns that are not really there; they are nothing more than chaos clothed in a costume of regularity, illusions of order in streams of data that are utterly random. We extrapolate repetition out of what actually is randomness. Anyone who really knew how to forecast the financial future would be most unlikely to let others in upon his secrets.
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: omshivaya
Date Posted: 18/Oct/2007 at 1:43am
|
Thank you Kulman jee. You have a perfect knack for such things. Great summize. ------------- The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it |
Posted By: kaushalchawla
Date Posted: 18/Oct/2007 at 2:09am
|
Om Ji, aapka retirement wala thread continue kariye..... ------------- Warm Regards, Kaushal |
Posted By: deepinsight
Date Posted: 19/Oct/2007 at 2:34pm
This is another interview with Jason Zweig:
------------- "Investing is simple, but not easy." - Warren Buffet |
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Posted By: getmanoj
Date Posted: 25/Oct/2007 at 8:42pm
|
After reading heavy articles one light story: Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for Rs10. The villagers seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at Rs10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at Rs20. This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms. The offer rate increased to Rs25 and the supply of monkeys became so little that it was an effort to even see a monkey let alone catch it. The man now announced that he would buy monkeys at Rs50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him. In the absence of the man, the assistant told the villagers. Look at all these monkeys in the big cage that the man has collected. I will sell them to you at Rs35 and when the man returns from the city, you can sell it to him for Rs50." The villagers squeezed up with all their savings to buy the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere!! Manoj |
Posted By: omshivaya
Date Posted: 25/Oct/2007 at 9:56pm
Hahaha!  Nice on Manoj jee. I can correlate quite easily, the aboVe to some monkeys who bring out research reports on CNBC channels.------------- The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it |
Posted By: deepinsight
Date Posted: 25/Oct/2007 at 12:15pm
Manoji:
manybe this has some resonance with pump and dump penny stocks too. ------------- "Investing is simple, but not easy." - Warren Buffet |
Posted By: Vivek Sukhani
Date Posted: 25/Oct/2007 at 8:55am
| In equities, as my dad says, dont even trust your dad/son. I saw a small illustration when Goldman cut down on their stake in IFCI when actually it was rumoured they have spread a pvt repotrt among their pvt clients with 700 rupees target. E.Mathew has also been a case in point. |
Posted By: kulman
Date Posted: 27/Oct/2007 at 8:42am
|
The Dow Jones Industrial Average is the encephalogram of the human race. That wiggly line reflects the limited information available to us filtered through our dreams-our hopes and our fears. Investors are profoundly affected by it-that is, by each other. While it makes no sense to get stampeded into buying or selling precipitately along with everybody else, most investors do exactly that. The herd instinct is so strong that only a handful of hardened, and perhaps slightly inhuman, souls can resist it. There is a story of a visitor to a western town who is having his hair cut in the local barbershop, run by an incurable practical joker. After a while a crowd of people starts streaming down the street, heading out of town toward a nearby hill. When the visitor in the chair asks what is happening, the barber chuckles and says that he himself as a little joke had started a rumor earlier in the day that there would be a flood. The visitor is amused. As the town empties, however, the barber gets more and more nervous, and finally takes off his apron, puts down his scissors, and says, "I think I'd better get going myself. Don't bother to pay." The customer is astonished. But the barber, heading out the door, says, "It may be true!"
---John Train, author of 'The Craft of Investing'
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 30/Oct/2007 at 6:17pm
|
Similar to the story (monkey-waalah) posted earlier......
Mr. MD goes to this village where there are plenty of coconuts. Mr. MD had full data that this village has an estimate of around 50,000 coconuts. Here the main occupation of the villagers is just farming and they don´t know anything apart from this.
Mr. MD tells these villagers that if they bring him 10,000 coconuts, he will pay them Rs.10 per coconut. The villagers are amazed why he paying Rs.10 per coconut when actually he can get them free.
Some of the villagers don´t want to shut their daily job of farming but anyway, more than 70% of the villagers go coconut hunting and by evening they bring him 10,000 coconuts and Mr. MD pays them Rs.10 for each coconut. When these villagers came back with the money, they were teasing others, who had not gone for coconut hunting that see we earned more than what you are and that too in just a day we got so much money. The remaining 30% villagers were feeling jealous and guilty of not doing the same.
After about a week´s time, MR. MD again goes to the same village and this time tells them that if they are able to fetch him 20,000 coconuts than he will pay them Rs.20 per coconut. The entire village was once again exited and around 85% went coconut hunting. This time the villagers took two days to collect the coconut and thereby they lost their two days farming. Anyhow they managed 20,000 coconuts and took Rs.20 per coconut. Now the remaining 15% villagers were again feeling guilty of not jumping on to the opportunity to earn extra money. Ten days later, again Mr. MD comes to the village and asks for another 10,000 coconuts @ Rs.20 only. But the villagers said him that the stock in the village was fast exhausting and it will be difficult for them to arrange 10,000 coconuts. Mr. MD raised the price to Rs.30 per coconut. The job will difficult but the greed of Rs.30 per coconut was forcing them to go hunting. This time more than 90% of the villagers were rushing to search for coconuts. It took them more than 30 days to collect 10,000 coconuts. They lost their farming for a month but they got Rs.30 per coconut. After about a month, Mr. MD again comes to the village and this time he comes with his closed friend Mr. DM. Mr. MD tells the villagers that now he needs 50,000 coconuts and he is willing to give them Rs.100 per coconut. He instructs his friend Mr. DM to come next month to co-ordinate the payment @Rs.100 to the villagers and leaves the village. The entire village knows that hardly 10,000 coconuts are left in the village and they will never be able to collect 50,000 coconuts. The entire village is in sad mood to loose such an opportunity of such big money. A month passes by but they are not able to collect more than 2000 coconuts.
After a month when Mr. DM comes to the village, he sees that only 2000 coconuts have been collected so far and tells the villagers that he has a plan. He will sell the coconuts lying in the godown of MR. MD for Rs.80 to them, so that they can than sell it back to Mr. MD for Rs.100. The happiness is again there in the villagers and they readily agreed to buy the coconuts @ Rs.80. MR. DM sells them the entire chunk of Mr. MD @ Rs.80 to the villagers. Now 1 year has passed, the villagers are still waiting for Mr. MD to come to their village to buy their coconuts @ Rs.100. But I hear that Mr. MD these days is buying mangoes from sum other village. Anyone interested in selling mangoes to Mr. MD ???? ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: deveshkayal
Date Posted: 12/Nov/2007 at 12:32pm
|
You call your stockbroker to ask him the price of stock “X” which you are holding and wish to sell. He quotes a bid and offer price Rs 99/100, which means you will be able to sell it at Rs 99 and buy it at Rs.100. You ask him to sell 100 shares at a higher limit of Rs 102 and anxiously wait for the market to go up. You also ask him the price of stock “Y” which you wish to purchase. The bid and offer price is Rs 65/66. You can sell at Rs 65 and buy at Rs 66. You ask him to keep a limit of Rs 63 and buy 100 shares, and wait for the market to go down. The author, chairman, Parag Parikh Financial Advisory Services, specialises in behavioural finance. He will write every second week of the month on behavioural finance. ------------- "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beat the guy with a 130 IQ. Rationality is essential"- Warren Buffett |
Posted By: basant
Date Posted: 12/Nov/2007 at 12:53pm
|
Great post Devesh. parag Pareikh was just one of the few who did not invest in technology except for an odd Infy here and there.He underperformed and will continue to underperform bull markets but he knows his risk profile and does not chase returns.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: omshivaya
Date Posted: 12/Nov/2007 at 1:57pm
|
Great article Devesh jee. Thanks for sharing. ------------- The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it |
Posted By: kulman
Date Posted: 09/Dec/2007 at 3:16pm
|
Factoring human emotions into stock valuation
Source: http://www.thehindubusinessline.com/iw/2007/12/09/stories/2007120950520700.htm - HBL article here
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: deveshkayal
Date Posted: 09/Dec/2007 at 10:27am
|
Heuristic is the mental short cut the brain takes when processing information. It does not process the full information and this leads to biased or faulty decision making. Human beings are prone to follow certain rules of the thumb when making decisions. These decisions may not be rational, but since they are followed by all they become the standard. A very good example of this is when we give tips to the waiter who serves us in a restaurant. The acronym “TIPS” stands for “To Insure Prompt Service.” If that were the case, tips should be given at the start of the meal. However, we follow the rule of the thumb and we always tip the waiter at the end of the meal. There are different types of heuristics and we shall try to understand the Availability Heuristic, as it is very relevant in the stock markets. Investors, basing their decisions biased by the availability heuristic, stake huge amounts of money. We are subjected to huge amounts of information and what sticks in our mind is that information which we can readily recall. And this recall value comes with it being continuously and vividly displayed. Let’s take an example of an announcement by a company on its discovery of gas. The stock starts spurting as everyone starts buying on this news. Newspapers start flashing stories as to the size of such a discovery among other things. But let us analyse the situation without becoming a prey to mental heuristics. Gas has been discovered, but it needs to be drilled and it takes a lot of time and money. What is the quality of the gas? How many wells would be needed for drilling? How much time will it take? How much money would be required and what are the plans to finance it? These are all very important and pertinent questions. In the meanwhile, the company will have to go through so many uncertainties, before the profits are reaped. However, analysts start predicting the future profitability and investors start chasing the stock. This is how mental heuristics work, when the brain takes a shortcut in processing information and does not process the full information and its implications. The tech boom was built on the same logic. Everyone talked of eyeballs and profitability of the company did not matter. Companies having more eyeballs commanded a better valuation than their profitable counterparts. All available information was on the eyeball theory and most of the investors believed in the emerging new economy. Availability Heuristic made investors make irrational decisions and lose money. “Om Shanti Om” the latest bollywood hit is a case in point. If you saw the movie, you would be surprised that it is a big hit. Correct? Availability Heuristic is at play. All information on the movie that is fed to you is positive and vivid. And you wonder if something is wrong with your intellect. (TOI) (The author, chairman, Parag Parikh Financial Advisory Services, specialises in behavioural finance. He will write every second week of the month on behavioural finance) ------------- "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beat the guy with a 130 IQ. Rationality is essential"- Warren Buffett |
Posted By: valueman
Date Posted: 10/Dec/2007 at 5:20pm
|
Availability Heuristic made investors make irrational decisions and lose money. This is one reason why Warren Buffet does not rely on future predictions or new business but bases his investment decisions on the past 10 years performance of a Company . |
Posted By: xbox
Date Posted: 10/Dec/2007 at 4:12am
In India ITC falls in such investment category. ------------- Don't bet on pig after all bull & bear in circle. |
Posted By: basant
Date Posted: 10/Dec/2007 at 7:16am
|
Everyone has his own style. Had people wanted to invest on the basis of a01 year track record he would have missed Infy,Bharti, PRIL etc so there is really a conflict of theories here. Mere hsitorical data provides nothing because it is history which might or might not happen in future.
Personally i would look at historical data to see if the management uses cash effectively (RoCE/RoE), dilutes equity only when necessary and things like that.
India is not a 25% CAGR market but a closer to 40% CAGR market especiually with so many sectors opening up. Buffett had his own compulsions because US did not have the retail boom in 5 years. It was spread over 25 years; similarily for the other sectors.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: valueman
Date Posted: 10/Dec/2007 at 9:17am
I agree with u , Buffet principles cannot be transplanted directly in Indian Market at the current phase and if you do so then you will be having only select few stocks that meet such a Criteria .Buffett principles are more valid for a mature economy and not for a growing economy like India .However the fundamentals of his Investment Wisdom is priceless as ever and are valid for all markets at all times . So if you are a conservative investor you can apply Buffett Principles in Indian Equities now and get good returns ( with safety of principle ) but not multibagger but if you want Mult Baggers than you must apply Peter Lynch Principles but that involves risk . In fact Buffet himself said that he was able to achieve his results because he was in USA and he could not have done the same if he was in Bangladesh etc . |
Posted By: kulman
Date Posted: 16/Dec/2007 at 2:32pm
|
Last week, I placed a limit buy-order on Geojit Financial. Only half my order was filled. Later in the day, when I logged-in to check how my portfolio was doing, I found that Geojit had hit the upper circuit. I was pleased that I had timed my entry well. But I also found myself wanting the stock to go down because I wanted the rest of my order filled! ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: deveshkayal
Date Posted: 11/Feb/2008 at 3:07pm
|
The markets are currently being swayed between the emotions of greed and fear. When the markets are in a bull phase, everyone wants to buy faster than the neighbour. One finds stocks under buy circuit for days together, just becoming expensive by the day. Investors are distressed when they are not able to buy. Then comes a big correction and investors wonder if the party is over. Now, they want to sell faster than their neighbour. The stocks nose dive and we have an exactly the opposite situation. Stocks go on hitting lower circuits everyday and start losing value. Investors are distressed as they are not able to sell. How does one explain this behaviour? The same stock under bullish conditions was a favourite of all. The same stock loses flavour just because the markets are bearish. Are these people investing? Definitely no. This is speculating or, in other words, gambling. They are following the greater fool theory. Buy what others are buying, for there would be some other greater fool to buy it from you. You don’t mind being a fool as long as there is another greater fool to bail you out. This is one of the reasons for the huge volatility of the markets. Investors are unable to control their greed and fear. Two planes crash into the World Trade Center and the next day the world stops travelling. Airlines go empty. The fear is totally unjustified as planes do not crash into buildings everyday. This was one off event and people started giving undue importance to it. In fact, the next day was probably the safest day to travel by air. Behavioural economists call this the Saliency Effect. People lay too much importance on a one off event and extrapolate too much in to the future. They overreact to such events, assuming their repetitions, while evidence suggests the opposite. The chances of recurring are very minimal. However, fear starts dominating and people are prone to act irrationally. This is what is happening in the current situation. If the markets fall on a certain day, fear dominates and investors are reluctant to invest. Once the market bounces up, greed starts dominating and investors rush to buy. These are just salient events taking place on certain days and in no way should it affect one’s decision making if one is an investor. Such times come and go. One needs to have a longterm view on investments. Similar instances abound in the world of investing. An exceptional quarter earnings announcement by a company is extrapolated too far in to the future and the stock starts rising. This one off event of a quarter doing exceptionally well is assumed to set the trend for all the coming quarters and people start buying. Conversely, investors would punish a stock on just one quarter’s dismissal performance. So is the fickle minded behaviour of investors. (TOI) (The author, who is chairman of Parag Parikh Financial Advisory Services, specialises in behavioural finance.) ------------- "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beat the guy with a 130 IQ. Rationality is essential"- Warren Buffett |
Posted By: basant
Date Posted: 11/Feb/2008 at 3:34pm
|
I wasted some money in parag Pareikh's book! He like many others as Manish Dave says benefitted during the FERA days and have since then done little to show their skills in the real world.
He does write well, without doubt.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: Janak.merchant1
Date Posted: 23/Feb/2008 at 10:14pm
|
Hi TEd members, What do you people stay away from in the investment world?
Hardcore Warren followers do not invest in commodities.
Some just specialise in commodities.
Thanks for any views-feedbacks.
Best wishes,
------------- I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money. |
Posted By: manishdave
Date Posted: 23/Feb/2008 at 11:10pm
|
Janakbhai,
My strategy is, I have not strategy.
Jiske Tad Me Laddu, Uske Tad Me Hum.
Sometimes hardcore WB followers get it wrong. WB is not averse to commidities, he only likes it less. He purchased crude oil in '93. He also made trades in copper and probably in corn in past. It is abt understanding of mkt. His silver and currency trades are well known aprat from his trades in commodity stocks.
Some investors are so averse to commodities that they don't follow commodities. But to be more complete investor, one needs to learn something of everything and everything of something. IMO understanding of commodities, currencies markets, demand/supply of money/ shares makes you better investor in banking, FMCG, Real Estate etc. also.
I have mentioned abt Bill Miller and I would love to give his example again. He is one who would not invest in commodities and failed to change with time. He is known for beating S&P for 15 years in a row. But after that is a horror story.
|
Posted By: kulman
Date Posted: 23/Feb/2008 at 11:31pm
Those are quite thought provoking observations. Have you been following these since long time or is this a recent change in your investing style. I would like to know from you about this.
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: Janak.merchant1
Date Posted: 23/Feb/2008 at 5:09am
Hi Manish,
I am glad our thots are matching. Even i do not have any strategy. Actually the strategy is to have no strategy.
best wishes ------------- I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money. |
Posted By: Janak.merchant1
Date Posted: 23/Feb/2008 at 5:14am
Hi Manish,
Yes at times Warren has invested in commodities. Silver was a prominent case. And it was widely read.
Any idea why Bill Miller's returns were low? Did he lose any particular bets?
Best wishes
------------- I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money. |
Posted By: Janak.merchant1
Date Posted: 23/Feb/2008 at 5:20am
Dear Manish,
How have u benefited by not having strategy? Your view pl.
In my case, it has helped me to be open to new ideas. I was reluctant to visit TED when told about it. The root idea-notion was that all the blogs and sites were of no real use. Except Motley Fool. And selected few good ones. But nothing interactive and useful like TED. At least for the Indian Market.
If i had kept that same strategy or thoughts, i wud not hv visited TEd and met many woderful people over here.
Charlie Mungers advises to kill one popular idea every year. May be there is lot to it then i realise.
What do you say?
Best wishes
------------- I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money. |
Posted By: Janak.merchant1
Date Posted: 23/Feb/2008 at 5:32am
Hi Manish,
In the investment world, over a period of time, i observed that many people i came across, most of the times were just interested in taking ideas. They had very short term view of relationships. They just wanted to benefit from somebody else's ideas. At the same time, they did not want others to benefit from their ideas. It was all superficial. But then it is the way of life. We all have to accept few hard facts.
Here Basant has designed this interactive investment web site which i found very useful. His daily involment shows that it's his baby and he is passionate abt it.
I think he is the only Indian in the investment world to have designed such a woderful place where like minded people can interact. Lets us all give him a big applause 1 Billion
 And he has not restricted himself to any particular strategy of having only fundamental ideas or anything of that sort on TED. I found him very open to suggestions and giving his point of view. I feel to a certain extent he knows Charlie's mental models and follows them, consciously or unconsciously.
Your view Pl.
Best wishes
------------- I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money. |
Posted By: basant
Date Posted: 23/Feb/2008 at 7:43am
I stay away away from companies whose EPS I cannot predict, my initial strategy is to hold stocks that become cheap after every quarter (rising EPS) and I use the growth as my margin of safety.
A company with a PE of 40 automatically becomes a 20 PE company if the EPS grows by 100% and we need to be right for just 12 months in order to make the stock cheap and generate a margin of safety.
Anything that does not confirm to this strategy is beyond my scheme of things and I prefer staying out from.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: BubbleVision
Date Posted: 23/Feb/2008 at 10:45am
Manishji......According to me, this is one of the top 3 post on the TED so far, from what ever I have read.
Take a Bow!!!
------------- You can't make money if you are unwilling to lose...It's like willing to breathe in but not willing to breathe out. -- ED SEYKOTA ....Read Disclaimer! |
Posted By: Janak.merchant1
Date Posted: 23/Feb/2008 at 11:36am
Hi BAsant,
I hv always found that predicting eps is a very tricky issue. I do not hv any particular expertise for it. So i try to go for much higher MOS.
Best wishes, ------------- I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money. |
Posted By: manishdave
Date Posted: 24/Feb/2008 at 10:20pm
|
Kulmanji,
http://www.theequitydesk.com/forum/forum_posts.asp?TID=1503 - http://www.theequitydesk.com/forum/forum_posts.asp?TID=1503 Janakbhai, Looks like you are hooked up to TED. |
Posted By: kulman
Date Posted: 24/Feb/2008 at 10:41pm
 I have been given to understand that he is a very kind & generous person who doesn't charge friends & especially loyal TEDies.
TED is very addictive is all I can say to JM bhai.
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 16/Mar/2008 at 12:59pm
|
http://money.cnn.com/2008/03/07/pf/funds/market_risk.moneymag/index.htm - Keep your cool in a dangerous market
Views/comments/analysis......welcome!
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: BubbleVision
Date Posted: 16/Mar/2008 at 1:35pm
Fwiw....
“If you wish to trade for a living you might consider studying yourself."………Ed Seykota
------------- You can't make money if you are unwilling to lose...It's like willing to breathe in but not willing to breathe out. -- ED SEYKOTA ....Read Disclaimer! |
Posted By: valueman
Date Posted: 16/Mar/2008 at 8:47pm
|
This is the best piece I found : For
proof, consider the crash of October 1987 and its aftermath. Had you
owned an S&P 500 index fund, you would have lost 23% during that
month, including a stunning 21% on Black Monday, the 19th. Had
you sold, you would have locked in that loss. But had you stuck it out,
you would have gotten back to even in 20 months. And then you would
have participated in the great bull run that followed, racking up an
annualized 15% return over the next 10 years. ------------- To achieve satisfactory investment results is easier than most people realize ; to achieve superior results is harder than it looks . Benjamin Graham. |
Posted By: kulman
Date Posted: 20/Mar/2008 at 5:29pm
------------- Life can only be understood backwards—but it must be lived forwards |
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Posted By: rider.royal
Date Posted: 28/Mar/2008 at 3:48pm
|
Here's a very intersting anecdote that describes how an "asset bubble" *builds up and what are its consequences. Read it even if it confuses you a bit...things will be clear as you reach the end.... ANCEDOTE - Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollar as there were only two pieces of 1 dollar coins circulating around. 1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar. 2) B decided to purchase the land from A for 1 dollar. So, A and C now each own 1 dollar while B owned a piece of land that is worth 1 dollar. 3) C thought that since there is only one piece of land in the country and land is non produceable asset, its value must definitely go up. So, he borrowed 1 dollar from A and together with his own 1 dollar, he bought the land from B for 2 dollar. A has a loan to C of 1 dollar, so his net asset is 1 dollar. B sold his land and got 2 dollar, so his net asset is 2 dollar. C owned the piece of land worth 2 dollar but with his 1 dollar debt to A, his net asset is 1 dollar. The net asset of the country = 4 dollar. 4) A saw that the land he once owned has risen in value. He regretted selling it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollar from B and and acquired the land back from C for 3 dollar. The payment is by 2 dollar cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollar. But since he owed B 2 dollar, his net asset is 1 dollar. B loaned 2 dollar to A. So his net asset is 2 dollar. C now has the 2 coins. His net asset is also 2 dollar. The net asset of the country = 5 dollar. A bubble is building up. (5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollar. The payment is by borrowing 2 dollar from C and cancellation of his 2 dollar loan to A. As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollar. B owned a piece of land that is worth 4 dollar but since he has a debt of 2 dollar with C, his net Asset is 2 dollar. C loaned 2 dollar to B, so his net asset is 2 dollar. The net asset of the country = 6 dollar. Even though, the country has only one piece of land and 2 Dollar in circulation. (6) Everybody has made money and everybody felt happy and prosperous. (7) One day an evil wind blowed. An evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollar in circulation, I think after all the land that B owns is worth at most 1 dollar only." A also thought the same. (8) Nobody wanted to buy land anymore. In the end, A owns the 2 dollar coins, his net asset is 2 dollar. B owed C 2 dollar and the land he owned which he thought worth 4 dollar is now 1 dollar. His net asset become -1 dollar. C has a loan of 2 dollar to B. But it is a bad debt. Although his net asset is still 2 dollar, his Heart is palpitating. The net asset of the country = 3 dollar again. Who has stolen the 3 dollar from the country ? Of course, before the bubble burst B thought his land worth 4 dollar. Actually, right before the collapse, the net asset of the country was 6 dollar in paper. his net asset is still 2 dollar, his heart is palpitating. The net asset of the country = 3 dollar again. (9) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollar bad debt to B but in return he acquired the land which is worth 1 dollar now. A owns the 2 coins, his net asset is 2 dollar. B is bankrupt, his net asset is 0 dollar. ( B lost everything ) C got no choice but end up with a land worth only 1 dollar (C lost one dollar) The net asset of the country = 3 dollar. There is however a redistribution of wealth. A is the winner, B is the loser, C is lucky that he is spared. A few points worth noting - (1) When a bubble is building up, the debt of individual in a country to one another is also building up. (2) This story of the island is a close system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss. (3) An overdamped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 dollar. (4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the loser. The asset could shrink or in worst case, they go bankrupt. (5) If there is another citizen D either holding a dollar or another piece of land but refrain to take part in the game. At the end of the day, he will neither win nor lose. But he will see the value of his money or land go up and down like a see saw. (6) When the bubble was in the growing phase, everybody made money. (7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A ) and take part in the game. But you must know when you should change everything back to cash. (8) Instead of land, the above applies to stocks as well. (9) The actual worth of land or stocks depend largely on psychology. |
Posted By: kulman
Date Posted: 07/Apr/2008 at 3:27pm
|
Here is
an excerpt from article appeared in ToI couple of weeks ago.... Greed and overconfidence were at the forefront. Why did this expensive issue
become a mother of all issues to be overwhelmingly oversubscribed? Greed: investors
were so greedy that they even borrowed to apply. They were blind to the
expensiveness of the offering. Availability heuristic was at play: All
the available information on Reliance Power was positive. The advertisement
campaign talked about powering Next is the turn of representative
thinking. The grey market premium was representative of the profits to be
made on listing. Overconfidence bias: The investors also understood
that the stock offering price of around Rs 430 to 450 was expensive but all
were confident that they would sell their stock on listing and make a clean
profit. The greater fool theory was at work. Surprisingly even
the qualified institutional investors were also thinking on the same lines. Wisdom ignored: Just 10% had to be allotted to
investors. A fair and a reasonable price would have earned immense investor
goodwill. A win-win situation for everyone. This is what Dhirubhai would
have done. He truly understood the value of investor goodwill, trust and
faith. Lesson: Everyone meant well but
allowed their emotions to control them. Greed
and envy were the culprits. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: rakeshmehta48
Date Posted: 07/Apr/2008 at 4:54pm
I disagree to some extent. Greed, no doubt is a very strong emotion and comes into play almost daily for a trader
but
the strongest is Fear.
One may control Greed (Sometimes) but virtually impossible to control Fear.
------------- Fund Management is Most Important |
Posted By: basant
Date Posted: 07/Apr/2008 at 5:06pm
Pearls of wisdom. Investor selling out of fear from falling stock prices is an inexplicable feeling. The comfort comes only after the trade has been executed - either way.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: rakeshmehta48
Date Posted: 07/Apr/2008 at 5:27pm
|
Very rightly said Basant Ji.
This is practical experiance speaking.
And it cann't be learned from readings only. ------------- Fund Management is Most Important |
Posted By: basant
Date Posted: 07/Apr/2008 at 5:35pm
|
I used to derive great comfort from selling stocks that had gone down a lot in the early part of my career. Since then I learnt that such a comfort comes at a big price. I now wait for rebound or a rally to sell even if I make up my mind about selling.
Though in long term investing sucha situation does not come very often since we are holding stocks but i used this strategy to exit Tv18 and NW18 last year.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: rakeshmehta48
Date Posted: 07/Apr/2008 at 5:53pm
|
No market in this world goes one way, for ever.
Otherwise it will reach zero or infinity.
All bull markets at some stage will have sevear corrections (because of stops already hit/profit booking)
Likewise all bear markets will have very very sharp rebounds (Maybe stops already hit or short covering)
An astute investor will use these opportuinities to load or exit. ------------- Fund Management is Most Important |
Posted By: kulman
Date Posted: 07/Apr/2008 at 6:21pm
One has to conquer both Greed & Fear equally to achieve this. It's easier said than done. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: rakeshmehta48
Date Posted: 07/Apr/2008 at 6:53pm
You are very right Kulman Ji
Both "Greed" and "Fear" are deadly and one must conquer both.
It's definately easier said than done.
In my fight, I found "Fear" slightly more dangerous than "Greed" ------------- Fund Management is Most Important |
Posted By: omshivaya
Date Posted: 07/Apr/2008 at 9:46pm
|
Greed is a large tree, whose root is also fear. Trying to figure out what is the difference between normal fear & greed's fear is vital!
This is IMHO...though I am in no way any expert ike others above are!! ------------- The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it |
Posted By: rakeshmehta48
Date Posted: 07/Apr/2008 at 10:21pm
|
Om Ji
This is a syndrome, which I am trying to overcome.
But greed and fear have become an integral part of our day to day life, so it becomes difficult to trade without these emotions.
It may be very difficult in real life to overcome these feelings but in trading at least, I try for it and still away from desired success rate.
No one is expert and perfact in trading. And I also try to improve upon my mistakes. ------------- Fund Management is Most Important |
Posted By: Janak.merchant1
Date Posted: 07/Apr/2008 at 10:36pm
I am of the opinion that we need to just accept them. Being aware about those two feelings will help us avoid many traps. ------------- I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money. |
Posted By: kulman
Date Posted: 07/Apr/2008 at 10:45pm
Oh okay....taking cue from your tagline: I love your opinion not your money. On a serious note, you are probably right. Jason Zweig who has done lots of research on http://www.theequitydesk.com/forum/forum_posts.asp?TID=1442&PN=2 - Neuro-economics says this...
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 12/Apr/2008 at 12:49pm
|
http://www.dnaindia.com/report.asp?newsid=1159456&pageid=5 - Random
stock market quite ordered
Excerpts....
The
$32 price is termed a support level and is considered an obstacle to further
downward movement. Stocks often seem to move between support and resistance
level. So one rule followed by technical analysts is to buy the stock when it
“bounces” of its support level and sell it when it “bumps” up against its
resistance level. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 13/Apr/2008 at 9:05pm
|
Interesting one...a MUST READ! http://www.businesstimes.com.sg/sub/money/story/0,4574,274799,00.html? - Don't
be afraid to be a contrarian .........minutes
after the final attack, a witness called the police. Police and medical
personnel arrived within minutes of the call. Genovese was taken away by
ambulance and died on the way to hospital. None of those who saw the attack take place bothered to call the
police, he was
told. Rosenthal
then assigned a reporter to investigate the 'bystander angle' of the
incident. Within a week, The Times published a long, front-page article.
The initial paragraphs of the report ran like this: 'For more than half an
hour 38 respectable, law-abiding citizens in 'Twice
the sound of their voices and the sudden glow of their bedroom lights
interrupted him and frightened him off. Each time he returned, sought her out
and stabbed her again. Not one person telephoned the police during the assault.
One witness called after the woman was dead. 'He
can give a matter-of-fact recitation of many murders. But the Rosenthal
subsequently wrote a book on the subject and attributed the non-action of
witnesses to apathy. 'Nobody can say why the 38 did not lift the phone
while Miss Genovese was being attacked, since they cannot say themselves,' he
wrote. 'It can be assumed, however, that their apathy was indeed one of the
big-city variety. It is almost a matter of psychological survival, if one is
surrounded and pressed by millions of people, to prevent them from constantly
impinging on you, and the only way to do this is to ignore them as often as
possible. Soon
psychologists were attracted to the case. And Latane and Darley came up with
the explanation that it was because there were 38 witnesses that no one had
helped. Two
reasons were offered as to why a bystander to an emergency will be less likely
to help when there are a number of other bystanders. One, with several
potential helpers around, the personal responsibility of each individual is
reduced. 'Perhaps someone else will give a call or call for aid, perhaps
someone else already has.' The
second reason is as follows: Very often an emergency is not obviously an
emergency. Is the person lying in an alley a heart-attack victim or a drunk
sleeping one off? Is the commotion next door an assault requiring the police or
an especially loud marital spat where intervention would be inappropriate and
unwelcome? What is going on? In
times of such uncertainty, people's natural tendency
is to look at the actions of others for clues. We see how others around us are reacting and then decide
whether the event is or is not an emergency. In
his book Influence, Robert Cialdini says everybody
else observing an event is likely to be looking for social evidence,
too. 'Because we all prefer to appear poised and unflustered among others,
we are likely to search for that evidence placidly, with brief, camouflaged
glances at those around us. Therefore everyone is likely to see everyone
else looking unruffled and failing to act. As a result, by the principle of
social proof, the event will be roundly interpreted as a non-emergency.' This,
according to Latane and Darley, is a state of pluralistic ignorance 'in
which each person decides that since nobody is concerned, nothing is wrong.
Meanwhile, the danger may be mounting to the point where a single individual,
uninfluenced by the seeming calm of others, would react'. So
in essence, the cause of inaction is the simple
state of uncertainty. Meanwhile,
experiments also found that we are likely to use
the actions of others to decide proper behaviour for ourselves, especially when
we view those others to be similar to ourselves. This
tendency.............when we are uncertain of a situation, can be observed
in the stock market as well. For
example, in the late 1990s and early 2000, many were uncertain about how to
value dotcom companies. This new breed of companies was said to be about
to revolutionise how business was done, and their earnings were seen to have
the capacity to grow at an exponential rate if they could be first in the
market. In
the confusion, some analysts began to value these companies based on the
number of eyeba*ls the dotcoms could capture. And ridiculously, the higher
a company's burn-rate for its cash, the higher it was valued. Companies were
also valued based on their sales, since there were no profits to speak of. Soon,
these metrics became acceptable ways to value a dotcom company, and more
and more people in the market started using them. That is, 'until the
euphoria mounted to the point where a single individual, uninfluenced by the
seeming frenzy of others, would react by selling the dotcom stocks'. The
same goes for an undervalued stock. Say, you spot a stock you think is very
cheap. It is fundamentally sound but is in an out-of-favour sector.
It is trading at only two times enterprise value over its earnings before
interest, tax, depreciation and amortisation. This was mentioned in passing in
the press, and the price did rise, but then the market's interest in the stock
slowly died down. In such a situation, the average investor would start
asking why a stock is so cheap, yet nobody is buying it. He will try to
explain it away by saying, 'others must know something that I don't',
and in the process, may miss a two or three-bagger. The
market will wake up to the stock's potential
'when a single individual, uninfluenced by the seeming ignorance of others,
reacts by buying the stock'. Such action, if it is by a respected
investor, will be the validation needed by others to come round to the realisation
that the stock is cheap. As
the almost legendary Teng Ngiek Lian of Target Asset Management puts it: 'A
great investor is never scared to be a contrarian.' ....I
believe the findings that humans have a tendency to take a cue from those
around when they are uncertain about how to behave, ring true. That's
why to be able to think independently is such a prized quality to have. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: Ajith
Date Posted: 13/Apr/2008 at 10:53pm
|
I feel John Allen Paulos is dead wrong.While luck and chance play a role,superior selection based on insight results in superior profits. Jim Rogers lived and breathed stocks for a few years and turned in outstanding results based on insight and no mathematical model can explain that away.And there are other lesser mortals like him. ------------- Ajith |
Posted By: kulman
Date Posted: 14/Apr/2008 at 9:27am
Excerpts from an article in ToI by Parag Parikh….
The market never
goes down in one shot. It sways
between fear and greed, and drops gradually. In between, you get rallies
when people feel the worst is over and jump in, only to find the next day that
they made a mistake. When such
“Cheater's Rallies” occur, more people get trapped by them. The important
thing at this stage is to keep greed under control. Human nature wants activity, right now, it’s introspection time.
Investors should also
avoid little-known large companies. In a bubble, little companies may
become large due to the market cap rising because of a spike in the share
price. Hyderabad-based Visual Soft, during the IT boom, is a fine example. Its
stock price shot up to Rs 10,000 (face value of Rs.10). It was recommended
heavily by reputed analysts. Investors lost a fortune when the tide turned. Financial Technology is another
little-known company that got attention because the financial sector was growing
fast. It promoted the Multi Commodity Exchange of India. It’s a good company with able promoters and a good
business model. But, with a triple digit valuation of over 120 P/E, in the
mid-cap category is not a good investment idea. Behavioral lessons: Be
fearful still, and avoid greed. Do not be anchored to past prices of stocks. Being in cash is also investing. Opportunities don't
come everyday, but when they do, you must have the cash to buy. We have seen a bull phase for
the last four years. Can it go on forever? Investment
opportunities come in bear phases. Shouldn’t we be happy that such times are
going to come? |
Posted By: basant
Date Posted: 14/Apr/2008 at 10:03am
Chatlal was a big proponent of VVisualSoft in the 2k boom and I had a swipe at it after it fell 50% from his recommended price. The stock finally fell 95% from its peak!!!
Bharat Shah of the erstwhile Bioirla MF went overboard on Visual and toiok it upto 17% of his portfolio before he was trapped.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: Janak.merchant1
Date Posted: 14/Apr/2008 at 11:33am
Dear Mr. Kulman,
I can give my opinions, but not my money. (Have burnt my bank balances in past by giving loans)
With my opinion and your money, we can make wise investments! Do invest in my company-fund in future !!!!
JM
------------- I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money. |
Posted By: deepinsight
Date Posted: 15/Apr/2008 at 2:33pm
|
Kulmanjee: Can you provide the link in TOI? I could not find the whole article. ------------- "Investing is simple, but not easy." - Warren Buffet |
Posted By: kulman
Date Posted: 15/Apr/2008 at 9:26pm
It's in http://epaper.timesofindia.com//? - ePaper . Please check Times of India-Mumbai edition, April 14, 2008 issue, under section Times Business, Page 22. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 22/Jun/2008 at 8:32pm
Excerpted from ToI epaper 17th June'08 page 22 ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: basant
Date Posted: 22/Jun/2008 at 9:08pm
|
I find his articles full of sense but not his investments. Is there a dichotomy between academic knowledge and actual work on the ground. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: kulman
Date Posted: 22/Jun/2008 at 10:12pm
The answer is an affirmative yes. e.g. yours' truly. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: basant
Date Posted: 22/Jun/2008 at 10:19pm
Oh I did (could) not mean that! When did you write a book on Investing? ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: kulman
Date Posted: 22/Jun/2008 at 10:22pm
|
Copy-pasting others' great thoughts is also a kind of writing.
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: deepinsight
Date Posted: 24/Jun/2008 at 10:25pm
|
great reading... source: http://naatmad.com/2008/06/11/the-psychology-of-losing-explaining-investors-bear-market-behaviors/ - http://naatmad.com/2008/06/11/the-psychology-of-losing-explaining-investors-bear-market-behaviors/
http://naatmad.com/2008/06/11/the-psychology-of-losing-explaining-investors-bear-market-behaviors/ - The Psychology of Losing - Explaining Investors’ Bear Market Behaviors
Posted by http://naatmad.com/ - naatmad on Wednesday, 11 June, 2008 By Lynn Carpenter (US Stock market analyst) Confession time. This is the first bear market I understand as a loser. Imagine that. I was in Magellan Fund when Peter Lynch ran it. I write newsletters, for heaven’s sake. I have a record of finding great stocks before they get hot. And I’ve seen plenty of bear markets before this one. And for the first time ever, I open my account and feel like a loser.
True, only one position bugs me. But it is the single investment that may be most like the investments thousands of people make. It’s become an amazing window into how a “market” thinks. I bought the losing stock because someone I trust told me about it (you know who you are, love of my life). This is someone with a record of finding phenomenal global stocks that go up hundreds of percents … an expert in Asia. But the buzz led him to this little penny stock that was supposedly capturing attention. First mistake - I don’t buy penny stocks. They’re OK for those who enjoy wild-eyed speculation based on what they think other people are doing. But they don’t fit my long-term value profile. Or even my “reasoned and disciplined speculation on major stocks for good reason” profile. I shouldn’t have done it. I don’t know beans about penny stocks. Second mistake - I did no research of my own. Not even checking to see if I liked what the company had done so far, what it made or sold, or even what its plans were. Stupid, stupid, stupid. Did I mention that was really dumb of me? Third mistake -I had no reason for investing. “Because someone said it’s going to go up” does not count. There has to be a cause. It’s going to go up because … pick one: sales are rising, a new contract is a big deal, the new product will grab market share, margins are improving, or even there’s momentum, which I can see because MACD just crossed positive and the stock had a point-and-figure triple-top breakout. Even speculations need some facts underfoot. Refer to Chart_3.jpg But this one stock has taught me how it feels to invest not knowing enough. Millions of investors are in my shoes. They bought something because their broker had it on the hot list to push, because they read a magazine article about it, because Yahoo! Finance keeps pushing it, or because someone they know recommended it. The most enlightening thing about this is that suddenly I really understand all those technical patterns that happen in a bear market or in a single stock that has plunged. In theory, I know stocks that come off their bottoms have setbacks. This is the first time I’ve found myself thinking in ways that would cause such a thing. I’m down so much that when the stock came up a couple of pennies, I thought maybe I should sell and take what gains there are. That is exactly what happens in a bear market when stocks hit their final (or significant) bottoms and begin to rise. Millions of people are watching, and at least some of them think, “at last, I get a little more than I had last week, better take it now.” Then the rising stock falls again. But if the bottom really was the bottom, then before the stock hits it or gets close, it begins another rise. This time, it may go past its recent sell-off spot because those people already got out. This time, if you look at a chart with volume-by-price bars along the side, you can almost guess where another sell-off is going to happen - at the spot where the largest blocks of buying occurred before the bottom. At that point, millions are watching and some of them are thinking, “thank gosh I’m back to even, and I’ve had enough pain. I’m getting out.” Similar reactions happen when stocks get to old support areas, which are spots the stock kept falling to, but not through, for a long time. Sell-offs of rising bear-market stocks also occur where very large and sudden drops happened in the past. In all these cases, the mental tape is the same, “I’m finally better off than I was, and this stock still scares me. I’m outta here before it goes down again.” The chart for Sears Holdings (not the stock I bought) shows how that works. When it comes to a loser like the one that’s bugging me, it makes sense to sell out at any of the emotional points. Or at least it makes more sense than it did for me to buy the fool thing in the first place. But for most of your stocks - which I hope are like most of my stocks - a different bear market strategy is in order. You should acknowledge that the selling on the way up from a bottom is not necessarily a sign that anyone knows something you don’t. Most likely, it is caused exactly by people who don’t know nearly as much as they should - people who are easing their emotional pain, not behaving in any rational way. If you know why you bought your stocks, what you expected from the company and whether it’s on track, then you can hold intelligently at those places where others panic. You’ll get the rest of the ride up. They won’t. Now I have this stock to sell, because I can’t stand feeling like a loser.
------------- "Investing is simple, but not easy." - Warren Buffet |
Posted By: kulman
Date Posted: 07/Jul/2008 at 9:43pm
Nice read...
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 09/Jul/2008 at 9:09am
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 11/Jul/2008 at 10:32am
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 16/Jul/2008 at 7:50pm
Excerpts from another Jason Zweig article...
Simple, but not easy. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 20/Jul/2008 at 2:40pm
Know thyself is the most common message usually given by great people & I guess has something to do with spiritual connection. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 21/Jul/2008 at 9:46am
|
I'm reading a very interesting book titled Investment Psychology Explained by M. Pring. This excerpt is from a chapter that looks at peculiar psychological misbehaviour:
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 22/Jul/2008 at 10:08am
Irrational markets: Concentrate on picking up valueParag ParikhExcerpts....
All of a sudden, market sentiment has swung from excessive optimism to subdued
pessimism. This is interrupted by a few spells of hope, when the markets
rebound on some days, only to correct later. They go on offering hope, now to
bulls, now to bears. This is one way to identify cheaters’ rallies. At present, investor perception is changing. Expectations
built into the prices of stocks are waning. Investors are now looking only at negatives. It is not as
though these didn’t exist before, but today, they have the attention of
investors and the media. All available information is negative. In spite of
this, when the indices take a U turn and rise, investors forget their original
fears, and greed drives them to enter the markets. Let’s understand the nature of the stock markets. When
there’s widespread optimism—as was the case in 2006 and 2007—every negative
factor is neglected. We had asset inflation, with the stock markets and real
estate markets going up by leaps and bounds. Commodity markets were also
soaring. But inflation was under control. Can that happen? And is it
sustainable? Now the inevitable has happened, and it should not surprise us at
all. Fears about a On the domestic front, reports are flowing in about the
delayed monsoon and about drought in parts of The
bullish stock market led to paper profits, which were diverted to real estate.
Lower interest rates encouraged people to borrow and to buy inflated assets.
The rise in interest rates and the fall in the stock markets has ensnared
people and corporations in a debt trap. Rising interest rates will increase
EMIs from 15 years to as much as 35 years. Just look at newspaper
advertisements: big corporations are selling real estate through closed
auctions. Participate in one and see how prices have fallen. A four-year bull run cannot just vanish in four months.
However, such times will offer tremendous opportunities for investors.
Attractive valuations have become a reality. Of course, you must be a long-term
investor, as these pains could linger. Don’t worry about where the index is
going, or what news is coming. Concentrate on picking up values: good
management, good business model, and a healthy balance sheet. Are you paying the right price? And what
is the right price? Answer: one with no built-in investor expectations.
Investing is all about buying when everyone is selling. That’s how values
emerge. When the markets fluctuate daily, based on news of oil prices, global
market trends, political developments and quarterly results, it is a sure sign
of weak sentiment. http://epaper.timesofindia.com/Default/Scripting/FindView.asp?skin=TOI&AppName=1&GZ=T&BaseHref=TOIM%2F2008%2F07%2F22&sLanguage=English&SortFieldIssue=PageNo&SortOrderIssue=asc&SortFieldRange=IssueDateID&SortFieldRange=desc&sQuery=parag+parikh&x=26&y=11&NumDays=7 - Concentrate
on picking up value ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: bassein
Date Posted: 30/Sep/2008 at 11:31pm
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Herd mentality rules in financial crisis By Maggie Fox, Health and Science Editor 2 hours, 58 minutes ago WASHINGTON (Reuters) - Herd mentality rules during a financial crisis because people are wired to follow the crowd when times are uncertain, experts say. Brain and behavior studies clearly show that when information is scarce and threats seem imminent, people often stop listening to their own logic and look to see what others are doing. "People are afraid, and the reason they are afraid is there tremendous uncertainty right now in the markets," Gregory Berns, a neuroeconomist at Emory University in Atlanta who studies the biology of economic behavior, said in a telephone interview. Berns puts people in magnetic resonance imaging or MRI scanners while he tests their responses to various scenarios, and studies patterns of their brain activation. One clear pattern -- the brain's "fear center" lights up when people are uncertain. "When people are presented with a situation where they don't have information or the information is ambiguous, we see activation of the amygdala and insula," Berns said in a telephone interview. And people begin to doubt their own judgment. Bern's team did an experiment in which they recruited actors and true volunteers. "One real subject went into a (MRI) scanner," he said. They were asked to do a simple task, assessing shapes. "We had the group (of actors) tell them the wrong answer sometimes," Berns said. The volunteers began to change their answers to match what the group said. Perhaps they were merely overriding their own judgments for the sake of getting along, Berns said. But the scanner suggested another explanation. RUNNING WITH THE HERD "The group changes how you see the world in some way," he said. "Our brains are really wired to accept the group opinion of the world." In this case, running with the herd may not make good sense, said Paul Zak of the Center for Neuroeconomics Studies at Claremont Graduate University in California. "There is this sort of herd mentality over-reaction," Zak said in a telephone interview. "One of my colleagues actually pulled his money out of Washington Mutual a few weeks ago. He ought to know better." The U.S. government has taken over mortgage finance companies Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc has gone bankrupt, giant savings and loan Washington Mutual failed and Bank of America Corp bought Merrill Lynch & Co Inc. The U.S. House of Representatives rejected a $700 billion bailout on Monday, sending stock markets crashing globally. Zak said the reactions are illogical. "I see no evidence that a depression is coming but it seems like people are behaving that way," he said. The reason is evolution, Zak said. "We are really hyper-social apes. We learn almost exclusively from each other," he said. "Gossip is really important because it is another way that we learn socially. Separating out rumor from fact is difficult, particularly in these complex markets." Berns, whose book "Iconoclast" comes out this week and aims to teach people how to avoid this herd behavior, declined to dispense advice on weathering the current market. "I am not a financial genius. I do know that when you see millions of people in the market essentially freaking out, that spills over into your brain and you get this impulse to do what everyone else is doing," he said. Zak knows what he is doing. "I am buying stocks," he said. (Editing by Will Dunham and Jackie Frank) |
Posted By: kumardiwesh
Date Posted: 03/Oct/2008 at 9:33pm
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An article by Prof Bakshi:
http://www.sanjaybakshi.net/Articles/fear_factor.pdf - Fear factor ------------- "History does not tell you the probability of future financial things happening" - Warren Buffett |
Posted By: deepinsight
Date Posted: 04/Oct/2008 at 2:42am
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Summon Your Courage and Buy Stocks Investors Who Conquer Stock-Phobia Have an Edge Over Those Too Focused on Their Rearview Mirror
During the Great Depression, an entire generation became convinced that owning stocks was dangerous. But if you were among the courageous few who bought and held stocks during and after the Depression, you earned spectacular returns. Depression-level stock phobia might be making a comeback. Will you suffer from it or conquer it? This past Monday, a team of researchers conducted an online survey of nearly 600 people nationwide. The results constitute a unique real-time recording of what was running through people's minds from 1 p.m. to 5 p.m. Eastern time on the day the Dow was shedding nearly 778 points in a ragged panic. First and foremost, Americans are afraid. Asked whether "the financial challenges the country is facing now pose a greater threat to the quality of my life" than major natural disasters, 87% agreed; 83% were more worried about the financial crisis than a terrorist attack. Psychologist Paul Slovic of the University of Oregon, who led the study, had investors estimate the performance of their stocks and stock funds over the next 12 months and the decade to come. When Dr. Slovic last asked this question, in early 2001, only 6.7% of investors expected a zero or negative return during the coming year and a mere 1.3% thought they would have no gains over the next 10 years. This past Monday, however, 36% foresaw no profits in the next 12 months and fully 5% predicted that their portfolios would go absolutely nowhere for a decade. Investors seem riveted by what is happening, as if they were the witnesses to a fatal accident unspooling in slow motion before their eyes. The closeness with which Americans say they have tracked events "is really kind of astounding," says Dr. Slovic's collaborator at the University of Oregon, psychologist Ellen Peters. Asked how long they had watched the financial news on television each day in the past week, 74% said at least one hour and 15% said four hours or more. In short, investors' view of the decade to come is being shaped by the events of the last few days. Peering into the future, all they can see is the immediate past, which is full of anger, pain and distrust. As finance professor Meir Statman of Santa Clara University says, "Fear increases pessimism." Add it all up, and it is hard not to be bullish. As an intelligent investor, you must always ask: What is my edge? What information or skill do I possess that the people on the other side of the trade don't? In normal times, that is a high hurdle. Today, however, you need only two things in order to have an automatic edge: cash and courage. This past Thursday, Columbia Business School held a conference on value investing to commemorate the publication of the revised edition of Benjamin Graham's classic volume, "Security Analysis." Seth Klarman of Baupost Group in Boston is an editor of the book and one of the leading value investors in the country. "Normally, as a buyer you have to compete with a lot of very, very smart competitors," said Mr. Klarman. "But many of the smartest people are on the sidelines now because of redemptions, margin calls or panicked-out-of-their-mind selling. So you don't have to be as smart as you did before. You just have to be in the game." The day Mr. Klarman spoke, the Dow fell an additional 348 points, and 658 stocks, or more than 15% of the total, hit new 52-week lows on the New York Stock Exchange. Yet the word Mr. Klarman and several other speakers kept using was "excited." That is because investments everywhere are priced as if the whole solar system were going out of business. U.S. stocks have lost 24% since Jan. 1; foreign stocks are off 32%; emerging markets, nearly 40%; junk bonds are down 13%; even municipal bonds have fallen almost 10%. Money is pouring into U.S. Treasury debt -- so much so that stocks now offer more income than bonds do. The dividend yield on the Dow Jones Industrial Average is currently at 3.14%, higher than the 2.68% yield on the five-year Treasury note. With so many professional money managers afraid to act, with most of the public in the grip of fear and anger, you should put your cash and your courage to work. If you have no cash, use your courage: Rebalance by selling a little of anything that's gone up and buying more of whatever's gone down. If you have both cash and courage, make a list of 10 stocks you've always wanted to own at "the right price." Chances are, they are cheap. Better yet, think of an investment category you've long wanted to venture into, like emerging markets. Chances are, it is on sale. Just about everything is. ------------- "Investing is simple, but not easy." - Warren Buffet |
Posted By: kulman
Date Posted: 06/Oct/2008 at 11:11pm
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I guess it was posted earlier, but still worth reading again: This is how stock markets work!!! A cold winter! It was autumn, and the Red Indians asked their New Chief if the winter was going to be cold or mild. Since he was a Red Indian chief in a modern society, he couldn't tell what the weather was going to be. Nevertheless, to be on the safe side, he replied to his Tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared. But also being a practical leader, after several days he got an idea. He went to the phone booth, called the National Weather Service and asked 'Is the coming winter going to be cold?' 'It looks like this winter is Going to be quite cold indeed,' the weather man Responded. So the Chief went back to his people and told them to collect even more Wood. A week later, he called the National Weather Service again. 'Is it going to be a very cold winter?' 'Yes,' the man at National Weather Service again replied, 'It's definitely going to be a very cold winter.' The Chief again went back to his people and ordered them to collect every scrap of wood they could find. Two weeks later, he called the National Weather Service again. 'Are you absolutely sure that the winter is going to be very cold?' 'Absolutely,' The Man replied. 'It's going to be one of the coldest winters ever.' 'How can you be so sure?' the Chief asked. The weatherman replied, 'The Red Indians are collecting wood like Crazy.' ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: stockaddict
Date Posted: 06/Oct/2008 at 12:51pm
| ref to vivek's post, It's sad that E Mathew who was banned from giving public advice on shares appears regularly on CNBC which has wide viewership. It shows that public memory is indeed short! |
Posted By: kulman
Date Posted: 07/Oct/2008 at 9:35am
Be greedy when others are fearful..... and always be extremely careful. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: paragdesai
Date Posted: 10/Oct/2008 at 7:16pm
Stock Market Crash: Understanding the PanicMarket psychology experts weigh in on what's feeding the selling frenzy on Wall Street and when to look for investors' moods to changeby http://www.businessweek.com/print/bios/Ben_Steverman.htm - Ben Steverman Searching for a way to describe the current http://bx.businessweek.com/us-stock-market/ - stock market meltdown? Call it the "Panic of 2008." In the past century, the world has seen countless http://bx.businessweek.com/credit-crunch/ - financial crises , economic downturns, and market crashes. But the last major event to be called a 'panic' was the Panic of 1907. If ever it were appropriate to revive the term "panic," this is the time. The day-after-day declines in the stock market are unprecedented. The S&P 500, the broad U.S. stock index, has lost 22% of its value in six trading sessions, from Oct. 2 to Oct. 9. Brian Gendreau of http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?capId=4305940 - ING Investment Management points out that the Dow Jones industrial average, founded in the late 19th century, until this month had never seen six consecutive daily declines of 1% or more. Forget NormalNormally even falling stock markets take a break from time to time, as the vultures swoop in to pick up stocks at bargain prices. But now, the market's psychology is anything but normal. Every time the stock market rallies—as it did on the morning of Oct. 9—"there are tons of sellers everywhere," says Dave Rovelli, managing director of equity trading at http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?capId=824177 - Canaccord Adams . "People just want out." Panic in financial markets—just as in everyday life—is explained by the fight-or-flight instinct. "That makes people overreact," says Avanidhar Subrahmanyam, a professor and expert on market psychology at the UCLA Anderson School of Management. Not only are stock traders running scared, so are financial institutions. "You've got panics not only among individual investors but panic in the industry itself," says John Merrill, chief investment officer at Tanglewood Capital Management. Dysfunction in the credit markets means financial firms lack the confidence to transact business with each other. Irrational Despair?A panic is a "situation in which people do things that contradict rationality," says Paolo Pasquariello, a professor at the University of Michigan's Ross School of Business. But by that definition, is this really a panic? "It's difficult to say people are selling because they are panicking," Pasquariello says. Selling now isn't necessarily irrational, he says. There are plenty of good reasons to move from riskier to safer investments at a time when the financial system has stopped working and a serious economic slowdown looks imminent to many economists. By contrast, Subrahmanyam is more convinced the markets are behaving irrationally. It's not as if we've had a nuclear war and "real" assets were destroyed, he says. Rather, problems are in the financial sector, not the "real" activity in the rest of the economy. "The real, nonfinancial base of the economy is still fairly strong," he says—far stronger than during, for example, the Great Depression. Bargain Basement"Financial panics don't last forever," says ING's Gendreau. Eventually investors will realize that many assets are trading at deep discounts. "Either we're going to go into a Great Depression, or some of these assets are trading at very attractive prices," he says. Many market participants believe the wave of stock selling is being pushed by hedge funds and other institutions that must sell assets to raise cash. Often these assets—from stocks in solid companies to municipal bonds—are being sold without regard to their inherent value. But, before jumping back in the market, "You wait for the forced selling to run its course," Merrill says. So when might this downward spiral end? Because of our flight-or-flight instincts, Subrahmanyam says, "things are very quick to crash." But "the recovery takes much longer." You First"The market ultimately reaches a bottom," says Georgetown University finance professor Reena Aggarwal. However, "no one wants to be the first to move. The markets behave in a herd mentality." Pasquariello worries governments may simply blame market troubles on panic and irrationality—"on people being crazy." That gives them the excuse to step in and try to restore market confidence in artificial ways—such as the its recent ban on the short-selling of financial stocks, which he opposed. The real reasons for the financial crisis will "take a long time to fix," Pasquariello warns. By its nature, a crisis is a time of uncertainty. It could be months before we know whether markets are crashing because of irrational fear or because of real economic problems. And that's scary. |
Posted By: Mohan
Date Posted: 12/Oct/2008 at 3:55pm
WE have to figure out now if we are the Red Indian Chief or the weather man ? and then remember it ------------- Be fearful when others are greedy and be greedy when others are fearful. |
Posted By: Hitesh Shah
Date Posted: 21/Oct/2008 at 10:12am
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Anatomy of a bottomCommentary: Psychological characteristics of capitulation are largely absent
ANNANDALE, Va. (MarketWatch) -- Panic is not the same as capitulation. That in a nutshell captures much of the confusion over what happened in the stock market earlier this month. Without a doubt there was panic. The Dow Jones Industrial Average dropped more than 25% in less than a month. But capitulation is something different, as I have learned in recent weeks as I have read more and more about the subject. Capitulation has a number of distinguishing psychological characteristics, such as investor disgust and exhaustion. Having been burned by the market for so long, investors capitulate by resolving never, ever, to trust the market again. In the wake of capitulation, therefore, interest in the market declines. Apathy rules. To be sure, this definition cannot be mechanically measured. It is hard to pinpoint when investors become maximally dejected and apathetic. But my hunch is that we have yet to experience capitulation. For example, interest in the market is now at an all-time high. Individuals who I never knew were even aware of the stock market, much less that I write a column on investment strategies, are stopping me in the street to ask what's going on. One illustration of capitulation that I find particularly instructive, even though it is from a pre-Internet era: During bull markets, as well as during bear markets up until capitulation finally occurs, investors turn to the business sections of their morning newspapers to see how much they made or lost the previous day. At times of capitulation, in contrast, investors don't even bother to open the business section at all. From the perspective of this illustration as well, capitulation is yet to occur: Far from being ignored, business news is now splashed all over the front pages of newspapers' lead sections. Yet another perspective, this one more quantitative, is provided by a recent study by Ned Davis Research, the institutional research firm. They looked at all panics since 1929, searching for distinct patterns in what occurred immediately in their wakes. Panics were defined as declines in excess of 20% in a short period of time, and of course this last month most definitely qualified. Ten panics prior to the past month made the grade. The firm found that in, seven out of these 10 cases, the panic low did not mark the final low of the bear market. This was certainly the case during 2000-2002 bear market, for example. The panic low that occurred near the end of that decline came on July 23, 2002, according to Ned Davis Research, when the Dow closed at 7,702. The final bear market low didn't come until two and one-half months later, on Oct. 9, when the Dow closed at 7,286. Of course, a sample of just 10 isn't big enough to draw particularly confident conclusions. Nonetheless, based on this sample, odds would appear good that the final low is yet ahead of us. My guess is that, when that low does finally occur, we'll see be witnessing, and experiencing ourselves, a lot more of the psychological traits associated with capitulation: Exhaustion, disgust, lack of interest, even apathy. Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
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Posted By: Hitesh Shah
Date Posted: 23/Oct/2008 at 5:46pm
No comments on the article on capitulation? Is that a sign of capitulation or should I remove the post?
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