All in a day's work

Have you ever wondered why do companies always seem to declare liquidity problems only when it's too late?

The last time I shared my opinion on a bottom is on 7th Jan 09 when Dow Jones seems to break a resistance of 8900. But in that post I did not refer to the charts. To read about my previous post, click here

However, this time round, I'd still see this as a potential rally but not the end of the bear run.

I've used arrows to indicate technical support formed in recent times and highlight the levels with a horizontal line, as you can see from the chart. This time round, I am in the opinion that we should have the "strength" to test 7,500 again, the resistance line formed since Aug 08, a breach of this resistance line would then lead me to rethink abt a sustained rally. Previously, a rally don't last longer than a week, 7 days and at this current time, we have about 3 days left.

I've removed all indicators in my analysis as I think indicators do not work in the current market. The tracking of the change in sentiments by indicators is too slow, in a way. Nevertheless, I do hope that most of you saw the bottom and caught the rally the last 2 days.

Finally, this is just my opinion and open for discussion/critics.

“I AM the most offensively possessive man on earth. I do something to things. Let me pick up an ashtray from a dime-store counter, pay for it and put it in my pocket—and it becomes a special kind of ashtray, unlike any on earth, because it’s mine.”

The endowment effect is a hypothesis that people value a good more once their property right to it has been established. In other words, people place a higher value on objects they own relative to objects they do not.

The endowment effect was described as inconsistent with standard economic theory which asserts that a person's willingness to pay for a good should be equal to their willingness to accept compensation to be deprived of the good. This hypothesis underlies consumer theory.

‘Thaler (1980) coined the term “endowment effect” to refer to the finding that randomly assigned owners of an object appear to value the object more than randomly assigned non-owners of the object.

Example: Look around your house. Pick something. How much would you sell it for? How much would people really pay for it? How much would you pay for something like this at a second-hand store?

What is Gambler's Fallacy?

Am i having a traits of a gambler in my investment decisions


Gambler's Fallacy, in Behavioral Finance, is the belief that if deviations from expected behavior are observed in repeated independent trials of some random process then these deviations are likely to be evened out by opposite deviations in the future.

This simply means this:

If a coin is tossed repeatedly and heads comes up more often than tails, a gambler may incorrectly believe that heads is more likely to appear in the future. But as a matter of fact, a coin has two sides and the chance of heads or tails is always 50-50.

An experiment carried out by Amos Tversky and Daniel Kahneman shows that people see (streaks of) random events as being non-random when they are actually much more likely to occur in small samples than expectations.

In relation to investing:

Do you gamble on the bottom more often at the start of a certain drop?
Have you considered the reasons of an entry/exit or are you just hopeful?
Do you see IPO as a sure-win opportunity?

Make sensible decisions based on analysis and not hear say or gut feeling as regret on a loss is always a worse feeling that the joy of a profit, Loss Aversion.

What is Loss Aversion in Behavioral Finance?

First and foremost. I am not a guru in this area but I've been interested in this for some time and did some readup. My posts on this topic, for sharing, might be fairly shallow and critics would be apppreciated.

"Behavioral finance is a rapidly growing area that deals with the influence of psychology on the behavior of financial practitioners."

"Behavioral finance is the application of psychology to financial behavior—the behavior of practitioners."

"Behavioral finance is the study of how psychology affects financial decision making and financial markets."Shefrin (2001)

For a while, theoretical and empirical evidence suggested that CAPM, EMH and other rational financial theories did a respectable job of predicting and explaining certain events. However, as time went on, academics in both finance and economics started to find anomalies and behaviors that couldn't be explained by theories available at the time. While these theories could explain certain "idealized" events, the real world proved to be a very messy place in which market participants often behaved very unpredictably.

Important Characters to BF:

Daniel Kahneman and Amos Tversky

• Fathers of behavioral economics/finance in the late 1960
• Published about 200 works, relating to psychological concepts with implications for BF
• In 2002, Kahneman received the Nobel Memorial Prize in Economic Sciences for his contributions to the study of rationality in economics
• Focused much of their research on the cognitive biases and heuristics that cause people to engage in unanticipated irrational behavior.

Richard Thaler

• This field would not have evolved if it weren't for economist Richard Thaler.
• During his studies, Thaler became aware of the shortcomings in conventional economic theoryies as they relate to people's behaviors.
• After reading a draft version of Kahneman and Tversky's work on prospect theory, Thaler realized that, unlike conventional economic theory, psychological theory could account for the irrationality in behaviors.
• Thaler went on to collaborate with Kahneman and Tversky, blending economics and finance with psychology to present concepts, such as mental accounting, the endowment effect and other biases.

The presence of regularly occurring anomalies in conventional economic theory was a big contributor to the formation of behavioral finance. These so-called anomalies, and their continued existence, directly violate modern financial and economic theories, which assume rational and logical behavior.
Examples of Anomalies: The Winner's Curse, January Effect, Equity Premium Puzzle and etc.

Conventional financial theory does not account for all situations that happen in the real world. This is not to say that conventional theory is not valuable, but rather that the addition of behavioral finance can further clarify how the financial markets work.

It has been a long time since I last posted and I wonder if my site is still being visited.

But nevertheless, I will be posting on a series of posts about something in Behavioural Finance. Something which I think will help everyone understand a little bit more about themselves in their investing journey.

This series of posts will be done and completed by End Feb. I am expecting to post about 10 posts which will be completed by end Feb, early March.

So stay tuned!

This post is just to bring about some thoughts to the current situation which hopefully some of you might find interesting.

1. The first huge spike from the left of the chart on 1929.

Right before the run-up, we can see some resistance from 1900 to 1926 before a bull run that ended in 1929. This run increased Dow Jones by a good 138% within 4 years.

That spike happened in 1929 before it collapsed to 44.17 points, this also meant that within 4 years, Dow Jones lost almost 89.2% of it's value.
I stress again, 89.2%.

2. The recovery from 1929.

If an investor added a position at the peak of the bull run on 1929, he would have to wait 30 years before he managed to break even, not considering the dividends that he might received throughout the entire holding period.

This once again stresses the importance of entry price for long term holding as it determines the yield thereafter from divvy.

After the recovery to it's previous high which took 30 years, the stock market tanked for almost another 30 years, from 1958 - 1986 thereabout.

3. The break of the 1000 mark and beyond

This historical peak of 1,000 was finally breached around 1983. This is the start of a monstrous run which was never seen in history.

Since 1983 till 2008, a period of 25 years, Dow Jones not only broke the 10,000 mark but in fact hit 13,930. In 25 years, Dow Jones increased 1393%.

Once again, I repeat myself, in 25 years, DOW JONES went up 1393%.

A few questions which I think can be pondered on would be:

1. Did the economy improve so much in the last 25 years to warrant such an astronomical increase, if we consider that the saying of the stock market being a reflection of the economy is true.

2. What then could be the reasons for such a sudden increment in Dow Jones

3. If PE ratio is a reflection of the investor's confidence in the company's future earnings, what motivated them to push PE ratios upwards

4. What causes Dow Jones to lose almost 90% back in 1929 (This can be easily found online, just google it.)

5. Lastly, will this be a repeat of 1929 or rather, has the run-up been way too strong to be justified by current share prices implying room for further drop, back to the times when the stock market reflects the economy in that time.