Posts Tagged ‘markets’

What a rebound!

March 26th, 2009 No comments

It’s been a while since I last posted – three weeks to be exact. I just went back and read my last post. Wow – so much has changed! I last wrote on March 5th when the S&P 500 was trading near 675, we had been beaten up for six of the previous seven days, and there was much despair. I wanted to call a bottom, but was hesitant to do so given I was already wrong when we were near 750.

Now, three weeks later, the S&P 500 is trading at about 825. That’s a gain of just over 22%. If I’d taken a position in the leveraged S&P 500 ETF I was considering, I’d be up about 44.5%! That certainly isn’t bad in three weeks. Alas, if only I had. We’ve all heard the phrase “Hindsight is 20-20″ – nowhere is it more true (and more painful) than in the financial markets. In hindsight if I’d gotten in on the double-long ETF, I’d have made quite a bit; in hindsight if I’d not been in Lehman at the time of the collapse, I’d have saved a lot!

As I contemplate my decisions, it becomes apparent that the only reason I didn’t go long is because I was wrong when I thought we wouldn’t dip too far past 750, and because there was an onslaught of punishing days in late February/early March. Thinking 750 was near the bottom, I did get in a little near that level, and so by 675, my long position was already in a loss (just like everything else in the portfolio). Being in such a loss position really makes you want to take risk off the table - in case you lose more. However, this is exactly the time that one should be putting risk on the table. Averaging down as the S&P went from 750 to 675 would have been great! I had never appreciated how much of an impact fear, greed, and psychology in general have on the markets. It’s funny, when you’re studying in business school you’ll rarely hear the words “markets” and “psychology” used together – it’s always more about “risk aversion”, the “rational investor”, and “no arbitrage” (or at least that’s what my experience was like). We spend hours building pricing models based on rational investors and efficient markets, but don’t realize until we actually participate in the markets that though rationality and efficiency make sense in theory (and in practice, to some degree), psychology and emotions are indeed credible forces in practice. In b-school I too was quick to dismiss behavioral finance, but in hindsight I realize that I have much to learn from it.

I guess at the end of the day, I’ve reinforced the lesson that it’s important to diversify – both in terms of the variety of assets you invest in, as well as the cost basis (time you purchase) of any one asset. If one had $10,000 to invest, it would make much more sense to put in $1,000 a week for 10 weeks rather than to put all the money to work at once. Of course, this is probably more true at times like these when market volatility is unprecedented. In a rising market you’d take a hit doing so – but then who amongst us can predict rising markets? So, you’re better off averaging your cost basis just in case. Related to this, it’s important not to let your gains get to your head, and your losses hit you too hard in the gut – if I’d gotten in at the bottom - 675, and was right, there’s a chance that I would’ve thought the S&P was going to 1,000 and put even more in around 800. It’s possible that right after this second infusion of cash the market falls and I lose anything I may have made (or more). Or maybe by 750 I see the money made on the position and decide to lock up the gain – I sell, just to have the market rise another 75 to 825 after doing so. On the flip side, if you take your losses too hard you become paralyzed (as I was) and unable to take advantage of the rising market.

Of course all of this talk implies that one can time the market, which has been proven to be very, very hard to do (if not impossible). The current rally could go to 1,000, or come sliding right back down in the next three weeks – who knows? However, wisdom and experience should help to better time ones entrances and exits from the markets – that’s what I hope to gain from this whole episode…

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March 5th, 2009 – Another punishing week

March 5th, 2009 No comments

Wow, what a week! And it’s not even over yet…

This week sees a continuation in the slaughter in equity markets. Today marked the sixth day of losses out of the last seven (with yesterday being the exception – the market was up on speculation that China will boost their stimulus plans and that lawmakers would reach an agreement on a plan to stem mortgage defaults). Well today we learned that the China speculation was just that – speculation; the Chinese Premier said there will be no changes in their plans. Furthermore Moody’s downgraded JP Morgan, fueling a slide of about 10% in financials.

It’s really a tough market in these times – it’s very volatile and investors don’t seem to be reacting in a rational manner. The slightest bit of news tends to move the market dramatically, regardless of whether the news is credible or not. The market seems to be driven by sentiment and emotion more than by rational logic  and valuation. Maybe this is a great buying opportunity for just that reason – just as sentiment and emotion cause investors to get carried away on the upside, creating bubbles, we’re now creating a negative bubble (an abyss?) with investors getting carried away and creating buying opportunities. Of course, the difference being that if you fail to call the top of a bubble and sell too early, you don’t mind too much because you’ve likely still made a handsome sum. However, if you fail to call the bottom and buy too early, it’s devastating to watch the losses add up beyond the massive losses that your portfolio has already suffered.

Among other points to note recently: Citigroup (C) traded for less than $1 today (though it closed at $1.02), GE traded as low as $5.75 earlier this week, and the S&P 500 got almost as low as 675. Ouch…

Overall, I think we go up from here. It seems as if investors have really hammered stocks for no good reason (heck, the lack of news itself has the same effect on the markets as bad news). As our President said earlier this week, I think now may be a good time to buy stocks (if you can hold on for a few years, that is). The losses incurred thus far are amongst the largest historically and fear runs amuck. The S&P 500 is trading at it’s lowest level since 1996, wiping out 13 years of gains. The upside potential here is huge – a recovery of a modest 40% over two years could deliver you 80% or so with a leveraged ETF. Of course, as I said earlier, it’s hard to call the bottom. Does it make sense to get it now with the S&P 500 near 680? Will it bounce back to 720+ in a couple of weeks? Will it fall below 650? Who knows?

I certainly don’t – earlier this year I thought that the 750 we had reached during the fear and chaos of November, 2008 was as low as we’d go. I didn’t doubt that we’d test that level again, but I certainly didn’t expect that we’d fall another 10% past it. So, I called a bottom at 750 and was clearly wrong. 675 feels pretty close to a bottom now, but heck, given this irrational market and volatility, I just can’t tell…

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Another day, another (almost) 10%

December 1st, 2008 No comments

The S&P500 is down about 9% today. About this time last year that would have shocked me. However given the volatility we’ve seen since October, I’m barely phased by today’s performance. Coming out of graduate school I thought market participants were generally rational and market movements like this usually have a good explanation. These days I’m not so confident of that.

Let’s see, what has transpired over the Thanksgiving long weekend that could cause such a fall? We had a five-day rally in the markets leading up to Thanksgiving (including the day after the holiday). This in itself is great since we haven’t been able to have a sustained rally for a while now (this suggests to me that a bottom is near – more on this later). Going into this five-day rally investor sentiment about the consumer and their ability to shop was grim. Then today some numbers come out saying that consumer spending over the Black Friday weekend was not spectacular, but was above expectations. So, doesn’t that mean that markets should move up due to the (sort of) good news? Rather, investors feel more down about consumer spending. There was no information today to suggest that spending will be any lower than was expected last week, yet there is still a sell-off.

I think a good part of today’s action was profit-taking from last week. Investors see a five-day rally amidst the backdrop of a recession and so they cash out. But that certainly shouldn’t cause a 9% drop. Yet I see no other rational explanation for it. Go figure…

Though steep and sudden losses have become a bit of the norm, take a step back and imagine 10% of your net worth (well, most of us aren’t fully invested in equities, so let’s say 10% of your investment portfolio) going up in smoke in a single day!! Imagine the things you could have done if you had that in cash! These are scary times, people – be afraid (of the volatility that is; the price level, on the other hand, is something to be excited about)…

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