Archives of “boom and bust” tag

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Bunting’s Laws of Investing

  
  Education
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1. Sell stocks of companies that announce huge acquisitions, that overdiversify, or that spend a fortune on a lavish new headquarters.

2. Avoid stocks where management picks fights with analysts (or, by extension, hedge funds). See Overstock.com in 2005; Netflix in 2010.

3. Watch out when executives start selling a lot of stock — regardless of plausible-sounding excuses. Top execs in homebuilders, mortgage underwriters and Wall Street dumped billions before the 2008 crash.

4. “Run a mile” from all stocks in an industry going through a huge investment boom: Massive overcapacity and consequent collapse is inevitable.

5. Steer clear of investing in manufacturing companies. Their industries are usually plagued with extreme cycles of boom and bust, overcapacity and slumps.

6. Pay little attention to economists or market gurus.

7. Mistrust all mathematical trading formulas as well — they invariably fail just when you most need them to work.

8. Look for companies where the insiders are buying lots of stock.

9. Look for companies generating a lot of cash — a great sign of sustained outperformance.

10. Look for companies which have monopolies (or near monopolies), and those which manage to take out their main competitors.

11. Remember you are buying businesses, not just stocks. Pay close attention to the quality of the business, and especially the quality of the management.

12. Look for companies which have earned the trust of consumers, and which have very strong brand names.

Thoughts on The Psychology of Speculation by Henry Howard Hopper

  
  Education
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Thoughts on the Psychology of Speculation by Henry Howard Hopper published in 1926 and then reprinted by Fraser Publishing Company.

The book is excellent on many different levels. I like most that it talks about encompassing principles of human nature. Not the trivial made up ones of behavioral economics but broad human tendencies that are crucial to how we make our decisions and go about living our life.

Included among these broad human tendencies is the tendency to go crazy when you see a massive flow in front of you like the many who commit suicide in Niagara falls after seeing the water flow and the many who lose their minds as the market goes up. Also paramount is the incredible ennui that a human feels when something that he formerly owned goes thru the roof in other hands. I also like the many market periods of boom and bust he covers including the fantastic bull market of 1915 in the middle of the war where stocks of many a sage speculator was short skyrocketed by 15 fold or more. “He did not live to see General Motors at 850 on October 25, 1916,” as his broker was forced to sell him out well before hand and “he had crossed the bar into the great beyond”.

Like my father’s experience in the Bowerey where he had to cart the bodies away when they couldn’t pay the rent after dying from gambling, “the widow was left almost penniless and he was buried at the expense of the lodge”. I like also the colorful vivid language so characteristic of the roaring 20s that makes on wish one was there and feel for the every emotion that he elicits.

I like best the last words he repeats of a short seller who made a fortune in leather goods and then lost it in the market through shorting. “In the past year I’ve suffered every torment known to the demons of hell. My only grain of comfort is that it’s all over now and I have nothing more to lose.” From this tragic experience, the author concludes “there is but little comfort or profit to be gained on the short side of a protracted bull market”. (more…)

Book Review- The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust

  
  Education
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Traders should be unemotional. No, traders should tap into their emotions and use these emotions as trading inputs. The debate rages on, mostly at the level of pop psychology, rarely rising to a level that is even quasi-scientific.

John Coates, a senior research fellow in neuroscience and finance at the University of Cambridge who previously worked for Goldman Sachs and ran a trading desk for Deutsche Bank, changes all this—or so one would hope. The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust (Penguin Press, 2012) is a compelling narrative of the links between biology and the trading floor. It’s one of the most intriguing books I’ve read in a long time.

Coates’s previously published research papers offer a glimpse into this book, but no more than a glimpse. Let’s start with the title, a French expression meaning literally dusk, when the light is so dim that you can’t distinguish a dog from a wolf. More subtly and aptly, according to the website Naked Translations, “it also expresses that limit between the familiar, the comfortable versus the unknown and the dangerous… It is an uncertain threshold between hope and fear.”

Traders live in the gloaming, and their bodies (and consequently their risk management skills) respond accordingly. They spend a good part of their day faced with novelty, uncertainty, and uncontrollability—“three types of situation [that] signal threat and elicit a massive physiological stress response.” (p. 217) If markets are more or less normal, traders can usually handle this stress because it is moderate and exists over a short period of time. If, however, stress goes on for an extended period of time, this chronic exposure can impair their cognitive and physical performance. (more…)

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