Archives of “bubbles” tag

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Jeremy Grantham's 10 Investment Lessons

  
  Education
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1. Believe in history: “history repeats and repeats, and forget it at your peril. All bubbles break, all investment frenzies pass away.”

2. Neither a lender nor a borrower be: “Unleveraged portfolios cannot be stopped out, leveraged portfolios can. Leverage reduces the investor’s critical asset: patience.”
3. Don’t put all your treasure in one boat: “This is about as obvious as any investment advice could be … Several different investments, the more the merrier, will give your portfolio resilience, the ability to withstand shocks.”
4. Be patient and focus on the long term: Wait for the good cards. If you’ve waited and waited some more until finally a very cheap market appears, this will be your margin of safety.”
5. Recognize your advantages over the professionals: “The individual is far better-positioned to wait patiently for the right pitch while paying no regard to what others are doing, which is almost impossible for professionals.”
6. Try to contain natural optimism: “optimism comes with a downside, especially for investors: optimists don’t like to hear bad news.” (more…)

Efficiency and Stability in Complex Financial Markets

  
  Education
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Efficiency and Stability in Complex Financial Markets

Abstract:

The authors study a simple model of an asset market with informed and non-informed agents. In the absence of non-informed agents, the market becomes information efficient when the number of traders with different private information is large enough. Upon introducing non-informed agents, the authors find that the latter contribute significantly to the trading activity if and only if the market is (nearly) information efficient. This suggests that information efficiency might be a necessary condition for bubble phenomena – induced by the behavior of non-informed traders – or conversely that throwing some sands in the gears of financial markets may curb the occurrence of bubbles.

via Efficiency and Stability in Complex Financial Markets by Fabio Caccioli, Matteo Marsili :: SSRN.

10 Investment Lessons

  
  Education
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1. Believe in history
“All bubbles break; all investment frenzies pass. The market is gloriously inefficient and wanders far from fair price, but eventually, after breaking your heart and your patience … it will go back to fair value. Your task is to survive until that happens.”

2. ‘Neither a lender nor a borrower be’
“Leverage reduces the investor’s critical asset: patience. It encourages financial aggressiveness, recklessness and greed.”

3. Don’t put all of your treasure in one boat
“The more investments you have and the more different they are, the more likely you are to survive those critical periods when your big bets move against you.”

4. Be patient and focus on the long term
“Wait for the good cards this will be your margin of safety.”

5. Recognize your advantages over the professionals
“The individual is far better positioned to wait patiently for the right pitch while paying no regard to what others are doing.”

6. Try to contain natural optimism
“Optimism is a lousy investment strategy”

7. On rare occasions, try hard to be brave
“If the numbers tell you it’s a real outlier of a mispriced market, grit your teeth and go for it.”

8. Resist the crowd; cherish numbers only
“Ignore especially the short-term news. The ebb and flow of economic and political news is irrelevant. Do your own simple measurements of value or find a reliable source.”

9. In the end it’s quite simple. really
“[GMO] estimates are not about nuances or Ph.D.s. They are about ignoring the crowd, working out simple ratios and being patient.”

10. ‘This above all: To thine own self be true’
“It is utterly imperative that you know your limitations as well as your strengths and weaknesses. You must know your pain and patience thresholds accurately and not play over your head. If you cannot resist temptation, you absolutely must not manage your own money.”

More Research Confirms The Benefits Of Overconfidence

  
  Education
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over-confidenceOverconfidence may cause people to invest too much in volatile stocks because such stocks have a greater diversity of beliefs, and so if people dismiss the objectively bad odds of beating the market, such people will be drawn to stocks where they are in the extremum, and highly volatile stocks have the most biased extremums.  One might think these people are irrational, but in the big picture people with this bias actually have a huge advantage, why Danny Kahneman said it’s the bias he most wants his children to have.
Two economists at Washington State University looked at twitter accounts for sports prognosticators and found that confidence was much more important than accuracy in generating followers. Their sad conclusion: Pundits have a false sense of confidence because that’s what the public, seeking to avoid the stress of uncertainty, craves. In other words, to be popular (read: successful), you need to be unwarrantedly confident. This takes either an amoral cognitive dissonance or ignorance. (more…)

George Soros loads up on gold

  
Analysis, Education, Gold / Silver
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soros-gold

So why is Soros buying gold?  Though he believes gold is the ultimate bubble, he had said before that he likes to ride bubbles.  But unlike most investors, Soros usually knows when to get out.

From the WSJ:

LONDON—Investor George Soros doubled his bet on gold at the end of 2009 amid rising prices, a filing with the U.S. Securities and Exchange Commission showed.

The filing, made late Tuesday for the financial period ended Dec. 31, comes after Mr. Soros made comments during the World Economic Forum in Davos, Switzerland, in late January calling gold an asset bubble. He told media at the time that the low-interest-rate environment creates a condition for bubbles to develop and that gold is the ultimate bubble…..

IMF: Dollar Carry-Trade Creating Bubbles Around The World

  
Analysis, Economy, Education, Global Indices
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imf-global data

bubble(1)

Read a PDF of the IMF’s recent report here.

The International Monetary Fund (IMF) highlighted the fact that low interest rates in the U.S., plus an apparent “one-way” bet against the dollar has created a global dollar carry-trade that is driving capital flows into emerging markets.

If not handled properly, this will lead to emerging market asset bubbles, which arguably have already begun to inflate.

We’ve highlighted before how places like Hong Kong are seeing property prices go through the roof due to low U.S. interest rates. (more…)

John Paulson's 8 Secrets

  
  Education
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  1. Don’t follow the crowd.
  2. Have an exit strategy before the bubbles burst
  3. Focus on the debt markets for predicting the future.
  4. Take the time to figure out how fancy new investment products like credit default swaps (CDS) work.
  5. Buy insurance. No one wanted out of the money puts on the housing market.
  6. Remember the past. Some of the big winners in the housing crash were those dismissed as out-of-touch dinosaurs.
  7. Remember that no trade lasts forever so don’t fall in love with your investment. After making his $20 billion. Paulson went long banks at the bottom. (The verdict is still out on this trade).
  8. Timing is everything and luck helps.

The coming economic crisis in China

  
Education, Life
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By Jim Jubak

Jim JubakI think investors are worried about the wrong kind of crisis in China.

Worry seems to focus on the possibility of an asset bubble and the chance that it will burst sometime in the next two to three months.

I’m more concerned about a slide into a crisis that will be an extension of the Great Recession. That slide could begin, I estimate, sometime in the next 12 to 18 months.

I understand the worry about the possibility of an asset bubble in China. After all, we’ve just been through two horrible asset bubbles — and busts — in the U.S. and global financial markets. And a Chinese bubble is a distinct possibility, one that should certainly figure into your investing strategy.

But China’s economy and political system are so different from ours in the U.S. and those in the rest of the developed world — and its relationship to the global financial market so unique — that I don’t think we’re headed toward any kind of replay of March 2000 or October 2007.

A bigger worry is a long-term slide into a lower-growth or no-growth world in which nations strive to beggar their neighbors and all portfolios slump. As crises go, it’s very different but ultimately just as painful for investors as the asset bubbles that draw all our attention now.

To paraphrase Leo Tolstoy in “Anna Karenina“: Happy bull markets are all alike; every unhappy bear market is unhappy in its own way.

Why having too many white males can derail markets

  
  Education
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  • How more racial diversity on Wall St could fight bubbles

I need to start this column with a disclaimer. I am white and male. This will surprise nobody, and not only because my photo makes my gender and ethnicity quite obvious. Finance, and its surrounding fields like financial journalism, remains a white male club to a stunning degree.

There are ample arguments that this is unfair, along with other arguments against intervening. But this important debate is beyond my scope today. Rather, the point is that if investors want better outcomes, they would be better served if capital is allocated by diverse teams.

And the issue is not just about white males. When a team or market is dominated by any ethnicity, it tends to make worse decisions.

Behavioural psychologists have long established that markets are prone to herding and groupthink. It makes sense that a homogeneous team will be more prone to these problems. Now, the effect has been startlingly well demonstrated in academic experiments held far apart in Texas and Singapore. (more…)

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