Archives of “cash reserves” tag

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Is the China bubble about to burst?

  
Analysis, Economy, Education
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China bubbleAn aggressive and arrogant China is entering 2010 with a bit of uncertainty. Although there was no let-up in its exports in 2009, its internal financial position looks uncertain. China watchers are expecting a bubble that will eventually burst.

In 2009 banks in China lent internally about US$1.4 trillion to businesses, including the real estate industry, with dubious performance records. James Chanos, a successful U.S. stock market dealer, has predicted that China’s financial collapse could be far worse than Dubai’s.

China soothsayers wish to prove Chanos wrong – and they may be right. With US$2.2 trillion in foreign reserves, it would seem China could weather any storm. But the problem is that its cash reserves are uncashable. The United States and Europe are not just waiting to repatriate the money to China. So China could be left to its own devices if it faces a financial storm where markets tumble and poor people with money tied to investments see their savings vanish.

Easy credit, too much money in the economy, excessive foreign direct investment, a completely undervalued currency and rising real estate prices have definitely created a bubble. This bubble could burst with any minor international event. That is the price China would have to pay for designing policies that serve Western consumer markets. (more…)

Battle of Waterloo and Trading

  
  Education
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I often talk about the Battle Of Waterloo and how it relates to trading in general and specifically strategy development. If you don’t know the battle (which I recommend reading about if you have time), just listen to this once popular country song and you’ll get a sense to why I think this is so important.

While I’m no historian, I do think traders can learn a lot about trading through learning about important battles in history. The Battle Of Waterloo offers a great example as it offers many lessons for us to consider:

  1. Make your planning and risk analysis commensurate with the size of your project. For major endeavors, contingency plans are critical.

  2. Know when to cut your losses if necessary. Don’t let your desire to succeed be the enemy of good judgment.

  3. Be sure that the justification is clear for your project, and that your entire team is sold.

  4. Don’t become over-confident, especially after many successes. Remember the basic principles.

  5. Never attempt an unpopular endeavor in isolation.

  6. Don’t make enemies. You are only as good as your allies.

  7. Adopt leader style politics, not the Machiavellian style. Look for the win-win.

Many of these lessons apply to good trading, especially the ones about the importance of having contingency plans, knowing when to cut losses, having clear justifications for your trades, the importance of avoiding overconfidence and finally how important it is to attack from a strong position like having plenty of capital and cash reserves.

Needless to say, every trading strategy has their own weaknesses. So, what the most common weakness I’ve found? That’s easy – human error. That’s right, usually most strategies that have been backtested and proven to work continue to work well unless we do things to either deviate from the plan and/or we apply leverage to it rendering it extremely vulnerable. It is fairly often that I see traders come forward with a hot strategy they’ve used and are in the process of levering it up, creating havoc and exposing themselves to great risk. There is good reason for the expression – leverage always kills. In my experience, that has been true. Beyond that, many strategies are based on things that don’t account for the constantly evolving nature of the market. (more…)

10 quotes from Warren Buffett’s letter to shareholders

  
  Education
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Warren Buffett is hunting for elephants and a bear.

You can look through the whole thing here, including as easily digested discussions of accounting as you’re ever likely to see.

But for those with limited time, here’s a look at 10 of the pithier comments.

1. On the search for new investment opportunities for Berkshire’s huge cash reserves after the acquisition of half of Heinz  HNZ -0.08% last month:

“Charlie and I have again donned our safari outfits and resumed our search for elephants.”

2. On strong performance at the GEICO insurance unit:

“The credit for GEICO’s extraordinary performance goes to Tony Nicely and his 27,000 associates. And to that cast, we should add our Gecko. Neither rain nor storm nor gloom of night can stop him; the little lizard just soldiers on, telling Americans how they can save big money by going to GEICO.com. When I count my blessings, I count GEICO twice.”

3. On company headcount:

“Berkshire’s yearend employment totaled a record 288,462, up 17,604 from last year. Our headquarters crew, however, remained unchanged at 24. No sense going crazy.” (more…)

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