Archives of “stock market bubble” tag

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George Soros quotes

  
  Education
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The Hungarian-born financier will therefore no longer be able to move markets. But many of his aphorisms and apothegms will long continue to apply. Here are some of the best.
QuoteWhen I see a bubble forming I rush in to buy, adding fuel to the fire. That is not irrational.”
QuoteWell, you know, I was a human being before I became a businessman.”
 
Markets are designed to allow individuals to look after their private needs and to pursue profit. It’s really a great invention and I wouldn’t under-estimate the value of that, but they’re not designed to take care of social needs.”
QuoteThe financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.”
 

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10 Laws of Stock Market Bubbles

  
  Education
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  1. Debt is cheap.
  2. Debt is plentiful.
  3. There is the egregious use of debt.
  4. A new marginal (and sizeable) buyer of an asset class appears.
  5. After a sustained advance in an asset class’s price, the prior four factors lead to new-era thinking that cycles have been eradicated/eliminated and that a long boom in value lies ahead.
  6. The distance of valuations from earnings is directly proportional to the degree of bubbliness.
  7. The newer the valuation methodology in vogue the greater the degree of bubbliness.
  8. Bad valuation methodologies drive out good valuation methodologies.
  9. When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble.
  10. Rapid growth of a new financial product that is not understood. (e.g., derivatives, what Warren Buffett termed “financial weapons of mass destruction”).

Speculation, Trading, and Bubbles-by José A. Scheinkman (Book Review )

  
  Education
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SPECULATION-TRADING-BUBBLESTo pay tribute to one of its most famous graduates, Kenneth J. Arrow, Columbia University launched an annual lecture series dealing with topics to which Arrow made significant contributions—and there were many. Speculation, Trading, and Bubbles stems from the third lecture in the series given by José A. Scheinkman, with adapted transcripts of commentary by Patrick Bolton, Sanford J. Grossman, and Arrow himself. I’m going to confine myself here to a few excerpts that encapsulate some of the lecture’s key points, ignoring the often perceptive commentary.
Scheinkman offers a formal model of the economic foundations of stock market bubbles in an appendix to his lecture, but he lays out its basic ideas in the lecture proper. The model rests on two fundamental assumptions—“fluctuating heterogeneous beliefs among investors and the existence of an asymmetry between the cost of acquiring an asset and the cost of shorting that same asset. … Heterogeneous beliefs make possible the coexistence of optimists and pessimists in a market. The cost asymmetry between going long and going short on an asset implies that optimists’ views are expressed more fully than pessimists’ views in the market, and thus even when opinions are on average unbiased, prices are biased upwards. Finally, fluctuating beliefs give even the most optimistic the hope that, in the future, an even more optimistic buyer may appear. Thus a buyer would be willing to pay more than the discounted value she attributes to an asset’s future payoffs, because the ownership of the asset gives her the option to resell the asset to a future optimist.” (pp. 15-16)

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The Sheep and the Herd

  
  Education
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American writers of the 20th century, that talks about the stupidity of sheep. He says “the individual sheep is stupid, but the herd is very smart. They always know the right way to go, the right thing to do (especially when guided by the dog and shepherd).

The stock market reminds me of that every time there is an earnings report of a major company. It originally does something stupid, as if the company reporting like Intel, Netflix, or Goldman $achs were the only company. But then after a proper time, it does the right thing.

My take on how to read financial news headlines

  
Analysis, Education
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Headline: Stocks Rose/Fell Today by 1% Because of _______
How to read it: Millions of shares traded hands today because investors all have different goals, strategies, risk profiles, holding periods and ideas.

Headline: [Popular economist/fund manager] Expects Market Volatility to Pick Up Later This Year
How to read it: Saying you expect volatility to pick up at some point in the future is like saying you expect it to rain at some point in the future. And volatility works both ways — to the upside and the downside — so really this is just a way of saying the markets will fluctuate, which of course they will.

Headline: George Soros Gained/Lost $1 Billion
How to read it: Soros has around $25 billion so what he does with his money shouldn’t concern most investors.

Headline: Markets Got Slaughtered Today: A Sign of Worse Things to Come?
How to read it: No one ever really knows why stocks rise or fall on a single day. The market is up just over 50% of all trading days and down just under 50% of all trading days so you can never put too much stock in any one day.

Headline: Investors Are Dealing With More Uncertainty
How to read it: The future is always uncertain. The past just feels more certain because now we know what really happened.

Headline: Are Market Overbought Here? 
How to read it: Ask us again in a few months.

Headline: [Democrats/Republicans/current or past president] Caused X% of Economic or Stock Market Growth
How to read it: Presidents or political parties don’t personally control economies or stock markets made up of millions of participants and trillions of dollars all wrapped up within a complex adaptive system. These things don’t come with levers that you can pull to make them rise or fall.

Headline: The Stock Market Enters a Painful Correction
How to read it: Retirement savers rejoice as stocks fall on the week. Those with decades to save & invest should hope it continues.

Headline: _____ Could Cause Gold Could Rise to $1500/oz.
How to read it: Total guess. No one has a clue.

Headline: Is This the Stock-Picker’s Market We’ve Been Waiting For?
How to read it: It’s both always and never a stock-picker’s markets because it all depends on the quality of the stock-picker, not the market.

Headline: Goldman Sachs Expects Stocks to Rally For the Next 3 Months
How to read it: Big financial firms have so many strategists that there will surely be a research piece put out in the coming days that totally contradicts whatever they just predicted.

Headline: When Will the Fed Raise Rates?
How to read it: Has Fed policy really ever helped you make better investment decisions? Even if you knew exactly what they were going to do in the future you still have no idea how other investors will react. 

Headline: Investors Panic as Stocks Enter a Bear Market
How to read it: Don’t panic — expected returns and dividend yields go up during bear markets. This is a good thing for long-term investors.

Headline: A Perfect Storm Caused Markets to Fall
How to read it: Stuff happens in the markets and we like to attach important-sounding narratives to everything. 100-year storms now seem to come around once a month or so. (more…)

The greater the story, the greater the bubble

  
Analysis, Education
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The greater fool theory explains almost every bubble

Some things have an intrinsic value. The most-obvious example is a stock with a dividend. The absolute floor for an equity is its dividend and so long as their is a profitable business behind it, the value is a multiple of that dividend.

Other things don’t have an intrinsic value. This includes virtually everything that doesn’t produce a yield. Oftentimes, prices of those things rise and fall based on future expectations of what profits or yield might be. In other cases, there is an estimation of utility. Oil, for instance, can be refined into gasoline which can be used to move things or for dozens of other uses.

Oftentimes there is a dispute about utility or a dispute about future profitability, which can lead to a dispute about prices. One way to resolve this is a model but oftentimes that’s so fraught with assumptions that it’s useless.

So how do you establish prices? Obviously, via the market.

This is when storytelling, which is another way of saying a sales job, takes over.

Cryptocurrencies are an obvious example. A Bitcoin has no yield but it has some utility. To some, that utility is replacing the US dollar as a global transparent currency. To others, it’s a way to facilitate transactions. And for others still, it’s a handy tool for criminal transactions. How you price it then, depends on how you view the future utility.

Or does it? (more…)

Learn from Jesse Livermore's personal life than from his trading techniques :Jesse Livermore Boy Plunger

  
Analysis, Education
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1929-crash

Jesse Livermore, the so called “Boy Plunger” and probably the greatest Wall Street Trader who ever lived, died $340,000 in debt.

Many look at his life to learn the secrets of his often extraordinary trading success. A better track for financial prosperity is to study and learn from mistakes he committed in his personal life.

The clues for true riches can be found there. The lessons from his personal failures are exponentially more important for modern investors than his exploits in the commodities and stock markets.

During the Stock Market Crash of 1929, Jesse Livermore made $100 million dollars betting that the stock market would plummet in spectacular fashion.

When he arrived home after another appalling day of market bloodletting in October of 1929, both his wife and mother-in-law met him at the door in tears. (more…)

“Markets Will Fluctuate”

  
Analysis, Education
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In the 1927 book “Security Speculation – The Dazzling Adventure,” Laurence H. Sloan repeated the now famous anecdote 1  about J.P.Morgan’s view of the stock markets:

History has it that young man once found himself in the immediate presence of the late Mr. J. P. Morgan. Seeking to improve the golden moment, he ventured to inquire Mr. Morgan’s opinion as to the future course of the stock market. The alleged reply has become classic: “Young man, I believe the market is going to fluctuate.

Fluctuate indeed.

That simple truism seems to been lost to some folks, who were taken aback by yesterday’s market decline. The Dow Jones Industrial Average fell 274 points, but that sounds worse than it is; in percentage terms the retreat amounted to 1.24 percent. The Standard & Poor’s 500 Index fell 38.1 points, or 1.54 percent; the Russell 2000 Index of small cap companies fell 1.78 percent (24.6 points) while the Nasdaq Composite Index had a 1.94 percent (123.2 point) fall.

As Bloomberg News noted, “Evidence is building that the market’s long stretch of tranquility is breaking. The S&P 500 swung at least 1 percent in three of the last six sessions after spending the previous three weeks without a move of more than 0.3 percent.”

The collective question investors are asking is “Why here and now?” It is tempting, and probably correct, to simply declare this the well-known random walk of markets. But rather than leave it at that, let us turn a critical eye to some of the explanations that were circulating. Here they are from least convincing to most . . .

Continues at: The Real Reason Markets Swooned Yesterday

Watch this profile of Jeff Bezos in 1999

  
Analysis, Education, Video
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Everyone was right

This is a great preview of Amazon.com and Jeff Bezos in 1999. It captures the skepticism about the company and the huge losses it was sustaining as it tried to stake its place as the world’s online bookstore. That eventually expanded into the world’s store for everything.

The company was only 5 years old at the time and it was the height of the tech boom. Shares of AMZN were trading at $150. The would fall to $10 two years later and it would take more than 12 years to regain the lofty heights of the dot-com boom.

But you can see from the start that Bezos had a vision (and a hearty laugh). On Friday, he became the world’s only person worth $100 billion but when you consider that he was worth $10 billion when this was shot, it somehow seems less impressive. After all, it’s only a 13.7% annualized return.

What’s also fascinating was that just about everyone was right, to some extent. Of course, Bezos was right about the future, but the critics of the stock price and valuations were also right. Or at least they were for a long time. And the analyst who warned that Wal-Mart should wake up was definitely right.

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