Sounds silly, but there is a study done to check the correlation between skyscrapers and Financial crisis ! and there seems to be a positive correlation between the two. which means the many and higher the skyscrapers, the deeper is the financial crisis.hmmm.
so the next time you read an article about new skyscrapers cropping up in the city, then you know...that economic trouble is around the corner..well might not be really, but the article below says so, and is a good read.
www.bbc.co.uk/news/business-16494013
January 28, 2012
October 10, 2011
Behavioral Science in Investments
Time and again i am reminded of this science of investment; behavioral finance. In my opinion, it is one area in Finance which has a very close connection between Theory and Reality. The concept is simple to understand and is easily observable in real world. When i think of my own investment actions in the past, it reminds me that the concepts of behavioral finance and investment biases are so very true ! Here are a few of them which most of the investors might have experienced in their life
1. Confirmation Bias : I like this one ! This bias is regarding actions of an investor post their investment decision. as an example, if you invested in stock of Sony. Then you would like the stock to do good. You will thus be 'looking' for good news about Sony. If there is any bad news, you would tend to discount it. The reason you want to see only good news is the justification of your investment decision to buy Sony. So rather than sell the stock upon bad news, you continue to hold it believing it will do good and continue to search for good news !
2. Escalation Bias : This bias too is easily observable in real world. Again if you bought a stock at say $100 and the price drops to $95. you will not sell it. nobody likes to see a loss ! most of us continue to hold onto the loss rather than book the loss. you believe someday the stock would rebound and do good. that's ok but worst would be to invest more in a losing stock to 'average down' the purchase price instead of evaluating the future prospects or financial condition of the company. Behavioral Finance texts have rightly said "Investors tend to sell their good picks too early and hold onto losers for too long" !
3. Overconfidence and Pessimism : when there is good news floating around, investors tend to be more optimistic about it. e.g. when most of the stock analysts have a positive indicator for the stock of a firm, investors give it an upward bias, flock to this stock thereby driving its price to the roof. only to realize later that they paid $50 for something which was actually worth $30. Similarly, investors tend to overreact to bad news. All this can be easily seen in everyday market movements. One day stock analysts and investors are highly pessimistic about the developments in Europe and the next day they are jumping with joy on even unconfirmed reports of possible German and French government support to the EU causing high volatility in the markets.
4. Others : Stocks perform well on Friday as opposed to Monday's similar to Holiday effect in which stocks do well on a day that precedes the holiday. Then there is January Effect in which stock returns in the month of January are better than the other months.
1. Confirmation Bias : I like this one ! This bias is regarding actions of an investor post their investment decision. as an example, if you invested in stock of Sony. Then you would like the stock to do good. You will thus be 'looking' for good news about Sony. If there is any bad news, you would tend to discount it. The reason you want to see only good news is the justification of your investment decision to buy Sony. So rather than sell the stock upon bad news, you continue to hold it believing it will do good and continue to search for good news !
2. Escalation Bias : This bias too is easily observable in real world. Again if you bought a stock at say $100 and the price drops to $95. you will not sell it. nobody likes to see a loss ! most of us continue to hold onto the loss rather than book the loss. you believe someday the stock would rebound and do good. that's ok but worst would be to invest more in a losing stock to 'average down' the purchase price instead of evaluating the future prospects or financial condition of the company. Behavioral Finance texts have rightly said "Investors tend to sell their good picks too early and hold onto losers for too long" !
3. Overconfidence and Pessimism : when there is good news floating around, investors tend to be more optimistic about it. e.g. when most of the stock analysts have a positive indicator for the stock of a firm, investors give it an upward bias, flock to this stock thereby driving its price to the roof. only to realize later that they paid $50 for something which was actually worth $30. Similarly, investors tend to overreact to bad news. All this can be easily seen in everyday market movements. One day stock analysts and investors are highly pessimistic about the developments in Europe and the next day they are jumping with joy on even unconfirmed reports of possible German and French government support to the EU causing high volatility in the markets.
4. Others : Stocks perform well on Friday as opposed to Monday's similar to Holiday effect in which stocks do well on a day that precedes the holiday. Then there is January Effect in which stock returns in the month of January are better than the other months.
October 07, 2011
Dim Sum, Samurai, and Yankees - Interesting Bonds !
Dim Sum...yes it is a very famous food dish in Hong Kong. But that is not what i am talking about here. I am referring to Dim Sum bonds. Yes ! basically these bonds are Yuan denominated and issued in the Hong Kong market by an overseas borrower. whats so special about them? These can be attractive for an investor who desires to have exposure to Yuan and also given that the foreign investors are restricted from investing into local Chinese debt. Not surprisingly, HSBC is one of the largest players in the Dim Sum bond underwriting market.
Whats also interesting are Samurai Bonds. These are yen denominated bonds issued by a foreign borrower in Japan. The advantage is YEN LIBOR yields are low and given the continued strength of the Japanese Currency (76.5 JPY/USD as of today), it would be attractive to the foreign borrower to convert the proceeds of the bond issue into their domestic currency to well pay back their existing local currency debt !
On the same page, a Yankee bond would be a USD denominated bond issued by a foreign bank or corporation in the United States although the regulations are quite tight to get the bonds registered into the US market.
Imagine what are bonds denominated in Japanese Yen and issued by a non-Japanese company outside of Japan called ? EuroYen bonds ! The term Euro here is mis-leading as it has nothing to do with the currency Euro !! Sometimes confusing but interesting concepts in the bond market.
Whats also interesting are Samurai Bonds. These are yen denominated bonds issued by a foreign borrower in Japan. The advantage is YEN LIBOR yields are low and given the continued strength of the Japanese Currency (76.5 JPY/USD as of today), it would be attractive to the foreign borrower to convert the proceeds of the bond issue into their domestic currency to well pay back their existing local currency debt !
On the same page, a Yankee bond would be a USD denominated bond issued by a foreign bank or corporation in the United States although the regulations are quite tight to get the bonds registered into the US market.
Imagine what are bonds denominated in Japanese Yen and issued by a non-Japanese company outside of Japan called ? EuroYen bonds ! The term Euro here is mis-leading as it has nothing to do with the currency Euro !! Sometimes confusing but interesting concepts in the bond market.
February 26, 2011
13 weeks for CFA Level 2
It was quite some time ago when i registered for the June 2011 CFA Level 2. But i realized that now there are only 13 weeks to go. By this time, i should have almost finished reading the LOS for all topics. But have not done so. I am lagging behind schedule, have yet to start Fixed Income, Corporate Finance, and Derivatives..i might not have sufficient time for revision and mock tests....
I think no other way but to study harder on the weekdays and catch-up with the schedule...Ganbarimasu !!
I think no other way but to study harder on the weekdays and catch-up with the schedule...Ganbarimasu !!
November 08, 2010
Time to re-balance your portfolio ?
The Stock market of the emerging economies of Brazil, Russia, India and China had a very good run this year. Indian stock market has been the best performing of all.YTD returns of 10%, 30%, and even 60% for some stocks have not been uncommon in 2010.
Money managers and Analyst are predicting a brighter road ahead based on GDP growth (8-10%),rising consumer demand for most of emerging markets, etc. So all this is good news. Most stock analysts are recommending a BUY or a HOLD position for the emerging markets stocks. I am wondering why there is no talk of portfolio re-balancing at this stage?
Portfolio re-balancing is nothing but an adjustment of the weights of different assets in your portfolio to match with your objectives.
Let's take an Example: Ideally every investor should have a target allocation for the equity and debt component in his/her portfolio. This would be based on a variety of factors such as his risk tolerance, investment time horizon, income, age, family needs, etc , etc. e.g. lets assume that out of an investors total asset base of 10 million, he chooses to allocate 7 million to equities(through stocks, mutual funds, etc) and the remaining 3 million to debt (through gov/corporate bonds, bond mutual funds, etc). so he has a 70%-30% mix between equities and debt holdings. Now assume that this investment portfolio was built at start of year 2010. Today, assume he got a return of 40% (after transaction costs) on his equities, then his stock position would be worth 7*1.4 = 9.8 million. Lets assume the bonds in his portfolio gave him 8% return. so his position in debt assets would be worth 3*1.08 = 3.2 million. The investors total assets grew to 9.8+3.2 = 13 million. a gain of 3 million since beginning of 2010. very good news for him ! but his equity-debt mix has now changed to 75% (9.8/13) in equities and 24% (3.2/13) in debt. i.e. increase in equities and decrease in debt component.
we can simply see a 5% deviation from his target allocation of 70%-30%. This means he is overweight in equity and underweight in debt. He should thus sell some of his equity positions and buy into debt positions (or just hold cash) to re-balance his mix to his target of 70%-30%. If the investor falls prey to an analyst stock BUY recommendation or to a new 'attractive' equity mutual fund scheme, his proportion in equities will still get higher; which means the investor is taking on more risk than he can digest. This can be dangerous to his financial well-being should the equities perform badly.
My recommendation is which stock or industry to BUY in is an important decision, but whats more important for the stock market investor is to re-balance his portfolio on a regular basis. To put it simply, if equities do good, sell some of them and buy debt or other risk-free asset or hold cash. If debt market does good, sell some debt and get into equities enough to maintain the right mix for you. This will ensure your total risk exposure remains at target level irrespective of market volatility.
Money managers and Analyst are predicting a brighter road ahead based on GDP growth (8-10%),rising consumer demand for most of emerging markets, etc. So all this is good news. Most stock analysts are recommending a BUY or a HOLD position for the emerging markets stocks. I am wondering why there is no talk of portfolio re-balancing at this stage?
Portfolio re-balancing is nothing but an adjustment of the weights of different assets in your portfolio to match with your objectives.
Let's take an Example: Ideally every investor should have a target allocation for the equity and debt component in his/her portfolio. This would be based on a variety of factors such as his risk tolerance, investment time horizon, income, age, family needs, etc , etc. e.g. lets assume that out of an investors total asset base of 10 million, he chooses to allocate 7 million to equities(through stocks, mutual funds, etc) and the remaining 3 million to debt (through gov/corporate bonds, bond mutual funds, etc). so he has a 70%-30% mix between equities and debt holdings. Now assume that this investment portfolio was built at start of year 2010. Today, assume he got a return of 40% (after transaction costs) on his equities, then his stock position would be worth 7*1.4 = 9.8 million. Lets assume the bonds in his portfolio gave him 8% return. so his position in debt assets would be worth 3*1.08 = 3.2 million. The investors total assets grew to 9.8+3.2 = 13 million. a gain of 3 million since beginning of 2010. very good news for him ! but his equity-debt mix has now changed to 75% (9.8/13) in equities and 24% (3.2/13) in debt. i.e. increase in equities and decrease in debt component.
we can simply see a 5% deviation from his target allocation of 70%-30%. This means he is overweight in equity and underweight in debt. He should thus sell some of his equity positions and buy into debt positions (or just hold cash) to re-balance his mix to his target of 70%-30%. If the investor falls prey to an analyst stock BUY recommendation or to a new 'attractive' equity mutual fund scheme, his proportion in equities will still get higher; which means the investor is taking on more risk than he can digest. This can be dangerous to his financial well-being should the equities perform badly.
My recommendation is which stock or industry to BUY in is an important decision, but whats more important for the stock market investor is to re-balance his portfolio on a regular basis. To put it simply, if equities do good, sell some of them and buy debt or other risk-free asset or hold cash. If debt market does good, sell some debt and get into equities enough to maintain the right mix for you. This will ensure your total risk exposure remains at target level irrespective of market volatility.
August 04, 2010
CFA Level 1 - Cleared !
I was thrilled to get my CFA Level 1 result. I passed with >70% in all sections including Financial Reporting (my weak area !).
It was a tough job with many sleepless and restless nights, no-fun time on weekends, and the regular pressure on the job. I owe a BIG THANK YOU to my dear wife for being so supportive all these months and especially during the last 3 weeks before the exam (I would say the most critical period). Without her support, it would have been impossible to clear the exam. Also Thanks to Schweser Notes (they are much condensed but precise version than the CFA curriculum books) plus the MBA background helped too..
Anyway, It's time to move to the next level (however don't feel like going back to studying again !). I heard from someone "If Level 1 feels quite an uphill task then Level 2 is like climbing Mount Everest!".
It was a tough job with many sleepless and restless nights, no-fun time on weekends, and the regular pressure on the job. I owe a BIG THANK YOU to my dear wife for being so supportive all these months and especially during the last 3 weeks before the exam (I would say the most critical period). Without her support, it would have been impossible to clear the exam. Also Thanks to Schweser Notes (they are much condensed but precise version than the CFA curriculum books) plus the MBA background helped too..
Anyway, It's time to move to the next level (however don't feel like going back to studying again !). I heard from someone "If Level 1 feels quite an uphill task then Level 2 is like climbing Mount Everest!".
November 23, 2009
Credit Default Swaps - Anti-Social?
As we all know, derivatives and CDS in particular were the focus and a root cause of the failures of big banks in the recent 1 year.Investors like Warren Buffet had warned years before about the ill-effects of using derivative instruments. They described them as "dormant economic weapons of mass destruction" of size upto $500 Trillion dollars . But people simply ignored the wise words...they simply loved the idea of leverage to make BIG money....
A recent article in the Financial Times, refers to CDS as an anti-social product. Its very interesting to know why. As many of you might know, a CDS involves 3 parties. One which has granted credit to another party (e.g. Corporation A gives credit to Corporation B) and the third which insures that loan (e.g. AIG). If company B fails to pay-back or has a credit downgrade, AIG would compensate company A. In return for this protection, Company A pays AIG a regular premium (insurance premium).
Thus CDS is anti-social as there is an incentive for Company A debt holders that Company B fails. There are also real cases wherein the debt holders of Company A forced Company B to go bankrupt. But what if the intermediary who provides for the protection (AIG in this case) also fails? This is what exactly happened ! Company A was left to the street along-with Company B and all the intermediary insurance providers.....The Financial world was paralysed and is still recovering......
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