Are all the market crashes bad?

Amit Trivedi of Karmayog Knowledge Academy on why the great Indian securities scam resulted in a better and safer market for the investors.

Click on the link below to read the article:

Are all crashes bad?

#RidingTheRollerCoaster

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Humans are pattern-seeking animals

Humans are Pattern-Seeking Animals! 

A man is a pattern-seeking animal. We see patterns where none may exist. We have seen Ganesh idol in the clouds and we have seen India map on highways between trees.
Those are fine, so long as our lives are not affected. However, when one starts putting serious money while looking at patterns, one may be in for a very big surprise.

Read the full article here …

Identifying bubbles

Typical characteristics of a bubble:

  • Rapidly rising prices
  • High expectations for continuing rapid rise
  • Overvaluation compared to historical averages
  • Overvaluation compared to reasonable levels
  • Several years into an economic upswing
  • Some underlying reason or reasons for higher prices
  • A new element, e.g. technology for stocks or immigration for housing
  • Subjective “paradigm shift”
  • New investors drawn in
  • New entrepreneurs in the area
  • Considerable popular and media interest
  • Major rise in lending
  • Increase in indebtedness
  • New lenders or lending policies
  • Consumer price inflation often subdues (so central banks relaxed)
  • Relaxed monetary policy
  • Falling household savings rate
  • A strong exchange rate

 

Source: “When Bubbles Burst – Surviving the financial fallout” by John P. Calverley

Cycle is the destiny

This is what the history of financial markets suggests. Cycle is the destiny. Cycles are destined. However, one tries – and that includes large corporate houses, or banks or financial institutions, or regulators, or governments – one cannot change the destiny. At most, one can only delay the inevitable.

Cycle is the destiny

Why most implicit guarantees are guaranteed to fail

When someone offer an investment that is 100% safe and still offers reasonably high returns, you are under no obligation to invest your money. Be careful. Read the article below:

China’s Wealth-Management Time Bomb

 

Courtesy: Alpha Ideas

Do you know the future?

It amazes me how frequently the same questions keep coming back.

Some of the most common questions are:

  • “Which mutual fund schemes are the best according to you?”
  • “Which is the best mutual fund? Or best stock? Or best investment?”
  • “What is your view on the market?”
  • “Should I invest now or wait for some time?”
  • “I have invested in ********* mutual fund scheme(s). How much returns should I expect?”
  • “I have invested in ********* mutual fund scheme(s). Are these good schemes or do I need to make any changes?”

All the above questions have one thing in common – an attempt to know the future. It seems the entire business of investment management may be about predicting the future. And the investment expert is a professional forecaster.

The fact is, most have failed to correctly predict the future events – even the best of the investors. Let us see some examples and we need not go too far in the past. In the last seven months of the year 2016, the world witnessed three major events taking place in three different parts of the world.

First in the month of June, the people of Britain voted for exiting the Eurozone during the referendum, whereas majority had predicted that Britain would remain in the Eurozone.

On November 8, while many experts were expecting the US to get the first ever lady President, the result was very different.

In both the above cases, while there were only two possibilities, the actual result was exactly opposite of the popular opinion.

On the other side of the world, on the same day, November 8th, the currency notes of Rs. 500 and Rs. 1,000 were pulled out of circulation. I am sure nobody had any idea about this. No forecaster could predict such an event happening.

Continue further on the US election results, majority of the market experts and economists had expected that a Trump victory would spell disaster for the US. What happened in reality? Post the announcement of election results; the US Dollar has gained against almost all major currencies of the world. Can someone say that the fall of the Dollar was already factored in the price and hence post the victory of Donald Trump, the Dollar only recovered? Well, even that argument does not hold water, since majority was of the view that Hillary Clinton would win the election. There was no question of the unexpected being factored in the price. So, it was not a case of a political forecast gone wrong, but also a market forecast going wrong.

Sir John Templeton has famously said, “Buy value, not market trends or the economic outlook.”

The subject of investment management for most retail individual investors is to ensure enough money is available at the time of one’s life’s financial goals. In such a scenario, one must manage the investment risks such that the money becomes available at the time of need.

For that purpose, the important thing is to understand what can go wrong and how to protect one’s investments. Forecasting the future is not required.

  • Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

#RidingTheRollerCoaster

What back-testing does not tell …

Once again, a superb post by Ben Carlson.

10 Things You Can’t Learn From a Backtest

Those who love back-testing data should take the results with a pinch of salt.

One line that I liked the most in this post is “Unfortunately there is no such thing as a front-test.” And add to it the disclaimer from mutual funds “past performance may or may not be sustained in future.”

#RidingTheRollerCoaster