Tuesday, March 6, 2012

Investment and Entertainment

Most investors equate investment to entertainment to some extent. Many, like the retail investors who have no information (e.g., my dad), invest purely for the entertainment. This is a severe behavior bias that we all need to guard against.

In the last couple of months, there are friends who ask me when I would advise them to sell, especially when they do not see I post anything. They are always itching toward the next trade. There will be people who would regard low portfolio turnover as being slacking on managing money for them. This happens even to many institutional investors.

There will also be people, who have MBA degrees from great schools and work for big banks, argue that they are still unclear what to do when they see my posting on risk on and risk off. Some of them also argue that my postings are not a track record because I do not tell them exactly what to do. Well, the simplest thing would be to buy or sell a Heng Seng index ETF, mutual fund, or futures contract. It cannot be easier. If one wants to spice up the trade a big more, bringing in high beta stocks and long term US treasury bonds or bond ETF, mutual funds, or futures contracts. Since some of these friends are managing money for other people, I think their clients should be really concerned. If these friends are so lazy to even think of these, they probably should give their clients’ money, plus their own money, for me to manage.

Investing should really be emotionless. Ups or downs, right or wrong, it should not affect your mood and behavior. This takes some experience to achieve. Good luck in getting rid of the entertainment aspect from your investment.

It is time to lighten up risks

I meant to post the day after ECB’s second LTRO to post this update but I was too busy. Four seminars of three papers in three weeks are a killer and I am still digging out of the hole due to the travels done in the three months till early February.

So what has changed? 1) ECB finally answers to the call of duty to its lender of the last resort responsibility and the risk of imminent breakup of Eurozone is greatly reduced. But ECB does not have clear plan for more large scale QEs unless things gets much better. 2) Bernanke announced the same intention in the last few days. The US first quarter GDP estimate consensus is likely to be revised down slightly. The US corporate earnings have peaked out. If it were not due to the blowout profit from Apple in the last quarter, corporate earnings would have pivoted then. 3) China will not loosen up as much as people have expected (of course they have always yielded to pressure of economic slowdown every time in the last ten years, which finally leads to the current dire situation).

On the eve of ECB’s second LTRO, the market has priced in all the great news (and likely more than the realistic level). Now some of the good news has not come as much as expected. So the market is a bit disappointed and is consolidating. It might still go up in more volatile environment than in the last three months but the risk has started to overweigh the return. The further gains can only rely on investors’ unrealistic overreactions to good news.

Is this a good time to set up shorts or buy long term T-bonds? I would wait at least another couple of weeks to examine the situation. Likely the biggest potential bomb is disappointment in earnings, which would happen after April 1. Even then, one has to see how much a correction it will be, if any.