Saturday, 19 April 2014

Framing Market Cycles: Speculators,Skeptics,Suckers & Sage.

"The crowd is untruth." - Soren Kierkegaard

Two years ago, stock prices hit their lowest point of the current market cycle.  As the investor herd wonders how to make money in year three of the Bull Market, I thought it prudent to observe the herd from a distance and frame the market cycle in a different way.I like to divide the investor herd (and market cycle) into three segments -Speculators, Skeptics and Suckers:
  • Speculators jump into stocks in the late stages of a Bear market and into the early stages of the Bull market; they are the gamblers; and they are willing to accept higher relative risk to capture the largest price movements that occur later, when the Skeptics and Suckers are buying in larger numbers.
  • Skeptics wait for the Speculators to make the first move and to see real evidence of economic recovery before buying into a Bull market. Skeptics don't jump in; they move in increments; and they usually miss the biggest price movements, both up and down. Put simply, Skeptics make their money when neither fear nor greed are at peak levels.  There is also a sub-category of Skeptic, which are the Contrarians, who are skeptical to the degree that the most prudent position is the opposite of the herd.
  • Suckers will buy or sell at any point during a market cycle but tend to buy more at higher price levels and sell more at lower price levels; therefore, as a whole, Suckers are the last to join a Bull market and the last to abandon it.
These are generalizations and most investors will exhibit characteristics of all three types at various points of a market cycle.  For example, at the market cycle extremes--the highest and lowest points--many Speculators and Skeptics become Suckers.  Also, there are hybrid forms (e.g. Speculative Suckers, Skeptical Speculators, Perma-Suckers, and so on).

At the present moment, I believe the market cycle is somewhere near the mid-point, where most Speculators have made their biggest gains; at least half of the Skeptics' assets are in stocks; and the buy high/sell low Suckers have yet to jump in.  In other words, uncertainty about the near-term direction of stock prices is higher now than at the easy-to-recognize extremes: The Bull market has room to run higher but short-term corrections are inevitable; and any investor armed with five-minutes' worth of gathered information could make a believable case on either side of the Bull vs Bear market argument .
"Ever more people today have the means to live, but no meaning to live for." -  Viktor Frankl
If there were to be a fourth 'S' for investor types, it would be the Sages:  These are the investors who do not predict, categorize, or apply heuristic models; they place self-knowledge and self-awareness above financial knowledge and market awareness; and they use money as a tool for life rather than following the herd's general behaviour of using life as a tool for money.

Where do you think the market cycle is today?  When do you think the current Bull market will end?  Are you a Speculator, Skeptic or Sucker (or Sage)?
Edited article from:

Friday, 18 April 2014

Quote for the day

"What sets successful traders apart?……Most people think that winning in the markets has something to do with finding the secret formula. The truth is that any common denominator among the traders I interviewed had more to do with attitude than approach." – Jack Schwager.

Colombo Stock Exchange Listings From 1989

Stock Market Bubbles!

"Excess generally causes reaction, and produces a change in the opposite direction, whether it be in the seasons, or in individuals, or in governments." - Plato (427 - 347 BC)

A financial mania, like any aberrant and self-destructive group activity, grows as new entrants and the passing of time legitimize the activity.

Much research demonstrates this dynamic of human behaviour, and have concluded that in a crowd, individuals take the inaction or action of others as a cue that this is the right course.

It is no revelation to apply this concept to group dynamics and in financial manias. Charles MacKay (1814 - 1899) in his 1841 "Extraordinary Popular Delusions And The Madness Of Crowds" book observed that:

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

A bubble is used to describe a stock that is trading at a price above its fundamental value!

Typically, the fundamental value of a stock is equal to the present discounted value of the stream of dividends paid by the stock.

Basically, it's the amount of money that you can expect to get back from the stock if you hold it into the distant future - taking into account the fact that present money is worth more today than tomorrow.

Things like a healthy economy, growing profit margins, a growing consumer base, etc., lead to better fundamentals and a higher stock price.

Recently a growing number of stocks do not pay regular (or any) dividends. The best way to think about the fundamental value of a stock for these cases is to think of the value of the company as the price it would receive should it be sold at some point in time.

So, why does a bubble's price stay above its fundamental value once it's there?

This is because if there is a bubble that has some chance of "bursting" -- or have its price drop significantly -- investors will not be willing to hold the stock unless there is a high rate of return.

As the price rises, the loss of money due to a fall becomes even greater, causing the price to rise even faster! The price rise will continue to accelerate until the price falls back to its fundamental level.

Why the price is initially too high is a big and strange question! It could simply arise from valuation mistakes, irrational expectations, animal mentality, or other idiosyncratic habits.

A quickly rising price reflects either a legitimate increase in the future earnings of the company, or a stock bubble -- which case it is cannot be told from current information.

The fundamental price of a stock should depend only on the future performance of the company. We can only observe the price, but not the future -- at least not without a crystal ball!

People are wrong about their bubble predictions all the time!

Even after the fact, a large fall in the price could be either due to a bubble bursting, or due to bad news which reduced the estimates of future performance and lowered the fundamental price.

A bubble can be perfectly rational in the sense that everyone is making reasonable decisions. The investors simply demand a higher rate of return on stocks that face a risk of bursting. Bubbles are not necessarily irrational.

On the other side, a stock that follows an irrational behaviour may be priced exactly according to fundamentals -- e.g. perceived future dividends; but may be completely irrational in the sense that the perceptions are too high!

In this case the prices are too high -- not because of a bubble, but...
Because of mistaken expectations of the future!

Thursday, 17 April 2014

Quote for the day

“If there is such a thing as a secret to the nature of trading, this is it: At the very core of one’s ability 1) to trade without fear or overconfidence, 2) perceive what the market is offering from its perspective, 3) stay completely focused in the ‘now moment opportunity flow,’ and 4) spontaneously enter the ‘zone,’ it is a strong virtually unshakeable belief in an uncertain outcome with an edge in your favour.” - Mark Douglas

17-Apr-2014 CSE Trade Summary

Following Stocks Reached New High / Low on 17/04/2014

Crossings - 17/04/2014 & Top 10 Contributors to Change ASPI

Top 10 Gainer / Loser / Turnover / Volume for the day

Foreign Activity for the day

Company Fact Sheet: Ceylon Cold Stores PLC - CCS:N0000

About the company:

Established: 1866                   Quoted Date: 1970-01-01              Sector: Beverage Food & Tobacco

Ceylon Cold Stores PLC is a Sri Lanka-based company principally engaged in the manufacture and marketing of beverages and frozen confectionery. Its soft drinks and ice creams are manufactured and sold under Elephant House brand. As of March 31, 2013, the Company's parent undertaking was John Keells Holdings PLC. Its wholly owned subsidiary, JayKay Marketing (Private) Limited, is active in owning and operating of chain supermarkets under the name of Keells Super. The Company operates in two business segments: manufacture and retail trade.

Chairman: Mr S.C. Ratnayake

Cheif Executive Officer: Mr J.R Gunaratne

Board of Directors:
Mr A.D Gunewardene
Mr J.R.F Peiris
Mr A.R Rasiah
Mr P.S. Jayawardena
Prof U.P Liyanage

52 Weeks Low: 113.00                                                                52 Weeks High: 183.00
Average Trading Volume: 16,330

Company Financial at a glance:
Click Table to Enlarge

Total Voting shares in Issue: 95,040,000

1. 2,160,000 Ordinary Shares of the Company were listed on 11th August 2011, pursuant to a 1:10 Rights Issue @ Rs. 300.00.
2. 95,040,000 Ordinary Shares of the Company were started to trade on 18th August 2011, pursuant to a 4:1 Share Split.
3. Investment in the Waterfront Project: The Company, along with its parent JKH and its subsidiaries JKL and JKP, will be shareholders in the Project Company WPL.

Top 20 Shareholders as at 31/12/2013

Percentage of public holding as at 31st December 2013 was 18.59%

The percentage of Foreign Holding as at 31st March 2014 was 5.98%