Monday, 30 November 2020
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!
Source:http://www.greekshares.com
Quote for the day
"Sometimes your joy is the source of your smile, but sometimes your smile can be the source of your joy." - Nhat Hanh
Sunday, 29 November 2020
Basic Volume Theory
Basic Volume theory includes the following maxims:
* Increasing Volume with an advance is Bullish
* Decreasing Volume with a decline is Bullish
* Increasing Volume with a decline is Bearish
* Decreasing Volume with an advance is Bearish
* A Market Top is imminent when heavy volumes occurs with little or No Gain in the averages.
* Heavy Volume confirms the direction of price breakouts from a Support or Resistance Zones.
* An increase on heavy volumes after a previous substantial rally signals a "Blow Off" with an impending to a Reversal approaching.
* Heavy Volumes accompanied by an accelerating drop in prices confirms a "Selling Climax" and impending price reversal after the panic selling subsides.
* Low volume periods after upward price reversals reflect a Consolidation Phase before resumption of the Upward Movement.
In the science of Technical Analysis, Volume plays a role which is as important as any other basic indicator. An increase in the volume in conjunction with Stock price moves adds strength and momentum in the direction of the move. It reflects the market's confidence that the uptrend will continue in force, or its pessimism that the downtrend will.
For the market, declining volumes as the market rises is supposed to warn the end of a BULL MARKET.
Likewise, sharp increase in volumes resulting in Selling Climax, signals the end of a BEAR MARKET.
An increase in abnormal volume can alert investors to coming price movements, Up or Down, before it becomes obvious to the overall market. Therefore, the market axiom "Volumes Precedes Price".
Historically, the majority of BULL MARKETS have originated with at least two days within two-month period where upside volume is at least nine times greater than the downside volume. Investors who track volume and spot the two-day Exceptional Upside Indicator can out-maneuver other investors and earn excess returns by positioning themselves for the coming Bull Market.
The Daily Volume Indicator measures extremes in the Supply/ Demand relationship. If a Stock closes at the mid point of its trading range for the day, the indicator reflects no change. Closing Price above or below the trading range midpoint show an increase or decrease in the Daily Volume Indicator, respectively.
In constructing the Daily Volume Indicators, Technical Analysts take into account the day's volume, closing price, Distance between closing Price and the mid point, and the Trading Range.
These are just the basic characteristics of the Volumes, these must be read in conjunction with other commonly used indicators before drawing up any conclusion.
Source: Importance of Value in Technical Analysis - http://www.stocklinedirect.com
* Increasing Volume with an advance is Bullish
* Decreasing Volume with a decline is Bullish
* Increasing Volume with a decline is Bearish
* Decreasing Volume with an advance is Bearish
* A Market Top is imminent when heavy volumes occurs with little or No Gain in the averages.
* Heavy Volume confirms the direction of price breakouts from a Support or Resistance Zones.
* An increase on heavy volumes after a previous substantial rally signals a "Blow Off" with an impending to a Reversal approaching.
* Heavy Volumes accompanied by an accelerating drop in prices confirms a "Selling Climax" and impending price reversal after the panic selling subsides.
* Low volume periods after upward price reversals reflect a Consolidation Phase before resumption of the Upward Movement.
In the science of Technical Analysis, Volume plays a role which is as important as any other basic indicator. An increase in the volume in conjunction with Stock price moves adds strength and momentum in the direction of the move. It reflects the market's confidence that the uptrend will continue in force, or its pessimism that the downtrend will.
For the market, declining volumes as the market rises is supposed to warn the end of a BULL MARKET.
Likewise, sharp increase in volumes resulting in Selling Climax, signals the end of a BEAR MARKET.
An increase in abnormal volume can alert investors to coming price movements, Up or Down, before it becomes obvious to the overall market. Therefore, the market axiom "Volumes Precedes Price".
Historically, the majority of BULL MARKETS have originated with at least two days within two-month period where upside volume is at least nine times greater than the downside volume. Investors who track volume and spot the two-day Exceptional Upside Indicator can out-maneuver other investors and earn excess returns by positioning themselves for the coming Bull Market.
The Daily Volume Indicator measures extremes in the Supply/ Demand relationship. If a Stock closes at the mid point of its trading range for the day, the indicator reflects no change. Closing Price above or below the trading range midpoint show an increase or decrease in the Daily Volume Indicator, respectively.
In constructing the Daily Volume Indicators, Technical Analysts take into account the day's volume, closing price, Distance between closing Price and the mid point, and the Trading Range.
These are just the basic characteristics of the Volumes, these must be read in conjunction with other commonly used indicators before drawing up any conclusion.
Source: Importance of Value in Technical Analysis - http://www.stocklinedirect.com
The Parable of the Mexican Fisherman and the Banker
An American investment banker was taking a much-needed vacation in a small coastal Mexican village when a small boat with just one fisherman docked. The boat had several large, fresh fish in it.
The investment banker was impressed by the quality of the fish and asked the Mexican how long it took to catch them.
The Mexican replied, “Only a little while.”
The banker then asked why he didn't stay out longer and catch more fish?
The Mexican fisherman replied he had enough to support his family's immediate needs.
The American then asked “But what do you do with the rest of your time?”
The Mexican fisherman replied, “I sleep late, fish a little, play with my children, take siesta with my wife, stroll into the village each evening where I sip wine and play guitar with my amigos: I have a full and busy life, señor.”
The investment banker scoffed, “I am an Ivy League MBA, and I could help you. You could spend more time fishing and with the proceeds buy a bigger boat, and with the proceeds from the bigger boat you could buy several boats until eventually you would have a whole fleet of fishing boats. Instead of selling your catch to the middleman you could sell directly to the processor, eventually opening your own cannery. You could control the product, processing and distribution.”
Then he added, “Of course, you would need to leave this small coastal fishing village and move to Mexico City where you would run your growing enterprise.”
The Mexican fisherman asked, “But señor, how long will this all take?”
To which the American replied, “15-20 years.”
“But what then?” asked the Mexican.
The American laughed and said, “That's the best part. When the time is right you would announce an IPO and sell your company stock to the public and become very rich. You could make millions.”
“Millions, señor? Then what?”
To which the investment banker replied, “Then you would retire. You could move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”
I love this simple parable.
It brings clarity to what the money game is all about… and definitely not about.
It brilliantly illustrates the illusions we so easily fall into when pursuing wealth and financial freedom. It's far too easy to build incessantly and forget the end game is happiness and a fulfilling life.
It's equally easy to forget all the goodness we're surrounded by today.
The truth is, it doesn't take a lot of money to have a truly wealthy life, but it does take freedom.
The investment banker was impressed by the quality of the fish and asked the Mexican how long it took to catch them.
The Mexican replied, “Only a little while.”
The banker then asked why he didn't stay out longer and catch more fish?
The Mexican fisherman replied he had enough to support his family's immediate needs.
The American then asked “But what do you do with the rest of your time?”
The Mexican fisherman replied, “I sleep late, fish a little, play with my children, take siesta with my wife, stroll into the village each evening where I sip wine and play guitar with my amigos: I have a full and busy life, señor.”
The investment banker scoffed, “I am an Ivy League MBA, and I could help you. You could spend more time fishing and with the proceeds buy a bigger boat, and with the proceeds from the bigger boat you could buy several boats until eventually you would have a whole fleet of fishing boats. Instead of selling your catch to the middleman you could sell directly to the processor, eventually opening your own cannery. You could control the product, processing and distribution.”
Then he added, “Of course, you would need to leave this small coastal fishing village and move to Mexico City where you would run your growing enterprise.”
The Mexican fisherman asked, “But señor, how long will this all take?”
To which the American replied, “15-20 years.”
“But what then?” asked the Mexican.
The American laughed and said, “That's the best part. When the time is right you would announce an IPO and sell your company stock to the public and become very rich. You could make millions.”
“Millions, señor? Then what?”
To which the investment banker replied, “Then you would retire. You could move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”
I love this simple parable.
It brings clarity to what the money game is all about… and definitely not about.
It brilliantly illustrates the illusions we so easily fall into when pursuing wealth and financial freedom. It's far too easy to build incessantly and forget the end game is happiness and a fulfilling life.
It's equally easy to forget all the goodness we're surrounded by today.
The truth is, it doesn't take a lot of money to have a truly wealthy life, but it does take freedom.
Source: https://financialmentor.com/
Quote for the day
“Never value the valueless. The trick is to know how to recognize it.”– Sidney Madwed
Saturday, 28 November 2020
Quote for the day
"Successful people aren't born that way. They become successful by establishing the habit of doing things unsuccessful people don't like to do. The successful people don't always like these things themselves; they just get on and do them." - William Makepeace Thackeray
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