Turmoil in Financial Markets: decision-making bias in financial trades

Coaching Psychology topics of interest to members and guests.
WARNING: Posts here can be read by anyone on the Internet
silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in the Financial Markets: Crunch time?

Post by silmcoach » Mon Aug 26, 2019 5:24 am

Well it's a Bank Holiday today, so London closed, but Asia down over 2%. I've got a feeling this week is going to be a bloodbath on the Markets. Trump is ratchetting up the trade war with China, and given his reaction to Denmark's refusal to "sell Greenland", I think it's becoming clear just what a risk he is to the world economy.

I still think I should have sold up when I wanted to a couple of weeks ago. But if testing a theory you've got to stick with it. We shall see. On the positive side, if the dip is big enough it could be another buying opportunity, but for me, the fear of losing is pretty strong. I feel I am being greedy. Getting the 20% contributions from the government is good enough, but it just seems silly for cash to sit there losing it's value due to inflation. Rationally, I think my strategy of mixing growth and income generating funds is right, but I am gambling that we will not tip over into full-blown recession like the 1930's, which might wipe out the dividends.

Oh yea of little faith!
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in the Financial Markets: How wrong

Post by silmcoach » Mon Aug 26, 2019 9:46 pm

So, talk of a bloodbath on the markets this week was misplaced. The big fall on Wall Street Friday, after Trump announces the raising of tariffs on imports from China, was followed by a rise for the Dow on Monday, after Trump's announcement that Trade Talks with China are to resume. Apparently, this is Trump's negotiating strategy, confuse the opposition by continually restating your intentions contradicting those made previously.

Personally, my strategy stands, hang on to winners, sell losers and get on with the rest of my life. You can't second guess confusion, so I will just ignore whatever Trump says and try to sell at peak, and buy in dips. The only problem with that is knowing the limit of either. I have previously managed to both get it both spectacularly right and spectacularly wrong. Need to develop that intuition more! [See "Intuition in Business".]
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in the Financial Markets: not optimistic

Post by silmcoach » Wed Aug 28, 2019 8:11 am

Seriously considered topping up a couple of funds this morning. But, although Trump claimed Monday Trade Talks were back on at China's request, they denied yesterday any such request had been made.

I'm beginning to think we're going to see a downward slide in the markets towards the end of the year. The only evidence is that negotiations appear to be mirroring those of last year when the markets steadily drifted down due to uncertainty. So, I'm sitting on my cash for now.

I think U.K. stocks will also be subdued due to Brexit uncertainty. So no point investing now, despite the recent dip.

Again, I am of the opinion that the steady rise in the markets over the last few years is down to the simple fact there is no where else to invest for a decent return. So investors take a cautious bet, but get cold feet as soon as any eventuality threatens the global economy. It's all about sentiment.

So let's see if, as with last year, the markets fall toward year end. I don't believe I'll miss out on any significant rise, I'd rather have cash in hand for a possible late December dip.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in the Financial Markets: What dip? The machines kick in!

Post by silmcoach » Fri Aug 30, 2019 5:29 am

So much for a drift down in the markets, the opposite has happened, they have bounced back. But the bounces have been instant on markets opening. That suggests the machines kicked in.

There appears to be an interesting tussle between sentiment and machine trading. I guess you need to know the logic of the algorithms that control the machines, and to understand the logic you need to understand the minds of those who make up the rules to code. So, what might be the criteria to initiate buy or sell?

As a novice I can only go back to first principles. Why does anyone buy shares or put their money into funds, which after all is a risky thing to do? I guess the most obvious answer it is to profit. For me, it's about getting a higher return than the minimal amount of interest paid by savings accounts and gaining a considerable tax advantage/government contribution. For professionals, it's their livelihood, either profiting for themselves or managing other peoples money.

The eye to profit can either be short or long-term. I'm inclined to think short-term gains are for the machine buying of shares for quick profit, and long-term for humans like me who are more inclined to invest for the long-term. You can't program sentiment or fear of losing into a machine, or the long view, because the future is impossible to predict (consider Trump's tweets, you can't take account of his future thoughts in an algorithm!). What you can program are rules. To profit on shares you need to compare share price to company value. The rule has to relate to this balance. If price lower than value, buy, if the opposite, sell.

No human can calculate this price/value ratio for all the shares in a fund overnight, but a machine can. Perhaps this is why the greatest price movements occur on the markets opening first, then human sentiment tweeks stock prices through the day?

It is unlikely that the U.S./China Trade War (and that is what it really is) will end any time soon, if ever, and so market volatility will continue. The only profit I have made so far is buying in the dip. I accept Kahneman's assertion that humans have an aversion to loss, but I'm not so sure about hanging on to winners in a prolonged period of exceptional market volatility. If I had sold up when I wanted to, and then bought back in when I did invest some more cash, then the value of my portfolio would certainly not have fallen as much as it did. Age does come into it though. If you have twenty or thirty years to go before retirement then I guess all this attention to the markets is pretty much a waste of time. Just hang on to winners.

Will give some thought to this. Now the following morning. I think my strategy, staying true to Kahneman, will be to raise the bar on what I determine are losers. I will sell those funds that dip the most, (when they return to profit that is). I have noticed that my best funds dip very little. I will obviously take into account charges, return and growth, as well as maintaining a good spread.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in the Financial Markets: Research - Fund Analysis

Post by silmcoach » Thu Sep 05, 2019 12:59 pm

The SIPP funds are currently up 8.4% as of 9 Sept 2019 (investing steadily from December 2018 to August 2019) plus a gross income of £38.60 on £3,700 invested, cash in hand £991. Charges £8.33. Interest received £2.19. (Not to forget the £3.7K invested after cash withdrawn includes 2 x £720 in government contributions, so the SIPP gain is actually considerably more than 8.4%).

Testing Kahneman's 'Aversion to Loss' theory continues. (Ah, Ah - so I'm sticking to the 'holding on to winners' strategy then)

Raising the bar to identify the best winners got me asking, "Why do some funds fall much more than others in a dip?" I thought a fund analysis is perhaps the best place to start.

Comparing three UK Equity Income Funds purchased since December 2018

The best performing Fund is up 26.32% up as of 4 Sept 2019, plus nominal income. All three funds are invested around 25% in Financials, but this winning fund is invested 65% in Consumer Discretionary and Consumer Staples, 45.58% UK (50/50); 20.29% International (predominantly Consumer Staples); 6.21% in the Technology sector.

The other two Funds that I consider losers, each purchased 50% in March & 50% in August 2019 are down -2.43% and -4.14% respectively. (I spectacularly misjudged the August dip). However, cash dividends are giving a return of approx. 3% p.a., so I can hang on to them until yield is in profit before selling.

So what's the difference in investment strategy? These funds have invested less in Consumer Discretionary and Consumer Staples at 22.87% and 21.82% respectively, and more in Energy and Industrials, 21.97% & 37.48% respectively. Neither are invested in the Technology Sector.

It would seem that Consumer Investments are more profitable and resilient to dips, as are Technologies. I guess Energy and Industrials are more exposed than Consumables & Technology in a recession

Comparing two funds that invest mainly in Bonds I discovered that:

The "winning fund" over 6 months had a 1.58% capital gain. It is invested:
UK Bonds 60.68% (Bonds 22.8%; Financials 19.21% ; Consumer services 8.02%; Industrials 5.87%; Utilities 3.19%; Technology 1.03% + misc);
Int'l Bonds 28.2% (Bonds 14.37%; Utilities 5.42%; Industrials 2.91%; Financials 2.28%; + misc.);
UK Equities 5.14%; International Equities 1.27%; Others 4.13%; Cash & Equiv. 0.36%

The '"loser fund" with no capital gain, and slightly lower income after charges is invested:
UK Bonds 34.61%; (Bonds 14.06%; Financials 12.64%; Consumer Services 5.19%; Industrials 1.76%; + misc);
International Bonds 48.67% (Bonds 24.97%; Financials 12.64%; Consumer Services 3.35%; Utilities 2.55%; Telecoms 2.55%; + misc);
UK Equities 8.28%; Cash and Equiv 8.54%; Managed funds were showing a loss of -1.22%.

It would seem that UK Bonds are a better investment as they must give a higher return.

Immediate future investment

Given the realization that to receive a dividend you only need to hold the fund on the ex-dividend date (just that one day) I see no point in holding cash; you can buy the day before and sell the day after. Given the uncertainty of the market - is it going up or down - I think it best to put cash into the "winning" bond fund with an ex-dividend date the beginning of next month. As the bond fund price fluctuation is within a relatively small range there is less risk of any sudden fall in price wiping out the dividend. So, I'll just follow the bond price to hopefully buy in any slight dip over the next couple of weeks.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: Saudi Attacks

Post by silmcoach » Mon Sep 16, 2019 11:12 am

What a difference a weekend makes!

My intention to sell "loser" Equity Income Funds high on Energy Stocks because "winner" funds are strong on the Consumer side suddenly seems wrong. The attacks on Saudi oil facilities proves the wisdom of a balanced portfolio; holding Consumer and Energy stocks now seems very sensible indeed.

So I was right to hold off selling the break-even "losers" over the weekend, to see how Monday shaped up. Shell is up 3%, and BP 4%. Hopefully this feed through to the mid-day pricing. I may find those "losers" have suddenly become "winners". I will still buy the bonds with cash in hand before the ex-dividend date of 1st October.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: Bond Funds; impact Saudi attack

Post by silmcoach » Tue Sep 17, 2019 12:05 pm

Interesting, of the "loser" Equity Income Funds I expected to rise due to the attack on Saudi Oil infrastructure, only one did. Despite them both being significantly invested (21.97% & 37.48% respectively) in Energies and Industrials, only the latter rose.

So as far as balancing my investment across Sectors is concerned, the fund to sell would be the first one, as the rise in Non-renewable energies was likely cancelled out by the fall in other sectors, i.e. Basic Materials (8.48%), and a lower investment in Health Care sector (3.53%) & a high cash holding (9.05%).

I have started to invest £100 a day in the Bond Fund with an ex-dividend date of 1st October, as planned. Just waiting to see how the prices move on the Equity income Funds before selling. Now I know which is the better I will buy back in the next dip, unless I am making a fool of myself! I'm anticipating a fall towards Xmas as I don't believe the US/China Trade War will be resolved anytime soon. Pride v Power is an interesting scenario, neither will blink.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: Sell!

Post by silmcoach » Fri Sep 20, 2019 6:19 am

4:30 a.m. Couldn't sleep - decided must sell my three UK "loser" income funds. :lol: Maybe silly, but whenever I'm restless like this it's usually my unconscious telling me to act.

Rationally, the funds have performed poorly over the last few years. Given the current uncertainty over Brexit and the global economy, I certainly don't think I will lose out on any significant rise in the near future, and I can buy back anytime. I think another dip is more likely. Yes, I definitely am risk averse!

Back to bed I think. Need to forget about the stock market while we're having such lovely weather. Must make the most of this last gasp of Summer.

4 p.m. In the cold light of day, no regrets selling these funds with a small profit. Fortunately the FTSE 100 & 250 both rose up to the 12 noon valuation point.

I shall enjoy the lovely sunshine forecast this weekend without a second thought for the markets. Hooray.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: Ah hah - there is a place for gut feeling

Post by silmcoach » Mon Sep 23, 2019 9:38 am

Monday 9:30 a.m.

Maybe coincidence but both UK and all Europe Markets have opened with significant falls. Glad I decided to get out of the "loser" funds" before last Friday's 8 a.m. deadline for trades and the noon valuation point, based upon my gut feeling early (3:30 a.m.) that morning. "Gut feeling" does have it's place in financial trading, although Kahneman thinks it's a mistake to trust such feelings because of innate biases, such as an aversion to loss.

However, when dealing with complexity (which is what trying to anticipate movements in global markets is about) it is impossible to rationally analyze all the factors that impact on the constant rise and fall of markets. Did anyone anticipate the attack on the Saudi oil infrastructure last week end?

But we manage complexity all day long, coping with everyday living. That's millions of judgements and decisions every single minute of the day, without our even noticing the incredible extent of processing going on unconsciously. At the most basic level, when you pick up a piece of paper or a cup of coffee, proprioceptive feedback controls muscle movement to adjust for the difference in weight. Reaching for a closing door you anticipate where the door will be the moment you catch it, and so on. Driving a car involves the same anticipatory process - that's the problem with self-driving cars, they can't anticipate the unexpected, only react to it.

Early hunter-gatherers would have relied on this innate ability to sense and anticipate, and although the World has moved on from those early days our physical bodies have not evolved at all. So having some feeling about movement in global markets is no different to the hunter-gathers sensing all has gone quiet in the forest, or noticing a herd of gazelle suddenly takes fright, suggesting danger is about. The wonderful thing about humans is that they have the capacity to rationally analyze a situation before they act, and given that there is often time to think in our arbitrary constructed World (as opposed to danger in the natural world), there is time to assess whether a "gut feeling" (intuition - in business) is valid, as I did early Friday morning.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: Slide begins?

Post by silmcoach » Wed Sep 25, 2019 7:54 am

Well Trump, attending the UN General Assembly in New York, has lobbed a metaphorical hand grenade into the US/China Trade War negotiations, maybe to distract from the impeachment investigation initiated by the Democrats.

"Not only has China declined to adopt promised reforms, it has embraced an economic model dependent on massive market barriers, heavy state subsidies, currency manipulation, product dumping, forced technology transfers and the theft of intellectual property and also trade secrets on a grand scale.” “As far as America is concerned, those days are over.” Donald Trump, BBC News Live, 25 Sept 2019.

Is this the beginning of the slide? So not only Brexit chaos affecting Europe's fragile economy, but trade war belligerence affecting the global economy. It's a double whammy - I'm sitting tight on my hands right now.

Glad I pruned my losers in the SIPP. I should have enough margin to stand a moderate to serious dip while markets take their course. Cash in hand to buy in the dip, just how deep it will be toward year end is the difficult call.

Of course, next week I could have egg on my face as I may have been talking a load of nonsense. But that would mean the SIPP funds remaining in healthy profit, so it's a win/win outcome whatever.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: Egg on face?

Post by silmcoach » Thu Sep 26, 2019 9:31 am

Well, markets are bouncing back this morning - could that be egg on my face?

Let's wait and see, I'm thinking there's a lot of buying in the dip. But I'm not buying yet, still think there's a way to go South up to year end.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: UK-US contrary market movements

Post by silmcoach » Fri Sep 27, 2019 10:26 am

Well, the US markets have fallen, but UK risen. Looking at the UK rise it does seem to be machine buying in the dip, with significant rises on opening. Sentiment doesn't seem to have kicked in yet, perhaps waiting till weekend. Can see no other explanation given the US markets fall yesterday in response to Trump and Trade.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: Tempted

Post by silmcoach » Thu Oct 03, 2019 9:23 pm

When it came it was sudden. FTSE still falling but US Markets have landed on a ledge for now, let's see if they hold steady.

Decided to dip my toe in another S&P 500 tracker fund that I've been following. Given the recent fall, thought I'd get it on the board as easier to follow. This fund is not relevant to the Kahneman experiment. It's just that Warren Buffet has told his dear lady that when he's gone she should sell up and put the lot in an S&P 500 Tracker. So I thought I would follow his advice.

Already in one S&P 500 Tracker, this is the only other one I could find for the mo, but two's enough to compare. One other possible plus, it is a US Dollar Fund. That may be an advantage if the pound struggles after Brexit.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets; Sudden

Post by silmcoach » Sat Oct 12, 2019 9:14 am

I did expect a steady fall to year end, but a fall of 27.6% in my gain in only three weeks is a blow, especially when I so wanted to sell the lot to bank my overall 13% gain.

I believe it was a mistake not to have sold up, despite Kahneman's argument that you should hang on to winners. I also believe the argument put forward by the fund managers that you should hold on to stocks for the long term is in their interest, not necessarily the investor. (Despite the claim that if you had been out of the market for the best ten days over the last 25 years your gain would have been halved)

These are exceptional times of wild swings in sentiment and stock values that I think much greater flexibility is required. I have to say I am finished with the Kahneman experiment, and I will be open to selling up my entire portfolio in peaks at any time. The fund managers and the trading platform service providers cannot lose, they get their commission regardless of whether stocks rise or fall.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 193
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: Note

Post by silmcoach » Sun Oct 13, 2019 6:55 am

As stated before these posts are not to be taken as advice or guidance in financial trading. I am commenting solely on a personal test of Kahneman's assertion that humans have an innate aversion to loss, such that when trading stocks investors are more likely to sell winners, to make a gain, rather than sell losers, and make a loss. Khaneman advocates the opposite, it is better to hold on to winners and sell losers.

Thus far it would seem that I most certainly do have an aversion to loss, and that my feeling in response to a loss (even in a portfolio without selling) outweighs any positive feelings about gains. It may well be the case that this aversion to loss is making me want to go against the Kahneman strategy of holding on to winners.

Most importantly, my age is a factor - at 71 l can't realistically think beyond 5 - 10 years. Getting that 25% cash contribution of £720 p.a. from the government, up to the age of 75, is an instant gain I am very satisfied with. I'm inclined to think that investing a little with sufficient dividend to cover fees is better than risking the lot hoping for a greater long term gain which, given the very real risk of a global recession, could easily turn out to be a significant loss wiping out even more than the £720 p.a. For this reason I think it wise in future to bank any significant gain (cash-in winning funds on peaks). I have resisted doing this so far three times, and in each case I could have bought back in at a significant discount.

I believe the markets will see significant rise and falls for some considerable time due to the US/China Trade War, which is about more than trade alone. It is a fact that very few wars have ended by mutual agreement to end hostilities, usually the fight goes on until one side is defeated. Without physical conflict to exhaust resources an economic war can continue almost indefinitely, austerity can be tolerated far longer than destruction. Thus, in the current market turmoil an investment strategy should consider not only economic fundamentals, but also global politics. What might the long term objectives of global players be? Might their political ambitions impact on economic policy? Capitalism is all about the money. Communist countries have tended to put political ambition before economic power and failed. That lesson has been learnt, and economic power now takes precedence, as it alone can empower political ambition.

Thus I question how political ambition might shape economic strategy? A Trade War may actually play into the hands of those it is intended to constrain. If the instigator's populace are free to challenge policies and politicians that cause them to suffer financially, but the other party's populace dare not protest, then the protagonist is acting with one hand tied behind its back. Thus announcing an intention to comply will influence market sentiment, causing stocks to rise, only for sentiment to weaken, and stocks fall, as non-compliance becomes apparent. This strategy need only be played out until the instigator loses power. In the case of President Trump that could be in just over a year. Given that any successor might likely scrap the tariff policy, there is an incentive to depress the markets because the American voters are influenced by the state of the domestic economy.

I therefore expect significant rise and falls in the Markets to continue. My strategy should therefore be to start surfing the Markets, waiting to catch the next big wave, alert for the right moment to bow out and cash-in. Then buy back in the dip. However, there is a risk the current downward trajectory could continue until year end.
silmcoach
Greatest wealth - happy heart, peace of mind :D

Post Reply