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Re: Turmoil in Financial Markets: wind of change?

Posted: Fri Feb 07, 2020 9:58 am
by silmcoach
Is this the turning point?

After softer gains on the US markets last evening (GMT), falls began overnight in Asia, and continued in Europe on opening this morning. With the realization that the coronavirus will not be going away anytime soon, sales warnings in the luxury goods sector, and supply chain concerns for major manufacturers, sentiment may now turn negative. Friday's close, and Monday's opening will give a good indication of how negative that might be.

My inclination before the 8 a.m. deadline (to sell funds today) was to cash in and secure the gain, but as the objective experimenter I'm going to stick with Kahneman and hold on to "winners".

Guess I will just have to steel myself for the appearance of red on my account summary, resist my subjective innate aversion-to-loss, and hang on to what I define as winners, even though they may show a loss in the short term.

Re: Turmoil in Financial Markets: Coronavirus; good news

Posted: Tue Feb 11, 2020 8:59 am
by silmcoach
The good news is that the number of new coronavirus* cases in China was down 20% yesterday. People's lives and health are what matter most.

Update 4 p.m. (GMT): The new coronavirus has now officially been named "Covid-19" by the World Health Organization

Re: Turmoil in Financial Markets: Coronavirus - deaths spike

Posted: Thu Feb 13, 2020 8:46 am
by silmcoach
Some 242 deaths from Covid-19 (the new coronavirus's official name) were recorded on Wednesday with the number of cases jumping to 14,840.

Apparently, this dramatic rise in deaths & cases is due to the use of a broader definition.

I don't want to be flippant, but a person is either alive or dead. So the dramatic rise in the number of deaths is absolute fact.

Although I feel uncomfortable thinking about finance at this time, this experiment is testing the theory of an innate human aversion to loss. Therefore, objectively, considering factors that increase the risk of financial loss is relevant.

In December 2018 markets around the world fell up to 25% on fear of a global trade war. Yet throughout 2019 they have bounced back to achieve record highs showing gains of up to 35%.

What's interesting is that investors over the year appear to have steadily become immune to risk as threats to stock values never materialised. It seems that the more risk investors were exposed to the more confident they became that they couldn't lose.

This might explain why the markets have reached record highs when the risk to the global economy could not be greater. It may be that a fear of losing out on likely future gains may actually have overridden any aversion to loss.

The question is whether the aversion to loss is innate human behaviour or not. If investors over the last year have learnt that fears of a loss were exaggerated, then we might expect markets to hold their nerve at this concerning time. However, if aversion to loss is an innate human survival mechanism then we could see a sudden and dramatic sell off as it kicks in with the sudden realisation that recently learnt behaviour (can't lose) proves mistaken.

Re: Turmoil in Financial Markets: does the penny drop today?

Posted: Tue Feb 18, 2020 6:55 am
by silmcoach
Asian markets all moved into negative territory overnight. The announcement by Apple that their bottom line will be hit by the coronavirus outbreak may just be the trigger for a major sell off later in the day.

We will soon know when Europe's markets open, and with an extra day to mull things over in the US, their markets (closed yesterday for President's Day) may well follow Europe's lead.

I've been wrong before, and if I am again today, then I will conclude that there is either no sense to the way markets work, or that my aversion to loss negatively distorts my judgement such that I cannot rely on any analysis of the markets I might make.

Re: Turmoil in Financial Markets: an economist's comment on the markets

Posted: Wed Feb 19, 2020 8:14 am
by silmcoach
Megan Greene, Harvard Kennedy School of Government, was asked about the markets continuing to do super well despite the coronavirus threat to the economy. Might investors be confused by this? She acknowledges that:
... the coronavirus outbreak is certainly having an impact on the global economy, but it is hard to quantify, so equity investors are leaving it out of their assumptions for now. But generally, beyond the coronavirus, if you run correlations between the equity markets in the US and the fundamentals underlying the economy there is about a 7% correlation which is incredibly low, in fact it's the lowest it's ever been. So there is a sort of a disconnect between what's happening in the markets and what's happening in the economy broadly.
Compared to the SARS outbreak, Megan was asked what impact the coronavirus might have on the global economy, she thought:
... it's hard to say, because the coronavirus is still spreading and there's still quarantines, and so until we know the extent of this it's hard to really quantify the effect on the economy. My guess is that it will be larger than the SARS virus, but we can sort of adopt some ideas from what we experienced from the SARS virus. One, for example, is that demand in China fell off pretty significantly in the face of the SARS virus. But if you actually look at retail sales for example, they bounced right back a few months later. We do know that some consumption ... will be purchased, so there could be a payback at the end of this coronavirus pandemic.
She also felt that:
... once the virus has passed it seems like demand could come back, also in China in particular, one thing we do know is that the authorities are going to do whatever they need to do in order to stabilize the economy and so we can expect policy measures to try to offset some of the implications.
BBC News, Beyond 100 Days, 7pm 18 Feb 2020

Re: Turmoil in Financial Markets: a buy

Posted: Wed Feb 19, 2020 9:54 am
by silmcoach
Placed a minimum order to buy into another high dividend UK Fund before 8 a.m. this morning.

Of course, the UK markets rebounded on opening (don't they always when I make a purchase due to be completed 12 noon the same day). But I'm now getting back on track to build up my portfolio of "winners" and holding on to them, as Kahneman says, regardless of whether they will show red (a loss) on my summary report. I'm just thinking about generating a regular monthly income better than any savings account, rather than long-term gain (given my age of 70 plus).

Re: Turmoil in Financial Markets: that's all for now

Posted: Thu Feb 20, 2020 9:32 am
by silmcoach
Given the rise in the markets yesterday I reflect again on the comments of the economist Megan Greene above:
But generally, beyond the coronavirus, if you run correlations between the equity markets in the US and the fundamentals underlying the economy there is about a 7% correlation which is incredibly low, in fact it's the lowest it's ever been. So there is a sort of a disconnect between what's happening in the markets and what's happening in the economy broadly.
I'm inclined to feel this experiment has run its course. Megan Greene's comments offer support to the view I've expressed several times, that there is no rational explanation, based on economic fundamentals, as to why the markets continue to rise. I do believe it is about a state of mind that investors have fallen in to, one in which you believe you cannot lose. This is because we've had a year of frights, where repeatedly there have been sell-offs because of one scare or another, yet the markets always seem to bounce back in a day or two.

I've spent enough time on this topic and it's time to move on, money is not a priority for me. As to Kahneman's main tenets:
  • Hang on to winners and sell losers, that seems to have been proved right. Although I have made a reasonable profit I would have more than doubled that gain had I hung on to winners.
  • As to aversion to loss - that's certainly proved to be true in my case. Because I have been putting my own limited resources to the test it is perhaps understandable that I feared losing the gains I had made.
Given these "results", my strategy now is to invest the majority of the capital held in my SIPP in a balanced portfolio of global equity and bond funds, further balanced between income and gain. I will have to follow the markets a little to choose the right time to buy. Once that's done I won't have to follow the markets any more. I'll just report occasionally on how the portfolio is performing. But now it's back to the feeling side of life.

Re: Turmoil in Financial Markets: ah, finally woken up

Posted: Mon Feb 24, 2020 9:28 am
by silmcoach
Is this the beginning of the big correction?

The record market highs of last week made no sense at all, even disregarding the coronavirus outbreak. I placed two fund orders before 8 a.m. expecting the markets to fall further this morning - and they did - with a vengeance.

Re: Turmoil in Financial Markets: still falling

Posted: Tue Feb 25, 2020 4:11 pm
by silmcoach
Placed four more fund buy orders. I will drip buy the minimum £100 per trade as long as the markets fall.

I realize it also means I will lose on a daily basis (unless the markets turn), but that will only be if I sell, which I will not do until long after the coronavirus and any impact it may have on the global economy is history.

Re: Turmoil in Financial Markets: still buying

Posted: Thu Feb 27, 2020 9:43 am
by silmcoach
I continue to buy as the value of stocks fall further. I am buying back at less than I sold in November 2019 - which means I didn't lose at all by selling winners and cashing in the gain.

It could be argued that the way the markets are performing now "disproves" Kahneman's theory of hold on to winners. But no one could have predicted the coronavirus outbreak, it's a once in ten year event. My decision to sell the majority of holdings in November 2019 was based on the total disconnect between stock values and economic fundamentals. The markets were vulnerable to a significant correction which could have been triggered by any other major global event.