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

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silmcoach
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Re: Turmoil in Financial Markets: no tariffs Sunday

Post by silmcoach »

A fresh wave of US tariffs on Chinese imports due to take effect on Sunday has been cancelled for now.
US negotiators are reportedly offering to significantly reduce existing tariffs on about $360bn (£270bn) worth of Chinese imports. In return, China has promised to buy large quantities of US soybeans, poultry and other agricultural products.

"We will begin negotiations on the phase two deal immediately, rather than waiting until after the 2020 Election," US President Donald Trump said in a tweet. "This is an amazing deal for all."


Trump halts new tariffs in US China trade war, BBC News, accessed 14 Dec 2019, https://www.bbc.co.uk/news/business-50784554
Interesting that the US markets response was luke warm to this announcement. I think the positive news was priced in a couple of days ago. I'm wondering if there might be a bit of an anti-climax now and the markets drift down to year-end. The same might apply to UK markets as the euphoria dies down and future trade deals become the focus of attention.
silmcoach
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silmcoach
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Re: Turmoil in Financial Markets: Happy New Year

Post by silmcoach »

Well, how wrong can you be? Rather than fall, all the indices rose to record highs up to Xmas. They have gone into decline post-holidays though.

I did not expect a significant "Boris bounce". Sold too soon, missed out on the 3.5% or so gain due to my aversion to loss. Still, happy to have banked (sold stock for cash) my 10% gain for 2019 on top of the 25% contribution from the government.

So, when do I buy back in to get those dividends paying again? Think will start with bonds. Royal London's price usually drops immediately after the ex-dividend date, that's 1st Jan this times around. If the price is right I will add to my current holding (the only one I did not sell any of at November's peak).

As to my suggestion that China would not sign up to a US-China trade deal after saying they would (so as to influence the markets and harm Trump's chances of re-election), it would seem I got that wrong too. Apparently they are going to sign up to Stage 1 of the deal in January, yet at the same time the Chinese Ambassador to the US was warning of a new Cold War between US and China.

It's going to be an interesting New Year! Best wishes to all.
silmcoach
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Re: Turmoil in Financial Markets: taking stock

Post by silmcoach »

As I follow the markets for now with interest it is time to reflect on my thinking about the stock markets and this experiment concerning loss aversion.

I started as an "experimenter" testing Kahneman's theory that humans are innately averse to loss. I stayed true to this hypothesis, strictly selling losers and holding on to winners, the counter strategy he suggests to avoid falling victim to loss aversion bias. I was okay up until late November, when I began to feel anxious about the lack of any US-China trade deal, and the fact that at the end of 2018 the markets had lost about 25% across the board because of the dispute. It was at that time I bought into several funds, some of which have gained that 25% over the year.

Throughout the year the markets were fairly volatile with significant troughs and peaks. The Dow rose and fell but ended the year up a record 26%. My FTSE tracker rose 19% and my Global funds on average rose as well. Had I stuck to Kahneman's strategy and not sold a majority stake in all but one of my funds (a bond one) I would have increased my investment gain of £376.92 by another +£48.80 +2.2% (on an average investment of around £3K over the year; excluding government bonus contribution of £720). I can't really complain about that. But the thing is, that is me from an "investor's perspective" talking, not the objective experimenter I started out as.

Now the question is, does this switch in perspective invalidate the experiment? Does my switch from an objective strategy to subjective intervention ruin the aversion-to-loss bias experiment? I think the answer comes down to perspectives again. If you take another objective step back and consider the investor from the objective experimenter's position, then the human aversion to loss is "proved" yet again. The experimenter, who due to limited personal funds was taking a significant personal financial risk, could not remain objective.

Perhaps this is an insight into why markets are moved more by sentiment rather than economic fundamentals. There appears to be no correlation between the economy and market indices, certainly not in 2019. So now I'm wondering if the effects of tariffs on China's economy in 2019 will begin to kick in through the Spring of 2020, regardless of whether a trade deal is signed or not.

Kahneman proposed a logical rule that should be followed regardless, hold on to winners, but sentiment, driven by unconscious fear and intuition over-rode that and appears to be doing it again. I'll hold on to my cash for the moment. Guess I fail miserably as an experimenter, but maybe a little more successfully as a prudent investor! My excuse is age. At 71 there may not be time for any significant collapse in the markets to recover in my lifetime. Guess I'll just enjoy my days out, there's far more to life now than worrying about money.
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Re: Turmoil in Financial Markets: Boom!

Post by silmcoach »

Forget the US-China trade deal - pales into insignificance as Trump lobs in a hand grenade! Don't think there will be any winners.
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Re: Turmoil in Financial Markets: it's a gamble

Post by silmcoach »

Just placed a £500 bond fund order. The price always falls just after the ex-dividend date. Yield is best available with lowest charges. Need to generate some income but still not a good time to buy back in for stock funds.

Racking my brain to try and understand why the markets are holding up with all that's going on in the world. I've come to the conclusion that investors are just getting used to and accepting risk far more than they could a year ago. The fact is that there is still no where else to invest cash to get decent return, so investors are willing to gamble (and that's what's going on at the moment) for fear of losing out. That fear is over-riding the aversion to loss. Given that the US indices rose over 25% last year, the thought of losing out on the possibility of a similar rise this year is just too much to bear. The thinking is - "I've got no choice ". It's going to take a real shock to shift that thinking. Guess it comes down to the signing of that US-China trade agreement. The question is whether the US flexing it's muscles will cause China to have second thoughts.
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Re: Turmoil in Financial Markets: the outlook for 2020

Post by silmcoach »

Steve Clayton, a fund manager with Hargreaves Lansdowne (HL) is upbeat about the markets for the coming year. He cites improving global trading conditions, greater political clarity at home [UK, Brexit], and an expectation that cheap money will likely remain on the table throughout the year as positive drivers.

Looking ahead, he suggests things look promising and is dismissive of negative outlooks. He acknowledges high debt levels, but argues low interest rates make these easily serviced, and with low unemployment and a greater willingness of employers to hire, he is far more optimistic. Further, with the likely deescalation of trade wars, he believes weakness in the Chinese economy could well reverse.

Clayton believes low interest rates and bonds yields will push money into stock markets around the world. That said, he then explains why investors should invest their money in HL Growth Funds, so I'm afraid I have to take his forecast with a pinch of salt. But we shall see. I'm inclined to take the World Bank's outlook for the economy with a little less salt. Andrew Walker, BBC World Service economics correspondent, summarises it thus, "The overall picture is one of a global outlook that is overcast and highly uncertain". World Bank warns on global growth, BBC News, Business, accessed 11 January 2020 https://www.bbc.co.uk/news/business-51041356

I will remain cautious before investing in any funds for the time being.
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Re: Turmoil in Financial Markets: so wrong!

Post by silmcoach »

Well, I couldn't have been more wrong. Market indices continue to rise around the globe :o

China did sign the US-China trade agreement (phase 1)!

It would seem that my aversion to loss distorted my thinking. I was justifying my decision to sell and take my profit of £378 rather than hold on to winners as advocated by Kahneman (but of course I did get 3 x £720 Government contributions in just over two years - that's been the real win in carrying out this experiment).

Loss aversion got the better of me. At least I have kept an average of £100 in each stock fund (9) so they remained on the board, but sadly I did not keep anything in my two S&P funds. I have also kept a watch list of what I sold and currently I would have gained £82.19 more had I not sold, and I will of course begin to lose some dividends.

But hey, oh, you live and learn. At least I put £500 into the bond fund (my tenth fund) which gained £3.00 the next day. Now, sorry to all you winners, I'm still hoping the market will fall so I can buy those winners back, and hold on to them in future.
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Re: Turmoil in Financial Markets: Chaos theory

Post by silmcoach »

What a difference a day makes, goes the expression. In this case, what a difference a week makes. A clear example of "The Butterfly effect". A solitary snake or bat in a marketplace exhales, and the second most powerful country in the world suffers what might be the greatest and most dangerous invasion in its history.

Just after 4 p.m., on what may be called V-day, and serious falls across all the markets, except for the Hang Seng in Hong Kong, closed for Chinese New Year.

A worrying and difficult time for many in China.
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Re: Turmoil in Financial Markets: on hold

Post by silmcoach »

After the US & Nikkei market falls overnight Europe takes a breather (suspect a bit of machine buying caused the opening spikes), perhaps unsure which way to go. It's a question of evidence; how reliable is the evidence coming out of China, and what of the outlook?

How the Hang Seng performs tomorrow after the New Year break may offer a better insight. No doubt some big investors will have close contact with those in the know in mainland China.

Update 10.30 am.

A few minutes ago BBC News reported that Hong Kong leader Carrie Lam has announced that in addition to suspending train and ferry services, flights to mainland China will be halved. People will also no longer be able to receive permits to visit Hong Kong from the mainland. Telling.
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Re: Turmoil in Financial Markets: wait and see

Post by silmcoach »

The Hang Seng stock market closed down 2.82%. Given Tokyo's Nikkei gained 0.71%, and Europe's markets gained slightly on opening, it would seem that concern is reasonably limited for now. Likely a wait and see time.

The determining factor may be whether the coronavirus outbreak is contained within China or not. Once all non-Chinese nationals are evacuated and have been quarantined for 14 days there will be a better indication of whether case numbers and deaths are rising or falling both in China and around the world.
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Re: Turmoil in Financial Markets: Hang Seng

Post by silmcoach »

The Hang Seng has fallen 9.0% since its peak of 29056.42 on 17th January 2020, and nearly 5% of that loss was in the last couple of days. Whether that reflects its location in relation to mainland China, inside information concerning coronavirus infection and mortality rates, or both, is hard to say. Whichever, I'm inclined to think there's only one direction for the rest of the global markets to go now. So I'm still sitting on my cash for the time being.

Wondering why global markets outside of China perform the way they do (such as slow to acknowledge the likely consequences of the coronavirus on the global economy). I'm inclined to think that investors are awash with cash from technology stock profits that all they can do with it, given a limited number of stocks, low interest rates, and reduced IPOs, is just gamble on sentiment and future expectations rather than economic fundamentals. I think they went out the window a while back.

On that basis, it is likely US markets will open lower.
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Re: Turmoil in Financial Markets: taking the plunge

Post by silmcoach »

Decided to invest (nominal amounts) in 3 funds while the markets are down and tomorrow is their ex-dividend date. Buying back at more or less the last sold price (no charges buying and selling funds).

I realize now you only make a loss when you sell. I can't stand seeing red on my SIPP account summary and so I made that the criteria for a loser. But nearly every single fund I sold, despite going into the red, actually gained 10 to 30% over the year. Had I been patient I would have enjoyed the dividends and gain.

The coronavirus outbreak could mean all funds lose over the next few months, hence an opportunity to buy. I think a focus more on income may be a better strategy for now, believing (from my experience so far) gain will come in the long run.

Update Saturday: The Dow fell 2% last night - hence the global fund I bought yesterday will fall at Monday's noon valuation, so I'll be in the red straight away - you've got to laugh 😄 This will be a test of my resolve to overcome my aversion to loss. It's my rational mind versus emotional response (fight or flight).
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Re: Turmoil in Financial Markets: still they rise!

Post by silmcoach »

As expected, my global fund valued at 12 noon fell nearly 2%. But surprisingly, despite Shanghai falling 8%, all other stocks, Asia, Europe and US, rose.

Perhaps the Shanghai fall was not as great as expected, or coronavirus concerns lessened, but there is definitely more confidence in the markets.

I'm beginning to think that investors are becoming more bold when it comes to risk. They've had everything thrown at them, heard the warnings, but still the markets continue to rise, bouncing back after brief falls. I still think it all comes down to there being no point in holding cash. With profits continuing to rise in tech and health sectors (as in China) I think the fear of losing out is greater.

I did invest the minimum amount in a another UK fund before 8 a.m. this morning - and of course :lol: the FTSE rose a hundred points on opening. I rest my case. Machine buying no doubt, we'll see how human sentiment kicks in through the day.
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Re: Turmoil in Financial Markets: stocks rising

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The markets held up yesterday in Europe, continuing up in US, and Asia overnight.

This morning, Europe is in reverse. Perhaps the penny's dropped. You can't bury your head in the sand. The current disruption in China will have a knock on effect globally. The question is for how long and to what extent.

This experiment is about testing a 'hang-on-to-winners' strategy. As an objective experimenter I failed, falling victim to a subjective aversion to loss, doing exactly what Kahneman said not to do, and sold winners to take the profit.

Realizing my mistake I have to buy back the winners. It is now a question of when. This is an exceptional time in the markets and it's going to come down to timing. I think the only strategy for now is to buy back at the price sold, then steadily increase my various holdings at a £100 a time, as long as the markets are falling, with a focus on cash dividends, balanced with an eye on historical gains.

Update: 9:20 a.m. Markets now in positive territory. I stand by my comments above. Guess I'm just gonna have to sit on my hands for now. Better still, have a good day out as the sun is shining 😊 Forecast toward the weekend is dire, gales for Sunday.
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Re: Turmoil in Financial Markets: still rising!

Post by silmcoach »

US markets had risen significantly at close Wednesday, then Asia rose again overnight, and European markets today (Thursday) rose across the board.

Trump was found not guilty, so perhaps there is relief in the eyes of some, with the likelihood of him being re-elected. China is reducing tariffs on over 1700 products from the US, presumably because they can't increase the amount of US goods they can buy for the moment, and there have been optimistic claims of significant progress in the development of a vaccine to combat the coronavirus outbreak.

Every things fine them, let's keep paying more and more for stocks so we don't lose out.
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