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

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silmcoach
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Re: Turmoil in Financial Markets: wind of change?

Post 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.
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silmcoach
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Re: Turmoil in Financial Markets: Coronavirus; good news

Post 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
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Re: Turmoil in Financial Markets: Coronavirus - deaths spike

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

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

Post 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
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Re: Turmoil in Financial Markets: a buy

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

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

Post 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.
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Re: Turmoil in Financial Markets: still falling

Post 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.
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Re: Turmoil in Financial Markets: still buying

Post 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.
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Re: Turmoil in Financial Markets: brave or foolish?

Post by silmcoach »

Good morning - well it could be an interesting day. Japan rose earlier today on the news that both the US (on Friday) and today Japan's central bank have both promised to help protect markets from the impact of the coronavirus. Is that not limited by the already low interest rates and significant quantitive easing?

I continue to buy on a daily basis as the markets continue to fall. I placed six buy fund orders before the 8 a.m. deadline this morning. My buying in a falling market last week has been a costly exercise. You may recall I said I wanted to sell all my fund holdings when the market peaked on 21st Feb, but in order to stay true to Kahneman's hold-on-to-winners theory I didn't. So those funds I held on to took a considerable hit last week - so winners are not always winners in the short term.

Buying in to a falling market has proved expensive on paper. To date I have seen my £400 + gain on an average investment of £2.5K over the year (of which £250 was realised by selling the major part of each winning fund and cash dividends) reduced to £162.32 as of Friday. That's because I bought a fund one day and it fell the next and so on. In total I bought £2K of fund holdings last week, and with 6x£100 buys this morning, brings my total investment to £4,445.88. Total fund losses (on paper) as of Friday was £250.26, but still in profit the £162.32.

Update 8:40 a.m. See Europe's markets now rising, so my losses may be reduced at the 12 noon valuation. That's a double edged sword, good, as my stocks increase in value, but not so good, as the opportunity to buy in a bargain basement lessens. In the short term I'd rather bag a bargain as losses on paper will recover over the medium to long term.

Isn't this fun, a real roller coaster. Looks like the machines kicked in on the markets opening. Humans panicked Friday, robots said thank you very much on Monday.
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Re: Turmoil in Financial Markets: hold steady

Post by silmcoach »

Bit of luck yesterday as both European & US stocks dipped at their respective valuation points. Dow actually jumped 5% soon after the trade. Instinct tells me to sell, take the profit, Kahneman tells me, hold on to winners.

Europe had less of a bounce as corona virus risk is more immediate. Think the inevitable spread in the U.S. is less appreciated by investors, for now. When it is obvious I think the markets will fall again, so I won't be buying today.

I am quite happy for now, despite reduced gain, as all my funds are income. So holding on to winners will beat the interest rate of 0.1% on cash in the SIPP, and will certainly cover any fees.

Let's see how the next day or two plays out before buying anymore funds. I am expecting more falls, so don't want to buy on this bounce.

The lesson learned is that the hold-on-to-winners strategy is good for the usual fluctuations in the market, but you must be flexible in times of extreme volatility.
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Re: Turmoil in Financial Markets: a safe haven

Post by silmcoach »

Placed a £500 buy order for a fund in the bonds sector before 8 a.m. Pays 5.62% p.a. with .40% annual charges. The price fell with the markets, I would have thought it would be the opposite. Something to learn there.

My reasoning is that the ex-dividend date (quarterly) is 1 April (hope I'm not an April fool) and any rise in price will hopefully fall within the range of the dividend payable. There will likely be little capital gain on the £1500 invested in this fund, but I see the steady income as a good fail-safe for my hold-on-to-winners portfolio which yesterday gained £117.58. But of course, it could lose double that tomorrow in this turbulent time.

Think I need to review notes from a Resilience Workshop I attended a couple of years ago. It's a quality I need to recharge in myself as the going gets tough. The people I feel sorry for are those in the Gig economy (think that's casual workers - will look up). They could be hit hard, like a lot of other self-employed people. Fingers crossed that we can slow the spread of the corona virus until the warmer (hopefully) weather arrives.
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Re: Turmoil in Financial Markets: decision-making bias in financial trades

Post by silmcoach »

Not investing this morning, taking a bit of a breather while the markets take stock (no pun intended).

See the coronavirus post to understand my reasoning.

Update 8:20: Note significant rise in U.S. markets last evening (GMT), more cautious in Europe this morning. Think that's about the stage of the coronavirus outbreaks in the respective continents. For once the U.S. is lagging behind Europe. Let's see how things pan out.

Politics is also coming into play as a downturn in the economy makes Trumps reelection less of a certainty.
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Re: Turmoil in Financial Markets: Could get nasty

Post by silmcoach »

Given Asian markets falls over last night (GMT), linked to collapse in oil prices, I'm expecting significant falls in Europe today, and later in the U.S.

Maybe unwise, but I have placed four buy orders to top up funds with an ex-dividend date end of the month. Probably will be my last for now as losses are eating into realised cash gains. Still in profit though, for now.

I'm expecting significantly greater falls yet to come. Just have to hold my nerve and wait probably 2-3 years for the markets to recover.
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