Another fall into my behavioral biases

My past posts in June and July suggest that I am having a separate view of my investments and of the general market. In late June, I have a dim view of the market but a optimistic view of my own holdings. Hence, I have been too over-confident about my stocks and suffer from the disparity between intellect (on the general market) and emotions (on my own holdings).

This few days, I have been feeling my behavioral biases again. And I have succumbed to these biases. For the past few days, I have been (too) eagerly searching for stocks to buy, since I have disposed of my holdings in China Print & Dye due to my gradual dislike in its huge leverage.

I have looked around and today afternoon, having chance upon a NRA report of United Engineers. The report states that UE is trading at around 39% of sum-of-parts valuation. Due to a combination of time constraints (lunchtime about to end), desire to add to property sector and the eagerness to use the cash to buy something, I decide to buy in UE after less than 10 min in looking at the report.

While I do not know whether UE would turn out to be good or bad, I recognize that I have been too hasty in buying UE. That’s anther fall into my behavioral biases.

My portfolio as at 16 Sept

My portfolio currently are:
Hongwei
Techcomp
China Precision
China Print & Dye
C&O Industrial
A HK stock

Currently, my portfolio is around 10% below its July peak. I did not have any trades except adding to the HK stock for the past week.

In the subprice downturn, I have added to or re-initiate (for Techcomp) all my positions. Perhaps, I do feel a tinge of regret that I did not buy Metro at 0.85-0.89, even though I have pointed out to a few friends and my family that Metro can be bought at that level.

I have also looked at my past post in June and July. It seems that I have been too over-confident about my stocks, while I feel pessimistic about the market. In future, I shall try to view my dissonance between my over-confidence in my stocks and my pessimism about the market as a contrary indicator. This implies that I will start to go into cash when I am quite pessimistic about the euphoric market, perhaps in a bid to reduce downward volatility if the correction comes in future.

Book Review: Trade with Passion and Purpose

This post is a review on Trade with Passion and Purpose by Mark Whistler. The book is recently published in 2007. Mark Whistler, as he mentioned in the book, is a staitisical arbitrage trader.

Basically, the book belongs to trader psychology literature. However, it brings about a slightly different dimension when compared to other trader psychology's psychology book as its chapters are arranged by charactor traits: Honesty, Humble, Courageous, Fear, Adversity and Anxiety; and followed by EQ, gratitute, relaxation and a last section on developing a game plan. Developing a game plan touches on trading plan and risk understanding.

Some interesting points:
1) The book starts by having a mission statement and using Morita therapy: acknowledging and accepting your own feelings as they arise. For example, if you feel worried about a trade, you should acknowledge and accept your feeling. Personally, I do find that acknowledge and accept my own feelings would help me in investing as well as other matters.

2) The book does encourage one to express gratitute often. It even cites an academic study that suggest the act of frequently find things to thank for in life would help a person to be more happy.

3) Surprisingly, the book also covers a few breathing technique to help a trader or person to relax. For example, a breathing technique is to breathe in while counting to 10. Hold the breath for 15 seconds. After that, breathe out until you are out of air. Then repeat.

4) Interesting, the author puts up a list of items he is willing to risk in terms of trading and writing under the "Understanding Risk" section. When you are at a bookshop browsing through, you may want to look for this book and go through the author's list of riskable items. Maybe it would remind you, as I am being reminded, that it is not easy to be a competent full-time trader (or for me, a part-time investor).

All in all, the book will be useful for people who actually puts their money in the market. I cannot speak for traders as I do not really trade. However, if you are wondering why you are feeling this and that during market downturn or how you can better manage your emotions, you may wish to take a look at this book and see if it helps.

Book Review: SuperMoney

This post is a review on SuperMoney by Adam Smith. The book is first published in 1972 and re-introduced in 2006. The NLB does not seem to have the book.

The book is a description of financial markets in the period roughly around 1965-1975. Supermoney is interesting to me in a few aspects.

1) Supermoney has a chapter on Benjamin Graham and Warren Buffett, even before Warren Buffett becomes famous. The author conducts his interview at around the time where Buffett no longer manages money (somewhere after 1969) but rather working as an owner of Bershire. And it seems that Buffet's famous Rule of 'Don't lose money' comes from Benjamin Graham. I shan't say much here, since it will spoil the joy of reading that chapter.

2) Another interesting event is the Penn Central bankruptcy. The event is a bit similar to the subprime fallout now. I shall briefly describe what happen from my understanding from the book.

At that point of time, Penn Central files for bankruptcy and its commercial paper (or bonds) naturally will become worthless. And at that time, not only Penn Central but also other corporations with similar credit-worthiness are having the commercial papers out in the market too.

The financial circle become worried that the Penn Central incident would spread to other commercial papers from similar corporations. People may become scared to own commercial papers due to Penn Central incident. Corporations may not be able to sell their commercial papers or they have to issue their commercial papers at a much lower price. And when price becomes lower, the yield becomes higher. Note that this may indirectly affect the stock market as money may flow from stock market to purchase higher yielding commercial papers.

To cut the story short, Penn Central incident's final impact is reduced due to actions by the Fed. The corporations who are unable to sell their commercial papers go to the banks. The banks then go to the Fed and borrow money to lend to the corporations. A potential large fallout was averted.

In conclusion, Super Money is interesting to read, especially if you are interested in US financial history.

Book Review: A Demon Of Our Own Design

This post is a review on A Demon Of Our Own Design: Markets, Hedge Funds, And The Perils Of Financial Innovation' by Richard Bookstaber. Website: http://rick.bookstaber.com/

I have bought this book during the recent subprime Credit Debt Obligations (CDOs) meltdown, so as to better understand how the subprime leads to market meltdown. Essentially, from what I understand from the book, the recent market meltdown is due to liquidity crunch, wherely hedge funds simultatneously sold their equities position and the market is not able to absorb. This transpire to lower prices for the equities and with the momentum traders further shorting action to pre-empt and in the process profiting from the selldown, the market meltdown was exacerberated.

Other interesting points from the book are:
1) Correlation of different assets is likely to converge to 1 during liquidity crunch.
2) There are liquidity demanders and liquidity providers in the market. Interestingly, value investors tend to be liquidity providers, while technical traders tend to be liquidity demanders.
3) A cockroach with its simple strategy of fleeing when uncertain is able to survive in different environments. However,the fugu fish which has evolve to many different fishes with different kinds of survival techniques become extinct when a new type of fish (predator) was introduced to their environment.
... The book contains other points besides the above.

Overall, the book is quite a good read, especially for those who have studied economics. Or if you have enjoyed books like 'Fooled like Randomness', you would enjoy this book too.