Tag Archives: Investments

Investing in, not Trading, the Price Cycle: an Overlay Strategy

March 4, 2015 By in Investments Tags: ,

Here’s the reason market timers lose money: They are traders instead of investors, and as discussed in a previous article traders are time sensitive as their main dependence is on price movement. Therefore they need to invest as close to the upturn in price as possible and they need to hold on and exit only when the price stops appreciating.

Investors, though, can trade the cycle to their profit as an overlay strategy. What is an overlay strategy? It is an extension of an existing strategy. An enhancement. It makes sense only if the underlying strategy makes sense.

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Who Wins, the Trader or the Investor?

March 2, 2015 By in Trading, Investments Tags: , , , ,

The perennially favourite discussion topic is trading versus investing. What’s the difference? Is it short time horizon versus long time horizon? Is it growth versus value? Is it Soros versus Buffet?

This post is a continuation of my 2007 article in The National. Reading the previous article is not necessary to benefit from this post, but looking at the ideas across an eight year period might be helpful.

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Moral Arbitrage and the Inheritance Play

February 22, 2015 By in Investments Tags: , ,

The thing about the rational investor hypothesis is that it assumes that investors wish to maximise a financial risk/reward function. They don’t. Investors have a utility function that includes economic considerations, but also includes many other goals important to the investor.

Some investors may refuse to invest in defense companies, especially those that produce offensive weapons. Others may avoid investing in companies based in countries who have policies that they don’t approve of. Still others may reject gambling or alcohol related companies. The list goes on.

Whilst economists discuss such issues ad nauseam, traders make money off it. A non-financially motivated seller nearly always provides an opportunity for the astute, and differently motivated, investor to make money.

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The Investor’s Edge

February 10, 2015 By in Investments Tags: , , ,

Many of the ideas used by the investment community are adopted from the horse track and casino betting communities. Much of the failure that has dogged the investment community is due to rocket scientist PhDs misunderstanding the successful models of plebeian punters. The use of betting as an example is not an endorsement, just history.

To understand how the securities markets work you have to look no further than the horse bookies. Bookies take the bets from the bettors. This is the first point that the public begins to misunderstand how betting, and therefore investing, works.

There are two potential misunderstandings: The first misunderstanding is assuming that each horse has a uniform probability of winning, i.e. they are all just as likely to win. The second misunderstanding is assuming that the bookie offers one to one payout odds, i.e. pays $1 for each $1 that is bet. Grasping the significance of these statements is the key to successful investing.

The bookie, equivalent to the investment bank or broker, will always make money. Always. They do this because they do not set payout odds depending on which horse they think will win, they set payout odds based on how people bet.

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The Breeding and Nurturing of Ideas

February 3, 2015 By in Leadership Cornerstone, Leadership Tags: ,

I must own up to something. I am not a prolific writer. I get that compliment quite often by readers of my articles. But I do not produce 3 to 5 major ideas a week. I harvest them.

What do I mean when I say that I harvest my ideas? Nobody can come up with so many ideas on a consistent basis. My ideas did not form in the days before I wrote an article. They formed over the period of my professional career, and even before that. And when I needed them, either to do my job or to write an article, well there they were.

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Game Theory's Relevance to Investing: The Basics

January 25, 2015 By in Game Theory Tags: ,

In many ways academia is no more immune to politics and arrogance than Wall Street. A great example is the view taken by pure mathematicians, who study abstract concepts regardless of real world applicability and think of their subject as intellectually uncontaminated as opposed to physicists, who think they are masters of the universe because they can understand it. This is a shame as it has created unnecessary barriers to the integration of mathematics as a useful tool for businesses and investors.

Physicists have had greater success, possibly due to their interaction with the real world in terms of such facets as flight, space travel, nuclear power, etc. However, the absence in the business world of other areas related to math has created market shattering fiascos such as Long Term Capital Management and the Doom’s Day Formula. In this post I’ll explain why and what to do about it.

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An Investment Analysis of Home Buying: Renting is Sometimes the Better Choice

January 14, 2015 By in Investments Tags: , ,

Buying a home is an admonishment that is drummed into the heads of most people. Buy don’t rent. Renting is throwing money away. At least if you lose everything, you’ll have some place to sleep. At least that’s what people say. But is it rational? Before you decide to invest such a large amount of money, don’t you want to analyse it a bit? You know, the same way you analyse a share purchase that costs a fraction of the cost of a home? Or analyse the merits of a Samsung versus an iPhone?

I think that the main confusion is due to the fact that there are several issues interwoven into this decision. In particular, two cash flows are being net off, thus hiding a valuable insight. To understand this, consider somebody who is renting a house. He pays rent to the owner of the house which results in a cash outflow to the renter and a cash inflow to the owner. When the renter is the owner these two cash flows do not go away, they just cancel each other out. Absurd as this may initially seem, getting to grips with this unintuitive insight is key to making intelligent investment decisions. Continue reading →

The Information Diet: Bad for Your Investment Portfolio

January 4, 2015 By in Investments Tags:

They say that information is power. Data providers think so. Prices delayed by 15 minutes can usually be had for free, but real time prices cost thousands of dollars per month. Data providers and hedge fund managers will place their own servers in the same building as that of a securities exchange, just so that they can gain an extra few microseconds of an information edge over the rest of the market.

High frequency traders pay exchanges to allow them to see prices a split second before anyone else (don’t ask me how this is legal, it certainly isn’t ethical). There are strong insider trading laws banning the use of information that is obtained inappropriately, another pointer to the value of information. Continue reading →