Tuesday 7 April 2009

Investment: Say “Hi” to Mr. Market

Do you know how to predict the future? I don’t. If I knew, I would have sold some stocks one day before the 30th March, and bought some back before the market closed on the 30th March. Why particularly this day?

The answer is obvious, Adam Cheng Effect / Ding Hai Effect. The King of Snooker premiere led to the fall of 4.70% in the market.

Can we explain why market goes up and down? Reporters in the evening news are always able to do so, and I do believe that there is some truth to their explanations, but most of the time, there isn’t really a reason. In fact, there is no need for one.

Say you walk down a street one day and see a stranger. Since you do not know him, you have no opinions or feelings towards him. However, the stranger sees you and gives you a big smile. Now, the question is, what is the reason he smiles at you? He likes you? Maybe. He wants to show you politeness? Perhaps. You look funny? Not for sure. Nonetheless, maybe he did so without having any reasons.

Another scenario is for the guys, how often have you seen your girlfriend suddenly in a good mood, but swung to nightmare in just a short moment? I have. Have you then asked why she changed so quickly? What will they tell you? Must there be a reason? Verbally, no; scientifically, yes. It is well-known that people’s moods are controlled by our brain and the messages are delivered by electric pulses and hormones. (Well, I’m not going to get too scientific here, don’t worry.)

Warren Buffett’s teacher, renowned Value-investor Benjamin Graham’s allegorical portrait of the stock market as Mr. Market [1], who in my rephrasing, is willing to buy your stocks every day at price he likes. The quotes he offers might be a worthy or super ridiculous, but you can feel free to take advantage of him or ignore him.

Mr. Market’s moodiness reflects the mood swings of the markets, and thus the irrationality of the human psychology. So by theory, if someone can catch the movement of this irrationality, then he will be rich! But is there any regularity in this irrationality?

Warren Buffett said that, “If a business does well, the stock eventually follows”, so if this stands, the regularity is found. In fact, he ignores the fluctuations of the market (the mood swings), and takes a more relaxing method and waits for the stocks to eventually go up, that is of course, if you are willing to wait. Well, whether it really is a good idea or not, it made him one of the richest guys in the world, and he is for sure a great teacher of everyone (He’s mine too).

But does that mean speculation cannot earn a big fortune? Then I really don’t know how people explain the case of Mr. George Soros. I haven’t read much about Mr. Soros, so I am not going to say more, but my belief is that every method has pros and cons, and timing is exceptionally crucial in investment. Wrong timing can kill.

But then how do we know when is the good time? Is now a good time? Well, with the Hang Seng Index (HIS) at 14998.04 (at the time of writing this article, 6th April 2009, market closed), I personally feel scared to buy in now because from 10917.65 on 17th May 2004, took 301 trading days to break 15000 on 2nd August 2005, but the recent two times of breaking 15000 from similar lows, from the lowest 10676.29 on 27th October 2008 took 7 trading days to break 15000, and from the lowest of 11344.58 on 9th March 2009 took 20 trading days to break 15000 once more. (For your interest, the 7 days to break 15000 took 13 trading days to reach a so-called low point 11814.81)

Where is the rationality this time?

Although history doesn’t guarantee the future and some might say history never repeats the same way, the odds of earning more is just not so great. With not just one market (the HSI) is going up and down by large amount, but the whole world’s markets going up and down at the same time, you know this is not something anyone can predict. Why not? Well, obviously, there must be a group of people so rich and so concurrent in their buying and selling, that they controlled the movement of the markets in the world. To me, this group of people seems like just one person and indeed, it does seem like it is really Mr. Market in action. How can you predict if he will be spending more money in buying something in one day or another?

Guess what, I can! Your chance is 50-50.





[1]: The Intelligent Investor Revised addition p204-p205 ISBN: 0-06-055566-1

Coming soon: Review of the Japanese movie "Departure" because it has been postponed.

Reply to comments & readers:

  1. Question time, how many times has Adam Cheng Effect / Ding Hai Effect worked for the Hong Kong Hang Seng Index?