I've written about this before, but I think it bears repeating.
The market and the environment in which investment decisions are made and investors interact has meaningfully changed over the past fifteen to twenty years or so.
The advent of new players (bank prop desks), new investment vehicles (hedge funds, SWFs, private equity), new investment instruments (ETFs, fixed income related derivatives), new quant strategies (HFT), increasing computing power, access to and the manipulation of voluminous mountains of financial data, and the willingness to use leverage, all combined with evolving academic support for momentum strategies has changed dramatically the nature and complexion of investment markets.
The best way I can think of to describe the market these days is either like a run and gun engagement, or as a game of chicken. Either way, it usually ends badly for someone.
I would also point out that these changes to and in markets, parallel in many ways some of the changes to our society and culture.
Monday, November 30, 2009
The future hinges on...
To a relatively large extent, the future hinges on whether banks return to a more normal lending environment.
If they fail to do so, then deleveraging and deflation will weigh down the growth outlook. If they do come through, then the recovery will receive a much needed capital underpinning.
Supporting the "yes, they will return to normal" camp are improving balance sheets, strong operating profits, a supportive fiscal and monetary environment, cyclical tailwinds, growing investor confidence, and the present low cost of funds.
On the "no they won't" side are an already overly indebted consumer, high unemployment levels, tightening lending standards, secular headwinds, and vestigial bank fears of another run.
If they fail to do so, then deleveraging and deflation will weigh down the growth outlook. If they do come through, then the recovery will receive a much needed capital underpinning.
Supporting the "yes, they will return to normal" camp are improving balance sheets, strong operating profits, a supportive fiscal and monetary environment, cyclical tailwinds, growing investor confidence, and the present low cost of funds.
On the "no they won't" side are an already overly indebted consumer, high unemployment levels, tightening lending standards, secular headwinds, and vestigial bank fears of another run.
Wednesday, November 11, 2009
Fish out of water
I feel like such a fish out of water.
I have essentially been fighting this move since the end of June. It doesn't make sense to me, it doesn't feel right to me. But there it is, another 30% on top of the initial 35% move off the low.
I am typically slow in getting with the party, which is a terrible trait to have in modern financial markets that are dominated by momentum and trend following strategies.
When I looked at the market a few months back I could see that the market had its gander up and that 1200 was within its sights. The problem was I just couldn't buy into it. I was fearful that at any point, the market could lose faith and crater again...and I didn't want to chance that. To make matters worse, I have been especially out of position in the energy, materials, and consumer cyclical areas.
At everypoint, one must re-assess ones conviction, and determine whether it makes sense to change tact.
I think I'll hang tough to see whether it'll break 1200 (but that could change tomorrow).
I have essentially been fighting this move since the end of June. It doesn't make sense to me, it doesn't feel right to me. But there it is, another 30% on top of the initial 35% move off the low.
I am typically slow in getting with the party, which is a terrible trait to have in modern financial markets that are dominated by momentum and trend following strategies.
When I looked at the market a few months back I could see that the market had its gander up and that 1200 was within its sights. The problem was I just couldn't buy into it. I was fearful that at any point, the market could lose faith and crater again...and I didn't want to chance that. To make matters worse, I have been especially out of position in the energy, materials, and consumer cyclical areas.
At everypoint, one must re-assess ones conviction, and determine whether it makes sense to change tact.
I think I'll hang tough to see whether it'll break 1200 (but that could change tomorrow).
Thursday, November 5, 2009
Riddle me this
What is risk? Risk is kind of like art. Its meaning resides in the eye of the beholder.
We use the word "risk" to refer to many different scenarios, situations, and outcomes. For example, "risk" for a soldier in a combat zone is very much different from "risk" for an investor in the markets, or the "risk" of making a marriage commitment*. As such, "risk" is dependent upon how the word is defined and the context in which it is framed.
Risk for an investor is generally market risk, and relates to the chance of loss and the potential magnitude of a loss. Prospective loss depends upon the investors position and the directionality of the market (ie. it relates to whether you are long or short). Risk is also highly time dependent.
"Real" investment risk however, is very much a function of the long run, and relates to return on investment after taxes and after inflation.
*Most people would probably consider getting killed a much greater "risk" than losing money, but also a different type of "risk" to committing your life to someone else for life - death and marriage have a certain absolute to them.
We use the word "risk" to refer to many different scenarios, situations, and outcomes. For example, "risk" for a soldier in a combat zone is very much different from "risk" for an investor in the markets, or the "risk" of making a marriage commitment*. As such, "risk" is dependent upon how the word is defined and the context in which it is framed.
Risk for an investor is generally market risk, and relates to the chance of loss and the potential magnitude of a loss. Prospective loss depends upon the investors position and the directionality of the market (ie. it relates to whether you are long or short). Risk is also highly time dependent.
"Real" investment risk however, is very much a function of the long run, and relates to return on investment after taxes and after inflation.
*Most people would probably consider getting killed a much greater "risk" than losing money, but also a different type of "risk" to committing your life to someone else for life - death and marriage have a certain absolute to them.
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