May 15, 2007

Happy Amnesia

A little bit of psychology to begin our day. The recency bias is our psychological tendency to give more weight to recent data or experience, than to earlier data or experience.

For example, suppose it's the end of the year and your boss is assessing your work performance. His impression of your work performance will probably be much more heavily influenced by what you did in the 2nd half of the year, than what you did in the 1st half of the year. This is despite the fact that what you did in both halves should matter equally.

Recency bias also affects the way people invest money. Suppose for example the stock markets have been in a bull run for the past two years. The masses will tend to forget other, less-recent years when bull runs turned abruptly into market crashes (eg the NASDAQ crash of 2000). Since all the recent data and experience indicates a charging bull, the masses will tend to develop the expectation that the bull will keep on charging on.

You might know this saying - "Those who never remember the past are doomed to repeat its mistakes." It's a neat encapsulation of the recency bias.

In the past two years, the Gods of Money have been very kind to Mr Wang. Thank you, sirs. Today, Mr Wang will start getting out of the markets. He senses mania.

ST May 15, 2007
STI hits high after China eases investment rules
Regional markets also shoot up in anticipation of massive outflow of new money

By Markets Correspondent, Goh Eng Yeow

SINGAPORE'S stock market hit a record yesterday after a landmark decision by China's banking regulators sparked a Manic Monday rally across the region.

Investors piled in to local shares to drive the Straits Times Index up 54.18 points to close at 3,501.1 - a rise this year of 17.3 per cent that has added $77 billion to the market's value.

The bulls were primed to run wild yesterday by a historic decision announced in Beijing last Friday: China's bank customers will be allowed to buy shares in overseas markets - mostly via funds - for the first time.

Such purchases will initially be confined to the Hong Kong market, but bourses from Mumbai to Sydney shot up in jubilant expectation of what could be a massive outflow of new money.

'We are witnessing history in the making - a move that may eventually open the floodgates for some US$2 trillion (S$3 trillion) of Chinese domestic savings (looking) for better opportunities,' said Mr Loh Hoon Sun, Phillip Securities' managing director.
Mr Loh forgot to mention that for starters, the Chinese government is going to allow China's bank customers to invest only US$7 billion overseas, over 12 months.

In terms of global stock markets, US$7 billion over 12 months is quite small peanuts. You can see from the ST article that the Singapore stock exchange itself grew by 11 times more (USD 77 billion) in market capitalisation, in the 1st five months of 2007 alone. And the Singapore stock exchange is quite small, relative to many other stock markets around the world.


Anonymous said...

Is that a bubble or is that a crystal ball?

Anonymous said...

Hmm...the if the SG market is high, then the China market is insane..

PE is >40...and >60 in one of the major exchanges (i think it's either shenzhen or shanghai).

People are using selling their houses, using them as collaterals, using their hard-earned life savings, and using credit card loans to fund their 'investments'.

And the thing is, the Chinese gov sure knows about it - it's been discussed and caution given an on their state television and even airline magazines. What they are going to do next could be v unpredictable, since they are not exactly a free market yet).

And that, I believe, is the greater worry. The longer this exuberance lasts, the greater the fallout.

Anonymous said...

wow mr wang, you sure are well informed. I wonder where u get your alternate sources of information from? care to share?(=

PC said...

The recency effect also influences elections. That's why governments tend to throw in sweeteners for a period before any elections are held.

Mr Loh didn't forget. Basically, as MD of Phillips, it would be better to keep all reminders of "irrational exuberence" to himself.

Anonymous said...

Beg your pardon mr wang but where did you read the part about the China govt only allowings its banks to buy 12 billion dollars of foreign assets only?

Gilbert Koh aka Mr Wang said...

Sorry, I only reproduced part of the article. The rest is here. The part about the USD 7 bn allowed by the Chinese govt is at the end of the article:

The deputy research head of Kim Eng Securities, Mr Tan Chin Poh, sees the move in similar terms: 'Increasingly, Shanghai, rather than Wall Street, is where we will have to look to in getting our bearings for the local market.'

There was no doubting that Hong Kong traders knew the significance of last Friday's news and they were primed to go from yesterday's kick-off.

Trading was furious with Chinese firms listed in the city - known as H shares - the main target. They shot up 5.4 per cent on a day when turnover hit a record HK$95 billion (S$18.4 billion) - HK$34 billion more than last Friday's level.

Overall, the Hang Seng Index was up 2.5 per cent to a record of 20,979.24.

But traders here were also caught up in the buzz and zeroed in on firms that might eventually benefit from the mainland money rush.

Big gainers included CapitaLand, which has a big stake in China property, and Singapore Airlines, which is reported to be keen on buying into China Eastern Airlines.

China-based stocks listed here, such as frozen dumpling maker Synear Food Holdings and meat firm People's Food, also enjoyed a boost.

Mr Tan said China's move will encourage people to invest more in such stocks.

'All Chinese shares are valued relative to each other. Any rise in Hong Kong's China H shares will cause China shares here to go up,' he said.

Other bourses also rallied. Japan's Nikkei gained 0.7 per cent, Australia's S&P 200 rose 0.8 per cent, India's Sensex advanced 1.2 per cent, while the Kuala Lumpur Composite was up 0.6 per cent.

Yet, for all the excitement, the initial amount of cash from China will not be huge.

Only US$7 billion will be allowed to be invested overseas over 12 months - a trifling sum in today's markets - but it is the promise of vastly larger amounts down the road that galvanises traders.

But Mr Marshall Gittler, chief Asian strategist of Deutsche Bank Private Wealth Management, said the market reaction was over-exuberant.

'This isn't the pot of gold the markets are making it out to be,' he told The Straits Times. 'It is more to do with the Chinese authorities' desire to cool down and prevent a bubble on the Shanghai A share market.

'Any enlargement of the scheme will take years. The Chinese authorities will want to see how it goes, give it some time and let its banks develop some expertise first.'

Lucky Tan said...

Mr. Wang,

I'm not an active trader type, I sit on my investments for years but past few months they appreciate quite alot so really had to make some hard decisions.

In Dec 2006, I thought our markets somewhat frothy...after I bought puts it got frothier and frothier until my puts expired worthless. Then when my downside protection disappear, the Feb 2007 correct came and I had to endure the pain.
The good thing is the market rose so much after the correction, it more than made up for those disastrous puts.

Right up to early-May 2007, basically sat on everything. But when 3rd liners started to move, it was like deja vu - seen this before..... bad stocks rising like the last leg of the bull market. No more puts start selling stocks and reduce exposure.

The problem with bull markets is they tend to surprise on the upside. Soros with all his vast experience thought the Nasdaq too high at 3500 in yr 2000, he started shorting and it shot straight up to 5000. He was ultimately right when Nasdaq sunk to like 1300(?)....but by then he cut his losses and covered his shorts.

Nobody knows when this market will peak. ...selling too early is as painful as selling too late.

hugewhaleshark said...


I feel that as market participants, we have to find a way of dealing with the emotions of being in the market.

I have a way of thinking about things which goes like this: there is money which you know how to make and money which you don't know how to make. The interesting thing is that you can profit from both kinds.

Consider this: you invest in a stock and it rises to your fair value (you must have an idea of fair value). At this point you have two options.

1. Sell the stock. It may rise more, and this is money that you don't know how to make. Maybe there is a lesson to be learnt. Maybe your fair value was too conservative, or you did not keep it updated. Either way it helps you deal with the fact that you have decided to sell.

2. Hold on for the ride, and put in a stop loss (a 5-10% pullback limit is often useful). This way you get to make some money that you did not know how to make, but will not be able to sell at the peak.

For me, it is much more painful to take option 2, or selling after a pullback. That's just how I am.

The way I look at it earlier in the year you took option 1 and re-entered the market when your puts expired. Now you are sitting on option 2.

Hope I've offered you another way to look at your trading.


Radikaz said...

Rule #1; when you see auntie and uncle rushing to pour their $$ into stocks, its a good indication one should exit the stock market asap.

hugewhaleshark said...

Mmmm... skali actually we ourselves are the auntie and uncle then how?

Radikaz said...

old man and old lady exchanging stock info at market place lar..i actually referring those not so "learned" types.

Gilbert Koh aka Mr Wang said...

You don't have to bail out in a hurry. You can exit a little bit at a time, and see how it goes. Later, you can exit a bit more if you think exiting is still the way to go; or you can stop exiting and sit tight.

People get paralysed when they are faced with big decisions. Eg they have a good chunk of their life savings in stocks, and suddenly the market crashes. Do they pull out, do they sit tight, do they buy more?

It's not so tough when you have already been making incremental decisions in the prior months.