Thursday, 19 July 2007

a speculator's creed

Greed and Fear: These are the 2 factors that intrinsically dictate the market at any given time (barring any govt interference). Greed for more appreciation..more gains..., fear of losing. Optimism about a stock or industry doing really well...pessimism about a crash or correction.

Eventually in the great market rush, it turns out that not only financial analysis skills are required to read market trend BUT also highly impeccable are economic and sociological skills. Afterall the market lives on the laws of demand and supply...this on the other hand is determined by investor behaviour and sentiment, greed, fear, optimism and pessimism (which may or may not be based on a company's performance).

If sentiments can be accurately forecasted, then the great financial purist and his PE ratios and dividend yield calculation can indeed be mocked at least in the short term

Wednesday, 27 June 2007

1.Principle of Diversification

The first principle that can be drawn from this time tested truth from the bible is the industry acclaimed Principle of Diversification.
In whatever market, diversification is measure that will reduce risk signiificantly. Though it must be said that diversification makes more sense when you are dealing with large volume.
Lets consider an analogy.
Lets say you are in living 1500 b.c., Fred Flintstone is your neighbour and the market system of the day is barter (currencies have not been created, economies are not complex at all.)
Deal 1
Assuming you are a farmer and all you have produces for one year is 12 bags of flour. If you keep only your flour, all you will eat is bread, bread, bread, boring bread.
Deal 2
But if you negotiate a deal with Mr Flintstone who is a hunter, he might agree to give you 3 young goats in exchange for 4 bags of flour.
Deal 3
Meanwhile another neighbour, Mrs Stoneage wants to celebrate a party and needs flour so she asks you for 5 bags of flour, in exchange she gives you two colts and a donkey from her husbands collection.

Preliminary Accounting
Now you have
1. three bags of flour left
2. three young goats
3. two colts
4. one donkey

As a result of this diversification, the next year you would still have the farm producing flour, a livestock business (raring the goats) and a transport venture (the colts and the donkeys).
At this point, you will be a much wealthier man than when all you had was flour. If you do the same the next year, your wealth would be multiplied again.

The principle of diversification says "Invest in seven ventures, yes in eight; you do not know what disaster may come on the land". (check the earlier post)

There is one exception to thie principle though, when capital is little, diversification is not necessary. If all you hav is one bag of flour, grow your farm till you have more. Any attempt to trade with the one bag is gambling. Build the small capital base, let it grow, then begin to diversify. See you at the top.

Wednesday, 20 June 2007

The Good Old Book Says

Ship your grain across the sea;

After many days you may recieve a return

Invest in seven ventures, yes in eight;

you do not know what disaster may

come upon the land.

Ecclesiastes 11:1-2 (TNIV)