KLCI

I have heard some people are saying that the bull is dead and soon the bear will take control. However, based on logical and simple observation, i would resist the view. There are not any strong signal showing the turn of the trend or the dead of the speculation era. I do admit the level is high for some people but, ultimately, how high is high? Disregard those rumors and concentrate on fact, as long as there is no any valid signals on the technical or fundamental side, hold is still the best option!

Redtone

Speculators, take note of Redtone! After some time consolidating and heavy distribution of a red candle previously, which scare most traders out of their wits, Redtone is now showing sign of coming back. However, the volume is relatively low, indicating that the new trend could not be as strong as expected. Nevertheless, a strong bullish white candle accompanied by sudden increment of volume which break the silence of the night deserve attentions from greedy traders. The dilemma now is to trade a breakout point or, waiting for some retracement that open the opportunities for traders to ride the trend. As chart will be unable to predict accurately the future events, gamblers are advised to consider their risk tolerance before jumping into the bandwagon. Should there be any positive occurring feedback loop, the profit potential will be great. Initial target price is set at RM1.00.

Chapter 10: Barclays Global Investors: “It Was an Evangelical Undertaking”

Ø Grossman enjoys discussing the role of basic finance theory in the development of BGI products and in their implementation: “I think the heritage of our product line goes back directly to the original theories of Markowitz, Sharpe, Modigliani-Miller and Black-Scholes.”

Ø When we developed the whole idea of separating alpha strategies from beta strategies like indexing related only to market forces, we were drawing directly to on CAPM for understanding what was involved and how to put it to good use.

Ø Much of what we do also draws on Barr Rosenberg’s innovation of multifactor models, in which Barr went beyond beta in the search for the drivers of return and for shaping risk control structures.

Ø Jack Treynor: “CAPM is about expectations. All the other asset pricing models are about surprise.”

Ø Grossman agreed: “CAPM is about what should hold in equilibrium, whereas multifactor models like Fama and French’s models incorporate the size effect and the value/ growth effect”

Ø Grossman added: “Much of the work, especially by practitioners, is not as much as theory, but it is about ways to capture what is priced or not priced in the marketplace.”

Ø Bill Sharpe agreed: “The optimal situation involves theory that proceeds from sensible assumptions, is carefully and logically constructed, and is broadly consistent with the data. You want to avoid empirical results that have no basis in theory and blandly say, ‘it seems to have worked in the past, so it will work in the future’”

Ø Grossman: “The constraint of theory, have as significant impact on investment results, often for the worse, but we would not understand that if we did not have capital market theories to explain the fundamental drivers of investment returns and risk exposures.”

Ø Grossman talking about bubble: “Over time, I observe that bubbles are more often made by clients than by managers, because it is scary for a manager to remain steadfast when long time clients start walking out the door. Only the most tough-minded can resist that kind of pressure.”

Ø Grossman talking about the future:

n The market is now even difficult to beat than it was in the first place. Alpha does not grow on trees, ripe for the picking, even for management organizations as sophisticated as BGI

n BGI is turning to new approaches à and application of behavioral finance, by studying the accounting data with fresh viewpoints to assess the quality and sustainability of earnings and to understand where the real drivers of earnings come from.

n BGI has found vast quantities of data and is uncovering many different sources of growth other investors are ignoring. The trick now is to discover how – or whether – the market prices these facts.

Chapter 8: Harry Markowitz: “You Have a Little World”

Ø Markowitz has lost faith in what he terms the traditional neoclassical “equilibrium models.” These models, he claims, “MAKE UNREALISTIC – ABSURD – ASSUMPTIONS ABOUT THE ACTORS”

Ø Furthermore, at a time when the world changes so rapidly and the markets are so dynamic, the equilibrium at the foundation of Capital Ideas will never come about or will stand still for too short a time to matter.

Ø You can look at stock prices swinging up and down every day, but what you observe reveals nothing about what is going on under the surface, such as the degree to which investors are succumbing to the overconfidence and loss aversion featured in Behavioral Finance.

Ø Markowitz believes none of this can be accomplished by modeling. Nor can you accomplish it by just looking at stock prices and trying to figure out what drives them.

Ø Markowitz: “However, CAPM should be taught. It is like studying the motion of objects on Earth under the assumption that the Earth has no air. The calculations and results are much simpler if this assumption is made. But at some point, the obvious fact that on Earth, cannonballs and feathers do not fall at the same rate should be noted and explained… Similarly, at some point, the finance student should be shown the effect of replacing [unlimited borrowing and short selling] with more realistic constraints and the “so what” should be explained.”

Chapter 7: Bill Sharpe: “It is Dangerous to Think of Risk as a Number”

Ø Sharpe now sees CAPM from a different perspective; he has transformed himself from a Nobel Laureate theoretician into a pioneering financial engineer.

Ø Sharpe is looking for ways to help individual investors get from here to there, from a miasma of self-defeating decisions into an environment where they know how to analyze the investment problem and where to seek solutions to it.

Ø Sharpe’s contributions:

n CAPM has become a standard for the valuation of risky assets and for calibrating investment performance.

n Alpha and beta are the starting points for many portfolio strategies, both complex and simple.

Ø As a practical matter, nobody today considers the estimates derived from the model as anywhere near the last word in evaluating assets or making judgments about the performance of a portfolio.

Ø Nevertheless, beta serves wisely as a measure of systematic risk, and alpha has become the holy grail of investment management – the excess return after adjustment for risk that can be earned over and above what the market returns.

Ø Sharpe: “I still think it is good to assume that you have to take higher risks if you are seeking higher returns. If you take risks other than the risk of being in the market itself, you probably will not be rewarded, because stock picking seldom pays off. So why do it?”

Ø The historical data on which we all depend so heavily may be useless for asset pricing: As we never know with certainty what the future holds, all we have to rely on is a sense of the probabilities of future events.

Ø Sharpe: “I have been around long enough to see empirical results that seem to be really solid until you try a different country or different statistical method or different time period. May be that’s why Fisher Black said you should put your trust only in logic and theory and forget about statistical empirical results.”

Ø Sharpe sums it up, “It’s dangerous, at least in general, to think of risk as a number… The problem we all face is that there are many scenarios that can unfold in the future…”

Ø The issue is: Do you have similar outcomes in various scenarios, or do you have diverse outcomes? Ultimately, that depends on your preferences (i.e., your utility function).

Ø In the process, as with Behavioral Finance and institutionalism, financial engineers like Sharpe, Markowitz, and Shiller improve neoclassical finance by toughening it and by improving the business payoffs with new and better techniques.