Watched the Jon Stewart show last night when he was grilling Jim Cramer. It was sad to me that so many people relied on snakeoil peddler who sells hope bottled in 24/7 news, dishing out advice and market forecast. Watching financial new non-stop and having ticker symbols flashing in your face all the time create a sense of false urgency to act and encourages short termism.
Tuning them out, aka the bloomberg and cnbc of the world is the best i can do. News are important as they contain information. However, to what extent are these news noise or information is dependent on the thoughtful user to seive out the junk. Even price has information, but does the market over-react to good and bad news, i think it does.
After doing my derivatives course in Ivey, taught by the really really great Prof Walid, i'm convinced that many of the hedging strategies out there are actually pretty risky. Riskless arbitrage opportunities simply doesn't exist in huge quantities to make it a profitable pursuit. Not so riskless arbitrage like merger arbitrage exists, but investor must have a good handle on the dynamics of mergers and acquisitions, the parties involved, time horizon, deal structure, probablity of success to have any chance of making profits in these area.
However, as XH argued with Prof Chua last year, time arbitrage probably exist. A person with a true long term view and long term holding power may choose a course of action that is vastly different from the rest of the crowd. I think this is the true edge a long term investor has in order to outperform. Another edge would be a stomach for lumpy performance. Short term volatility is NOT RISK. Permanent impairment of capital (aka lw's attempts at buying bank stocks on the cheap last year) is RISK.
I can't help but quote the following paragrah from Keynes again. It just amazes me that after 70 years since The General Theory of Employment, Interest and Money was published, it still rings true today.
"But there is one feature in particular which deserves our attention. It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence. Moreover, this behaviour is not the outcome of a wrong-headed propensity. It is an inevitable result of an investment market organised along the lines described. For it is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence.
Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called “liquidity”. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.
This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years, does not even require gulls amongst the public to feed the maws of the professional; — it can be played by professionals amongst themselves. Nor is it necessary that anyone should keep his simple faith in the conventional basis of valuation having any genuine long-term validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.
Sometimes the game of Musical Chairs turned out ugly. When the music stops, there turned out to be no chairs after all....that's the illusion of a growing economy built on leverage creates...
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