A Bourse Diary

Thoughts on stocks, speculation and ... life

Friday, December 16, 2005

Who is the greater fool?

You have probably heard of that "Greater Fool Theory". I'd like to transform it a little bit - from an exclusively stock market view to a capital market view. Who is now the greater fool - the stock buyers or the bond buyers? Or even like this: the people holding the shares or those holding the money (cash)? Who will first loose the patience or will be forced somehow to sell (or to buy, of course - there are always two sides of a transaction)?

Stocks will not fall if there isn't exceed of supply. Where will this supply come from? Some possibilities:
- the companies need money to finance investment projects and issue new shares
- IPO sector gets more active and fuels the market with new companies (shares)
- the stock-investors get anxious and prefer to park the money in bonds
- the bonds again offer attractive interest (plus safety)

I still can not see any big investment activity that absorbs the (global) money the way companies need to issue shares. Actually the corporations are full of cash and have rather "problems" finding appropriate place/investment for it. The companies seemingly can still manage the existing demand for their products with the existing capacities. They produce still on below historical average levels (although approaching the average). What I see is still concentration on the core business (where the risks are also lower) and on saving costs. There is no substantial rush for expanding business or entering new markets. Also (or therefore?) the IPO activity is not huge. The business does not need money - IMHO - by now. And even if, it's cheaper for them to borrow (and lock in the low interest). The companies rather act as capital provider and together with the global saving activity are still mounting up money in fixed rate and hold the interest rates down.
And there we come to the attractivity of interest. I can hardly consider the interest rates of 4,5% attractive. Even if there would be no inflation (above the targeted 2-3%, who knows exactly?). And adding an even small further inflation peaking makes the investment in bonds a "zero-sum-game". The interest rates in Europe are even lower!?
And finally, how about the anxiousness? Well, it's sentiment, you never know. But beyond the normal waves of optimism and anxiousness, I guess the most investors well know about the bad news possible to come (cooling off of economy, rising inflation, rising oil etc.). But I ask myself, why should you sell now stocks performing not bad, lagging actually behind the earnings growth pace, with price earnings ratios below bond yields and solid dividends? To buy 4% fixed rate? No, thanks, I stay with stocks.

Thursday, December 15, 2005

Some More Basics

I probably must apologize to all more experienced readers about posting some really basic things about the stock market. Though, other ways, I have seen and heard not just a few traders, who of course know this basics, but still seem not have "internalized" them fully.
We talk about supply and demand. And this is the only postulate on the stock market. Prices are the result of supply and demand. Only. Everything else is interpretation.

The quotes coming on the ticker are real trades, and they indicate a real transaction which occurrs only if supply and demand offers meet. Thus, there are two sides of a transaction - somebody has sold and somebody has bought a stock at this certain price. If prices rise, this is only because buyers are willing to pay higher prices now AND there is no cheaper sell offer. And vice versa.
No news, no earnings ratios, no interest rates, no economic indicators actually determine about stock prices. As clear as it is, as often you can observe how people think of the (possible and "logical") way of the market as if it were "something" that must go up or down if the news is good or bad. They often also refer to the stock market as of barometer of the economic state. The bourse is no barometer. The bourse only measures the balance between supply and demand. You should really internalize this other ways you will encounter with countless "illogical" situations and reactions on the stock market. I know it sounds trivial, but this is the very essence of the stock market.

To get the future direction of the stock market right, you should get right where the future demand and supply (is likely) to come from. A share (or the shares as a whole) could be very "extravagantly" valued, if the shareholders are not willing and not forced by other mean to sale (notice 2 conditions, I'll come to this again) nothing will happen. The prices will stay high. And vice versa. The market could be severely undervalued by any criteria you can imagine, if there are no buyers enough to absorb the supply of the (fearful) sellers, the prices will sink further. Therefore it is often true for the short to mid term periods, that not the quality of the shares, but the quality of the shareholders is the determinative factor.

Tuesday, December 13, 2005

To speak a common language

A Russian poetess once asked how would she feel about living in exile and with a foreign language around her, answered: "what does it matter in which language you are not understood". The sooner I explain some terms I often use and which are also often misunderstood, the better. It's not a big deal - for the first here are these three ones:

I consider it important. These are the main characters involved on the bourse:
A trader is the one who tries to exploit the short term, even day-on-day fluctuations of the prices. I also call him a gambler, because the (extreme) short term movements of the chart are a highly hazardous, non-predictable matter. This is my conviction. Anyhow - even if I do not know famous names of traders who managed to achieve some kind of impressive wealth - there should be successful ones. The main point is that the trader acts in a specific way. In the very short term the stock markets are mainly driven by emotions and technical conditions. They also say "a news-driven" market, though the way the public reacts to the news is highly emotional. The same news can produce very different reactions. The public also seldom knows exactly and right away which news is good and which bad. I do not believe in those efficient markets theories. The trader (and even more the so called day-trader) should be very flexible and fast in catching the emotional and technical conditions of the market on every single day. For example: He/she might come to the bourse (or sit down in front of the monitor) with the serious intention to buy, but recognizing the weak opening and the dull sentiment of the day he/she sells short all the shares, which were yesterday considered an excellent buy-opportunity. They also say "to read the ticker" i.e. to feel the immediate reactions of the stock prices. The trader can and should not care about the deep sense and couse for a larger price movement, because he/she trades the small ones in either direction.

The investor is the opposite pole of that. An investor puts his money in stocks for many years, he/she mounts a (someday large) portfolio of shares - bought may be in bad days at low prices and may be also in good periods at high prices. The investor believes in the overall superiority of stocks vs other investment forms in a long term. He does not care about how the market closed today or this week, or even this year. He knows his money good invested and expects in some dozens of years to earn the fruits. If an investor has a good sense of business models, of intrinsic value, maybe a vision about a company or sector, he can get extremely rich, because he does not sell too early. He has the patience to wait and see things evolve. The pioneer investors in companies like IBM, Microsoft or Apple - to mention just very few - who had the patience are surely rich men. The most prominent investor is of course Warren Buffet. As good as I know the average duration of his stock positions is ca. 12 years. But the specific skills of an investor are much more in evaluating a business model and prospectives, to estimate an intrinsic value of a company etc. You need to be much of an accountant, of a businessman, of a financier, not a stock exchange operator. Warren Buffet has once stated, he does not even look at the stock prices on the bourses. There are just a few like him of course, but my point is: investing as described demands skills "from outside the stock exchange", and secondly the investor has one great advantage: the stocks rise in long term - (almost) inevitably, so the very most of the investors win - not excitingly much, but win.

Somewhere in between stands the speculator. His time horizon is not that short sighted (pardon: just short), but not that long like the investor's either. The speculator looks at the cyclical movements on the stock markets, the bigger ones, and does not care about the day-on-day fluctuations. A percentage point or two higher or lower just don't matter. He concentrates on the overall conditions of the market and on the main underlying trend. His considerations are of completely different matter as these of the trader, but also not that business or purely saving-in-stocks related like the investor's. Please make no doubt about it - the job of the speculator is also very dangerous. If he is at a fault, he can severely loose.

As a rule of a thumb I would consider the long term success chances of these three like that:
The investors win in a long term, the traders almost certainly loose, and for the speculators there is no rule of thumb.

I consider myself speculator. And the focus of this blog will be on the issues of relevance for acting in this manner.

Monday, December 05, 2005

The risks are still outside the bourse

At the beginning of this year I noted (in my classic note book in regard of the world markets but focused still on Europe) the following:

I expect strong performance of the stocks, because everything speaks for undervaluation of the market: stable economic development and stable technical conditions.

The fact that the economic situation and moves on the stock exchange do not develop parallel must be here very clearly stated: this is somewhat complicated relationship, which often drives both - stock markets and real economy - even in opposite directions. I have not overlooked it.


If risks exist - I wrote at that time - they are "outside" the stock exchange, perhaps in the economy, the politics, on other markets (e.g. commodity markets) etc. If something goes wrong there, we will certainly get to feel it at the stock exchange too. But this is not so dangerous, because - after my consideration - with this valuation level (inclusive bond yields) and the other technical and psychological factors stocks are on a relatively firm soil: without exaggerated risk positions, exaggerated speculation, without illusions...

The risks may stay in the economic development, in dangers of the terrorism or whatsoever - as long as they are not "in stocks themselves", nothing is so dangerous. Everyone already made the observation that the discussion (and reality) of the economic cycles goes for about few per cent points growth or decrease; with the profits and other company numbers these fluctuations are carried into a scale higher; at the stock exchanges however the volatility is a multiple of all that. If only the fundamental data would count and the valuations of the enterprises were to some extent consistently, rationally and comprehensively determined, then (logically) the prices might vary not so strongly. But the stocks are subject to something other prniciples. They load up themselves frequently with illusions or skepticism, with emotions and also technical factors, under whose influence the volatility rises disproportionately to the underlying data.


I still "would sign" all of this today. The big bullish movement did not come in such a way, as I expected, but it is still some time up to the end of the year (and in addition I find it ridiculous to hold on too much on calendar years).
A little more confidence has build up however - and it'’s no wonder after all periods of weakness and concerns that we have nevertheless overcome. Slowly, the undetermined get also more confident. Nevertheless: I may not be able to calculate properly or I overlook something very important, but I cannot see even little growth priced in the stocks for a mid-term investment period. Therefore, I suppose: should the world economy (and particularly the USA) cool off, we'll may feel it in the stock prices. But there isn't much air there; if we should fall more sharply, it ought to be not just cooling off. It ought to be a crisis. That risk I can bear.

Disclaimer: All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and are in no way intended to serve as personal investing advice and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Readers should not make any investment decision without first conducting their own thorough due diligence. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed.