Six months that TASE and the rest of the world is extremely uncertain and nervious, any rumor of Greek default produces a 10% fall and any vague pronunciamiento from the Grand Duke of Lichtenstein that they will stand by the EU turns the market mood to super-optimism. Apparently this situation will not resolve itself soon because Europe has no organizational instruments to make up its mind and take decisive action.
In this situation of prolonged uncertainty, what is the way: (1) ignore volatility because nerviousness, without outside feedback for a time, will surely unwind and normalize, (2) do nothing and stay on the sidelines till the fog clears up (losing opportunities and precious life time), or (3) prepare for a dramatic crash, because prolongued nerviousness is unbearable for human beings and must be resolved by individual and collective nervous collapse, followed by gradual rebuilding of confidence. What to do?
11 comments:
In my ignorance I assert that game theory will not help. What it can do is to help us bluff our way in coffee shops, if the topics of min-max or fixed-point theorems (which I do not understand) come up. Years ago the biologists Rappaport and Axelrod in the course of a run of experiments to determine the stabilty of cooperative strategies; involving both sanctions and cooperation, that may be useful for populations both human and animal concluded that TIT-FOR-TAT is the most effective one. Well how about that Einstein? And the Pope is a Catholic.
Ivan
Liechtenstein is ruled by a prince (furst) who is also count of Vaduz. The family never held grand ducal rank. If they ever acquired a ducal title from the Habsburgs, it is actually of lesser rank than their princely title because that princely title signified rule over an "immediate" territory (only the Holy Roman Emperor himself held any rights over the local ruler).
You must be guided by the "expected value" of the various outcomes - the dollar amount of each outcome weighted by the likelihood of that outcome. Of course the hard part is deciding what the proper weights are.
Also diversification theory teaches us not to put all our eggs in one basket so your portfolio should contain some assets that would thrive in a worst case scenario and others that would do better in case prosperity were to return, so that you are not left empty handed either way. Naturally the returns on such a strategy would be lower than guessing right (but higher if you guess wrong). At this point I don't see any great likelihood of a boom anytime soon - a best case scenario would be muddling through.
K
Ah! I may have meant the Great Duke of Luxemburg. He is the one active in European finances.
Ah! I may have meant the Great Duke of Luxemburg. He is the one active in European finances.
Some kind of a crash is inevitable. The only question is how it will materialize.
If you believe the EEC and USA will jointly inflate their way out of debt, then you should purchase traditional hedge assets like stocks and real estate while they are cheap, and furthermore, you should even be prepared to go into debt since inflation favours the indebted.
If on the other hand you believe there will suddenly be a massive conversion to economic self-discipline, as in the UK, apparently, then money will be tight, economic growth will be stunted and it might pay you to invest in high-yielding, safe financial instruments like bonds, denominated in currencies which are likely to retain their value eg the Australian dollar, Swiss Franc or perhaps the Israeli shekel.
Anon.
Building the Decision Tree based on consensus opinion produces depressing results: world economy sinking into stasis. On the other hand, there is something approaching world peace, people are working and trading, so it cannot be so bad.
I'm moderately optimist and investing in Israeli stock.
You write about TASE so much that I'm guessing that your investing manifests a massive case of home bias. What percent of world market cap is TASE? 1%? Then you shouldn't be investing most of your money there. Take into account your own human capital, and diversification probably says that you shouldn't invest *any* of your money in TASE.
Dennis,
TASE's capitalization is about 0.1% or so of global markets. Even for a small American fund, TASE is so minimal that it is not worth for it to invest time in learning what is going on here. In that sense, you are right.
For global investors we are generic Middle East and say, a terror attack in Kurdistan increases our risk rating. The analysts are very superficial.
On the other hand, every time I tried to invest in areas that I was unfamiliar with, like oil futures or currencies, I lost. Therefore I try to focus on a few companies that I know personally and have a feeling about them. Moreover, the fact that most of the reports and releases are in Hebrew and you have live here to understand the environment, means that there are only a couple of hundred players in each stock. TASE's reporting demands are so onerous that few people has the time and patience to read the reports. The annual report of Bezeq, a communication company, is five times longer than Nokia's, and ten times more obscure. Working through it paid: Bezeq is distributing a 10% extraordinary dividend.
J, agreed that extraordinary diligence in a market that's not covered much by analysts can give you an edge. But you're also subject to big market risk, e.g. events in the ME will affect TASE, but not NYSE.
Dennis, Just now, we are sinking but not because we are killing each other in this Middle East but because of a stupid announcement by the Fed.
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