Sunday, June 01, 2008

Predicting the financial markets...

3 months ago, people thought the US$ is a washout and will be trending down. Not only did it not fall, it held steady and gained against a number of major currencies including the S$ & Japanese Yen. Where do we go from here? .....This is the conventional market wisdom that I see quite often in the media:

1. The recent rise in stock markets is a bear market rally.
2. The US economy is slowing and recession will come soon.
3. The stock markets will start to tank ...this rally cannot last.

The logic is so compelling, you might be tempted to sell all your investments, wait for bad times to come then buy everything back at a lower price. The other day, an analyst went on TV to say that private property prices will drop by 35% in Singapore. Now that is scary isn't it but will it come true? Should you sell your home and buy it back 6 months from now.

The problem with predictions is there are so many factors involved it makes most predictions useless. I find that except of occasional periods of over exuberance (which have unpredictable lengths) and periods of terrible pessimism (which also have unpredictable lengths).....when one may be more motivated to buy or sell....timing the market is usually futile exercise.
What about charts? One of my friends swear by this series of videos, he tells me not only have the been right on every major move, turning points on the markets, they are able to explain everything with great clarity.

Watch the video for yourself. They are saying the US stock market will start moving down next week starting on Monday or Tuesday ...and so on. There are a number of economic numbers out next week and there is a possibility of the market making big moves when that happens. However, the technical analyst is saying the market will move down with a greater probability than it will move up. He uses past movement in the market to divine the future. The market may move down just like he predicted ....but it can also move up because nobody knows what the economic numbers will show before they are released. While this technical analyst has been right, does it mean he is able to continue predicting the markets? Was it luck or skill? My belief is the market will end next week up with 50% probability and down with 50% probability. I find it interesting to listen to people's predictions and their views but I've never found anyone able to time the market accurate enough to follow. This feller might have been right for the past few months but going ahead, I still believe his predictions are 50-50. ...
For most people the best approach would be to forget timing the market all together. It is a waste of time and energy. Especially when the market has been restored from "crisis" mood to something more "normal" what is known about the global economy - US economic slowdown, inflation, bank losses etc is actually discounted by the markets and built into the prices. The best thing to do for people who are young is to make regular investments in a diversified portfolio and not waste too much time trying to time the markets. Your time horizon should be at least 10 years and in a few years this whole mess with subprime & US housing despite the severity will be just a small blip. In 1998, we had the Asian crisis, in 2000 the bubble burst, in 2001 we had 911, in 2002 we had widespread corporate malfeasance, in 2003 we had SARS, in 2007 we had the subprime crisis. But if you have invested in the stock market at regular intervals say every month, you would have still beaten the fixed interest rate by a sizable margin.

I'm not a big fan of property investments. I don't think people can time this market with any accuracy however, history has shown that if you buy when everyone is buying and developers are marketing a large number of condos to large number of enthusiastic buyers....the end result can be quite painful 12 months later. 12 months ago the showrooms were packed, there was "certainty" that the market can only get hotter and higher. There is no such thing as "certainty" in the markets. 3 weeks ago, people thought that rice prices will keep climbing and a number actually started to hoard rice. The price of rice has been falling steadily because Thailand released a lot of it to the market. Price falls, and those articles on "why there is a shortage because production has been falling" ....disappeared from the newspapers. It is strange but true, there is always a perfectly logical explanation whenever something happens. ..and very often once the explanation is published the opposite happens and the explanation becomes irrelevant.

Always treat your investments as something uncertain and risky, you overcome the risk by diversification and averaging over long periods. History will be on your side if you do this. ....but nothing is guaranteed in this world. ...even keeping your money in fixed deposits or keeping it under your pillow can become risky. Just take the recent bout of inflation, it has wipe off more than a few % off the real value of your money in the bank. People end up taking more risk by avoiding risk - the 3.5% return on CPF money has already been wiped off by inflation. Inflation will prompt the govt to now increase the minimum sum because it has become inadequate again....CPF Life is doomed before it even started - it probably won't be enough for Happy Meals when you retire, you can only live on French Fries. No amount of tweaking can get the CPF to work, the only way is to employ the best people to manage the money for Singaporeans to minimize the risk of insufficiency. A responsibility that our govt refuse to take while the govts of Malaysia, Chile, Norway, and numerous pension funds around the world do.......the govt uses our CPF for investments by lending it to the GIC, then it refuses to allow more transparency on what the GIC does with the money. Think hard about this. What is going on here?....


Anonymous said...

it's like going on the world stage and telling everybody it will be a peaceful rise because, they need the money. so what happened when they had acquired the pile of money we help to put in their hands? if there is any lesson to be learnt, they will take the money and kick your ass!

Anonymous said...

Are these men of peace or men of war( cause of wars)?
You put powers into someone hands and you expect peace to ensue? How naive!

Anonymous said...

One of the best article on finance and CPF I have read.

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