from green to black

investments

by the by my group kindda topped the investment class in
the investment game designed by our prof. we realized a
period return on 15.6% and an annualized return of 117.7%.
which according to our prof would make us billionaires by
the age of 33. that doesn't sound too bad until we realize
that we dont have that amount of capital to start picking
the stock market.

so todays topic would be about stocks and picking a portfolio.
i'll also tell you how much chance is involved along
with information asymmetry. i'll let you know that you need
a sense of sangfroid to rival your beliefs and that would
probably be the hardest for the average investor to muster.
you'll also have to realize that you need money to "magically"
make money.

anyway investment analysis was a very enlightening module
as you learn how all the gurus of the stock market make the
big bucks.

on hindsight its rather funny that we did exactly what the
textbook told us NOT to do so that we could have the highest
returns. so that says quite a lot about obeying the rules
doesnt it?

stock selection was crucial, thankfully we had our 4 stocks
chosen for us. we just had to determine the appropriate mix
in order to reduce our losses or gain the most. the 4 stocks
were also taken from the same industry so we could be compared
to other groups with the same management strategy. should
we be diversified? how much cash balance should we keep.
how much loss can we stomach if our predictions go wrong.

this emotional aspect is so crucial because even if your
stomach churns at the market drop which caused your stock
value to fall by 10% you still need to hold on or even buy
more if you believe your analysis is correct and that the
stock has a way higher fundamental value.

i confidently predicted 3weeks before the close that a fall
in stock prices presented an opportunity for my group. it
did and we capitalized on it, and we made a killing.

so much for the glamour. we have to remember the not so nice
stuff too. most did not break even, 28 out of 41 groups
ended in the red. this is despite the fact that the market
was on an upswing around the second part of the course.

going for the review session, many groups talked about how
their timing of the market went wrong, they bought too high
too early too late, missed dividends and favourable news.
glossed over pertinent unique circumstances of the company.
we see how information is so crucial to decisions, yet we
are bombarded by just too much of it. not all is useful and
the negative reports are given cursory treatment. we realized
that it isn't about finding something that is good but finding
value, value for money that is.

of course we complained about the lack of realism. we couldnt
have automatic actions, buys and sells at prices. we couldnt
short sell. if there was risk, all we could do was diversify.
many groups would have loved to hedge to ensure that they
could guarantee their returns.

the diversification process also proved counterproductive
at times. there was a group that was most diversified yet
they incurred the greatest loss. minimum risk doesnt mean
lowest possible loss. you could be very diversified but
you may not be well diversified. maybe well divesified
could mean putting your money in performing stocks despite
its increased volatility(risk), capital is still conserved
which is safer wouldnt you agree? rather a volatile stock
going up than a less risky stock going down?

posted by green unseen @ 6:38 PM