Tuesday, April 01, 2008

Learnings over the last 9 months

The last 9 months have been really incredible. The best way to learn about monetary policy, central banking and stock markets is to be in a financial crisis like today. So here are my key takeaways:

a) Markets can be manipulated - Witness the fall of Bear Sterns and the volatility in Lehman's stock price. Bear Sterns was brought down by feverish rumour mongering. If it can happen in a liquid stock like Bear Sterns, there is also truth to allegations that the 1997-98 East Asian crises was caused/exacerbated by hedge funds. That is not to say there weren't real issues, but the decisive blow could have come through manipulation.

b) 5-year financial models that linearly extrapolate last 3 years of data are useless - In 1997, could anyone have predicted the East Asian crises and then the tech bubble? In 2002, could anyone have predicted a 5-year global bull run? If one cannot predict such defining macro trends, how can one really do a "bottoms up, company specific analysis". Because any such analysis assumes stable macro trends. Except for some defensive companies (FMCG, healthcare etc), almost everything else is impacted by macro trends, most importantly interest rates and currencies. While financial models do help understand a company better (especially if there are one-offs, tax rate changes etc), one should be careful in not getting too bogged down.

c) Speculation is possible: I disagree with those avowed value investors who think speculators are gambling and will lose money in the long run. Sorry. You are wrong. The definitiveness with which you claim that traders are gamblers reminds me of my MBA school's insistence that markets are efficient. They clearly aren't. Otherwise Bear Sterns wouldn't have gone belly up in 24 hrs. Value investing is great, and so is speculation.

d) It pays to be a contraian: Nobody in emerging markets predicted in January that markets are going to crash. But they did. Similarly, if confronted with the fact that UBS had a $19bn write down, a logical person would have said that markets would go down. They didn't. Media commentary tries to justify restrospectively why certain things happened. It is useless. The simplest answer to why markets went up yesterday is - they went up.

I guess what Warren Buffet says is true. Markets are efficient, but not all the times. And we are living in such a time.

1 comment:


Outstanding great very interesting post.