Sunday, October 4, 2009

How To Be Rich!

I'm sorry, but the title was meant to mislead you. The graph charts a scaled down STI with information from Yahoo Finance besides day-on-day changes in the index (the red colour blades of "grass").

First, did you know that if you invested at 30, with a lump sum of $10,000 and you average 15% compounded till you are 65, you will have become a millionaire when you retire then? I know that is a random fact, but it shows that if you start early, even with a modest sum initially can turn into some thing big.

But what is the purpose of the graph? On on hand, if you managed to ride all the Bulls (represented by the green line) and avoid all the Bears (red lines), an old timer would have probably become a millionaire by now. But that is besides the point.

The learning point here is that the end of any bear market is marked by extreme volatility. If you observe carefully, the "tall blades of grass" tend to cluster towards the tail end of a bear market and the start of a bull run. I am not sure why is that so. During most of the bull run, all the short blades of grass start to cluster as well.

At the moment, if I were to plot the same thing using information of the Dow or the S&P500, my MS excel might crash as there are too many data points. But preliminary, I would say that during the periods of currency fluctuations and bear markets, there are extreme stock market volatility. During the short American recession in 00/01 (a result of the crash), there was not the clustering of very tall grass seen in the 97 Asian Financial Crisis or the recent sub-prime melt down.

The other observation is that volatility comes in spits and spurts. This point has been explored by Mandelbrot, a very famous scientist who conceived of the notion of fractals. It can be seen that in a bull run, there is not a regular wild price increase or decrease. Coincidentally, during the current phase of the stock market, we have also witness wild movements in the STI and Dow.

What is for the retail investor who is you and me? I think that there are ways to get out the market to minimise the damage done to the portfolio. You can read Fisher's books for how he does it. Briefly, when the general stock market declines more than 2% monthly, and that the market has fallen from its peak by more than 20% 3 months ago, you can turn to cash for safety.

However, you must systematically enter the stock market to re-equitise your portfolio. The point of the post is to show you that the ends of bear markets are really scary. There are enormous intra-day swings and day-on-day swings for the matter. Therefore you must discipline yourself to get into the market between 18-24 months after the peak. This is a rough guideline because so far, bear markets last this long on average. Do no try to bottom fish because very often, it is the fisherman that gets hooked.

What are your thoughts? Do you find what I have posted drivel or banal? Drop your comments or you can email me at if you prefer a more private discussion.

No comments:

Post a Comment