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Japan 1989

I am not one for historical comparisons because they are largely specious and mostly irrelvant but this one gives a nice bit of history that I lived through so consider it a nostalgia piece.

……The Nikkei stock index rose more than 900% in the 15 years before it finally topped. It was a frenzy powered by a belief that Japan Inc. was on its way to taking over nearly every major industry worldwide. The stock market bubble was further fueled by a massive real estate bubble at least twice the size of the one the US experienced in the 2000s. Tokyo alone became more valuable than all the land in the US.  In short, it was the product of a tsunami of monumental and concurrent events that are unlike anything present in the US today…..

It is hard to comprehend the apprehension that was rolling around markets and the business world with what was called the coming Japanese century. There was a belief that just 45 years after the end of the Second World War that Japan would rule the investment world. Even popular fiction writers such as Michael Crichton got in on the act with his novel Rising Sun. Japan was the flavour of the month, we were both fascinated and frightened.

 

Index Correlations

For my own curiosity I decided to have a quick look at the price correlations of a handful of world indices. Those correlations that are below 0.5 I have coloured red.

Index Correlations

As expected most share a positive correlation with the only true diversification coming from the Shanghai Composite. This does pose a conundrum for index traders since it causes difficulties with diversification in the traditional sense. However,these are price correlations not return correlations. If I get some time I will redo this as returns table and see what the difference is.

The Year That Was.

It is that time of the year when everyone involved in this business looks in the rear vision mirror and attempts to make sense of what happened.  And of course to everyone involved everything is so obvious and predictable. What is worse is that they take this data and attempt to make some form of prediction about the year ahead. Hindsight is all we have and whilst it is the perfect investment tool; we are denied its luxury in the real world. Even looking at a league table of performance of various instruments is somewhat meaningless. However, since they are all the rage below is one such table I quickly knocked up for a few common instruments.

League Table

Part of the problem is that these tables are looked at from the perspective of the buy and hold investor. It is assumed that you simply bought one of everything last year and held onto it and your performance either good or bad is a function of this. However, this is not how trading works. For example the AUD/USD began the year with a 15% gain, which is then gave back and settled into a meandering decline resulting in its ordinary year on year performance. Likewise all the gain in heating oil came in the first half of the year. Conversely, cocoa which turned in a shocker traded in a range for most of the year and then collapsed in October.

Whilst it is twee to say so in trading only the journey counts not the destination, in fact I would go a little bit further and say that even the starting point is irrelevant. As such tables such as the one above whilst vaguely interesting are essentially irrelevant to us.

Starting Dates

The post I did just now on luck got me thinking about the role of luck in trading – specifically the luck of your starting date. This ties in with a bit of playing around with annualised returns I have been doing in markets that have been rubbish. One of the issues with looking at returns for various funds and other investment strategies is that they are distorted by the start date and the start date for each individual is a function of luck. This is an issue that bedevils those who are required to undertake investment strategies such as industry based superannuation scheme. To get a sense of the impact of timing on longer term investment returns  consider the chart below of  annualised returns for the Nikkei.

nikkeiIf I had started my investment journey 5 years ago I would be reasonably happy with the results to date, if I had started 30 years ago I would view it as a disaster.  Although I was surprised at the 5 year return of the Nikkei. The same is true when we look at a variety of markets – the period through which you invest shapes your return and your perception of how successful that period had been.returnsThe question then becomes how do we overcome this as a factor within our own trading/investment and I think the answer lies on the chart above. Passive investors do rely upon external circumstances to achieve whatever return they get. Whereas. those who are more active look for returns wherever they may – simply being able to map the returns of various markets is a good starting point.

Think We Are Being Told Something

FV

Markets Are Moving

I posted this in the Mentor Program forum this morning and it is worth sharing because it represents my favourite style of price distribution. This one week relative performance is reminiscent of a smile and it indicates a series of movements that provide ample opportunity for traders. I accept that parts of equities markets are stuffed and if you are restricted to those then your opportunities will be limited.  Remember – equity markets are the smallest markets in the world.

Capture

You better watch out, You better not cry

There has been much talk on the Googlebox about us being saved by a Christmas rally and I thought what  an ideal topic for a chart. So I went and had a look at the average December gain for a variety of markets over the past 20 years and the results are below.

Screen Shot 2015-11-30 at 11.07.30 AMAs you can see the average December gain for our market is hardly anything to write home about. If interpreted literally (a dangerous thing to do with averages) it would mean that the All Ords would gain about 89 points from where it currently sits. However, averages are problematic and the December move could be anywhere between a loss of 2.6% to a gain of 6.1%. When looking at any set of numbers it is the dispersion of those numbers which conveys more information than simply using the average. Variance is important but often overlooked. So the statement “on average we have a rally in December” doesn’t really tell us much, whereas looking at the possible range of outcomes tells us a lot more about what might happen.

However, it is important to note that none of these numbers convey anything other than a bit of statistical mangling on my behalf. These numbers become a problem when they become part of peoples narratives and therefore part of their expectation. Expectation for traders is a problem because it involves a sense of ownership as to the outcome and it is ownership of  what is thought to be the right outcome.  As opposed to an understand as to all possible outcomes and what action might flow from the trader when one of those possible outcomes eventuates.

 

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