Trap 3

Behavioural finance theorists believe stock-market bubbles are due to an overreaction to a positive investing climate. During the dotcom era, investors were said to be at the peak of optimism and many believe they were making rational decision by investing in stocks that had yet to generate earnings. The higher stock prices are, the more optimistic investors become. Likewies, low prices lead to pessimism. It can be difficult, even for the more experienced investor, not to get caught up in the prevailing sentiment of the market.

An indication that the investors are over- or under-reacting to eventsare when share prices fall by a large quantum aafter a hint of bad news, such as when financial institutions reported losses due to the defaults on subprime mortgages in the US. The American stock market fell after hearing about the losses due to the subprime sector. This created fear among investors and some will overreact. Investors usually start behaving irrationally when the market starts goin down.

WHAT TO DO

Revisit the basic principles of investing: asset allocation. To avoid getting caught up with irrational exuberance, investors should allocate their protfolio between strategic and tactical investments. Then, limit tactical investments based on "hot" themes to their portion for tactical investments.

Strategic investments offer modest but steady returns and should be held for the long term. Tactical investments offer the potential of quick but volatile returns and should on make up between 10% to 30% of your investment portfolio. How much tactical investment you make within this range depends on your risk profile.

Investors can avoid overreacting to bad news by anticipating periods of underperformance. As long as your stocks meet your long-term investments goals, don't worryabout outperforming the benchmark or your peers on a short-term basis. Stocks will move up and down. This is all part of an economic cycle.

Perhaps the best way to handle snetiments of optimism or pessimisms is to double-up oyur research. If your stock falls, look for reasons. If your share gains in value, also try and identify the cause. Only then can you make an informed decision on wether to sell or hold on to your investment.

Stocks soar worldwide on U.S. action

In a dramatic end to a volatile week, shares on exchanges around the world moved sharply higher Friday as Washington moved to restore confidence in America's financial markets.

The Dow Jones industrial average closed up 368.75 points, or 3.4 percent, and the broader Standard & Poor's 500-stock index was up 4 percent. The rise Friday came on the heels of a 410-point rise in the Dow on Thursday.

The Dow shot up more than 400 points shortly after the start of trading on Friday as the markets took heart in Washington's move to buy distressed mortgage-backed securities that continue to drag down the financial sector.

"What the authorities have done is tackle the root of the cause of the lack of confidence," said Ian Gordon, an analyst at Exane BNP Paribas in London.

Although the Dow closed slightly lower for the week, it recovered 800 points in the last two days.

"Nobody knows how sustainable this is, but the immediate reaction just to the rumors about the steps yesterday showed that this has the potential of being the beginning of the end," Michael Holland, chairman of Holland & Company, said of the market rally.

In London the FTSE closed up 8.8 percent, while in Paris, the CAC 40 rose by 9.3 percent, its biggest jump in more than five years. The DAX gained 5.5 percent in Frankfurt.

Financial stocks were especially bolstered by the government's actions, which included moves to insure money market funds and curb short-selling of financial companies' shares. Citigroup's stock was up 18 percent, Bank of America gained 15 percent and JPMorgan Chase rose 12 percent. Shares of Morgan Stanley, which has been involved in talks about a possible merger, were up 22 percent.

"Markets tend to react in tandem and for the time being the momentum is positive," said Andrew Popper, chief investment officer at SG Hambros Bank in London. "The overall context is that the central banks and the U.S. government is very proactive and that is what the market wants and needs."

"It is hard to see whether it will bring back the confidence in the long term," Popper said. "We had so many false recovery beginnings already. One has to be prepared for some storms ahead. I don't think this is the turning point. We still have the restructuring of the entire industry ahead of us."

In the Treasury markets, rates and bond yields rose as traders unwound their safe-haven positions. The dollar rose against the yen, but fell slightly against the euro.

The spreads between Treasury yields and two-year interest-rate swaps narrowed on the news of the bailout plant. The rate on a two-year interest-rate swap, used by companies to hedge and investors to speculate on rate changes, narrowed 17 percent, the most since September 2003.

In Moscow, meanwhile, both of Russia's main stock exchanges, the Micex and RTS, halted trading twice Friday as the markets surged, Reuters reported. The Micex and RTS exchanges said the suspension was caused by technical limits on how fast stock prices can grow, the report said.

The Hang Seng index leaped 9.6 percent in Hong Kong, gaining 1,695.27, to close at 19,327.73 points. Another spectacular turnaround took place in Shanghai, where the composite index soared 9.46 percent to close at 2,075.09. Trading had slowed as many stocks increased by the daily limit of 10 percent soon after the stock market opened.

As the wave of buying swept across the Pacific, the Nikkei 225 index gained 3.8 percent in Tokyo. The All Ordinaries index climbed 3.9 percent in Australia, and the Kospi index increased 4.8 percent in Seoul.

Ajay Kapur, the chief global strategist at Mirae Asset, a large Korean investment bank, said that the surge in Asian stock prices was a response to discussions in Washington on the possible creation of a government-owned corporation that would buy distressed mortgages from banks and other financial institutions.

"Almost the entire rally is based on the hope that the U.S. authorities will take credible action," Kapur said.

But not everyone thought the rally could be sustained. "This is just a breather we're getting," said Jeffrey Davis, chief investment officer at Lee Munder Capital Group in Boston. "The rally will stop because we don't know what it all did to hedge funds and other institutions that maybe had to make decisions in stressed periods. The rally will subside and people will take the weekend to look at what damage it had."

"The best thing that can happen now is lots of cross-border transactions," Davis said. "If there is anxiety and legislation going on in Europe, though, that can really slow things down."

Across Europe, banking stocks leaped higher with Crédit Agricole up 16 percent, BNP Paribas gaining 10 percent, Anglo Irish up by a huge 61 percent and Bank of Ireland adding 52 percent. Deutsche Bank and Credit Suisse Group both climbed 15 percent while, in Australia, Macquarie Group, the country's biggest investment bank, gained 38 percent.

The continental European and Asia gains were mirrored in London after regulators in Britain followed their counterparts in the United States to propose new regulations Thursday on short-selling, the practice of betting on a fall in share prices.

At the close of trading, Barclays rose 29 percent, HSBC rose 15 percent and Royal Bank of Scotland Group gained 32 percent.

The increases across the globe reflected a calculation that action by the United States and other governments would stem the tide of losses that has roiled American financial institutions, forcing the authorities in the United States to rescue some, notably the big insurer American International Group, while allowing Lehman Brothers, a Wall Street stalwart, to fail.

Gordon at Exane BNP Paribas said the measures taken by the authorities had "very quickly" reversed losses. "What we've seen over the last two days was a significant technically driven collapse and that is being reversed very quickly. I think it should hold in that we now have a window through January and we probably won't have a repeat of the things we've seen lately. It's bringing the market back to normal and make things easier," he said.

But some experts took a more cautious view, questioning the limits of American financial power.

"This is a short-term reaction that is definitely positive but we are still waiting for the details of the rescue fund to come out over the weekend," said Thomas Romig, a fund manager at Cominvest Asset Management in Frankfurt.

"It's definitely a positive sign because we've seen some holes appearing in financial vehicles around the globe as a result of the Lehman bankruptcy but in the medium-term one needs to ask the question about how the United States is going to pay for all those rescues."

The official Xinhua news agency announced on Thursday evening that a government agency had begun buying shares in three of the country's biggest banks: the Industrial and Commercial Bank of China, the Bank of China and the China Construction Bank. The government also removed a tax of 0.1 percent on the purchase of shares.

"With the latest Chinese government measures to save the market, announced last night, mainland Chinese retail investors are finally convinced the government is stepping in the market to help," said Peter Lai, a director of the Hong Kong office of DBS Vickers Securities, a brokerage firm with headquarters in Singapore.

Asia Stocks Tumble to 3-Year Low on Bank Woes; Macquarie Slumps

Sept. 18 (Bloomberg) -- Asian stocks tumbled, pushing the region's benchmark index to the lowest level in three years, as credit markets seized up and concerns grew that more financial companies will collapse.

Macquarie Group Ltd., Australia's largest investment bank, plunged by a record 23 percent as Morgan Stanley and HBOS Plc sought buyers. Newcrest Mining Ltd. rose as gold extended its biggest jump in 26 years. U.S. three-month Treasury yields traded near the lowest since World War II as investors fled stocks for safer havens.

``Confidence has been shattered,'' said Nader Naeimi, a Sydney-based senior investment strategist at AMP Capital Investors, which manages about $108 billion. ``The market is worried about a domino effect in the financial sector, with no one sure who's going to fall next.''

The MSCI Asia Pacific Index dropped 1.7 percent to 108.74 as of 7:39 p.m. in Tokyo, the lowest since Sept. 16, 2005. The index trimmed an earlier 4.3 percent drop after the Federal Reserve, the European Central Bank and the Bank of Japan moved to pump dollars into the financial system. Hong Kong's Hang Seng Index rallied from a 7.7 percent loss to close little changed.

Most benchmark indexes in the region fell. Japan's Nikkei 225 Stock Average lost 2.2 percent to 11,489.30, led by Sony Corp. after Goldman Sachs Group Inc. cut its recommendation.. Taiwan's Taiex index lost 2.7 percent, prompting the government to announce it may buy shares to help prop up the market.

Bank Takeovers

Today's central bank action, which was announced after Japanese and South Korean markets closed, is aimed at heading off the credit crisis that has caused Lehman Brothers Holdings Inc.'s bankruptcy and the takeover of American International Group Inc. by the U.S. government.

Futures on the Standard & Poor's 500 Index rose 1.4 percent in after-hours trading. U.S. stocks slumped to the lowest in three years yesterday, with the Standard & Poor's 500 Index sliding 4.7 percent.

More than $19 trillion has been wiped off global stock market value since a high on Oct. 31 as the worst U.S. housing recession since the Great Depression and a resulting global credit crisis slowed the world economy.

Morgan Stanley, the investment house that fell by a record yesterday, started weighing a merger with Wachovia Corp., according to people familiar with the matter. Lloyds TSB Group Plc agreed to buy HBOS, the No. 1 mortgage lender in Britain which has been faced with a shortage of funds.

Exuberance Over

Macquarie slid 23 percent to A$26.05, taking its loss from a high in May 2007 to 73 percent. Babcock & Brown Ltd., Australia's second-biggest investment bank, lost 17 percent to 76 cents. Babcock has plunged 97 percent this year, making it the third- largest loser in 2008 on the MSCI World Index behind Fannie Mae and Freddie Mac.

In a sign that banks have lost confidence in the solvency of their competitors, the London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent yesterday, the biggest advance since Sept. 29, 1999. Corporate bond default risk indexes rose to records in the Asia-Pacific region today.

The perceived risk of U.S. government debt, long held to be absent of any default risk, also climbed to a record yesterday as the government's involvement in bailing out financial markets weighed on its own balance sheet.

Unprecedented

Sumitomo Mitsui Financial Group Inc., Japan's No. 3 listed bank, slumped 6.6 percent to 582,000 yen. HSBC Holdings Plc, which CNBC reported as being a possible bidder for Morgan Stanley, lost 0.2 percent to HK$114.90. The stock trimmed an earlier 7.6 percent slump.

``People want to avoid any type of risk,'' said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., with $54.6 billion in assets. ``I've never seen this kind of crisis before,'' said Okumoto, who has been in the financial-services industry for 23 years.

U.S. Treasury three-month bill rates were 0.071 percent as of 11:58 a.m. in Tokyo. They dropped 65 basis points yesterday to close at 0.04 percent, a level not seen since 1940. Two-year yields were 1.65 percent, near the lowest since April.

Newcrest, Australia's largest gold producer climbed 15 percent to A$24.50, the biggest gain since September 1999, after the price of gold surged the most in 26 years and silver rose the most since 1979 yesterday. Lihir Gold Ltd. jumped 16 percent to A$2.48. Zijin Mining Group Co., China's largest gold miner by market value, rallied 21 percent to HK$3.90.

Sony, the maker of the PlayStation 3 game console, lost 8.7 percent to 3,270 yen, the steepest fall since April 28, 2003. Goldman's Yuji Fujimori cut his rating on the company, citing rising risks for the company's mobile phone, television and digital camera divisions.

2nd psychological trap

Anchoring is a shortcut that is used, by selecting an initial reference poinr (the anchor), the brain only need to process additional information that is received instead of reassessing all the facts that were received from the beginning.

When investing, this tendency often results in investors "anchoring" to their own estimates of a company's earnings or the "fair value" price of a share.

In a bull market, investors can also "anchor" each new high achieved by a security ti its previous highs abd the new higher recent price is taken as evidence of value.

The share's distant price history appears irrelevant to any desicion-making. The effect of anchoring on an investment desicion is similar to the fear and regret (previous post). The recent price of the share that is used as a psychologial anchor slows down rational valuation estimates. Losing positions will be held too long and winning stocks will be sold too quickly.

WHAT TO DO?

Investors are always upset and regret not executing their transactions at the highest or lowest prices. But the highs and lows are not accurate benchmarks as the share may only be at that price for two hours in a single day. It is better to compare your sale or purchase price with the average rpice of the security across a two-week duration. Also, remember that market participants are not the same as before. We have more hedge funds woth billions of dollars invested int the market and they can be very aggresive. This is when prices of securities can be pushed up or down very quickly.

Anchoring can lead to a strategy of buying stocks that have fallen considerably in hopes of buying it "cheap". Investors anchored to a recent (high) price value take this as an indication of value, and the new (low) price appears chaep. To avoid this pitfall, check your intentions in buying a security that is on its way down. If you had evaluated the security and determined that you would like to accumulate a position in this company, then it can be beneficial to take advantage of any price weakness in the share price cause by the overall market sentiment. On the other hand, be alert if a sharp price decline is the primary motivator behind your desicion to buy and a recent higher price is a main factor in the stock's attraction.

Malaysia's Anwar leads criticism of government crackdown

Malaysian opposition leader Anwar Ibrahim on Saturday led demands for the government to end a crackdown that saw the arrests of an opposition politician, a blogger and a journalist.

The arrests on Friday under tough internal security laws raised fears that the ruling Barisan Nasional coalition will launch a widespread campaign against dissent as it faces an opposition bid to seize power within days.

Rights groups have condemned the use of the Internal Security Act (ISA), which allows for indefinite detention without trial, and the United States summoned Malaysia's top envoy in Washington in protest.

Anwar, who is trying to sign up enough defecting lawmakers to topple the government, said it was running scared after March general elections that handed his opposition alliance unprecedented gains.

"Instead of pursuing a reform agenda it has chosen to burn the country to save itself and to maintain its odious grip on power," he said in a statement.

The three arrested have been accused of inciting ethnic tensions in the multicultural country, but Anwar accused the government of stirring up a phony racial crisis in order to deflect attention from its own problems.

"We ask the government how far it is willing to go to usurp justice and destroy the institutions of good governance in its attempt to drive the Malaysian people against each other," he said.

Anwar insisted he has the support to seize power, but indicated that the timing of his parliamentary coup, slated for next Tuesday, could be affected by the ruckus.

"The priority is political stability. It's not an issue of deferring, we have the numbers to move," he told a press conference, adding he was "mindful" that he too could be targeted with arrest.

Home Minister Syed Hamid Albar denied the detention sweep was aimed at suppressing dissent and said the police had moved to secure public order as tensions rose and people started to hoard food.

"This country is multiracial and their relations can be fragile," he told a press conference. "If the police feel public order is under threat or possible conflict could occur in the country, they will take preventive action."

Syed Hamid said that the journalist, 32-year-old Tan Hoon Cheng from the Chinese-language Sin Chew Daily News in northern Penang state, was released Saturday afternoon.

"She is not a security threat," he said, adding that one of the reasons she was taken into custody was because "we received reports her life was threatened."

Tan was thrust into the national spotlight after reporting on an outburst from a ruling party member who called ethnic Chinese "squatters" and was disciplined by the ruling party which represents Muslim Malays.

The arrest drew rare condemnation from the Malaysian Chinese Association, the second-largest political party in the Barisan Nasional, which said the ISA may need to be abolished.

"MCA is dismayed, disappointed and shocked with the ISA detention of Tan Hoon Cheng," said Ng Yen Yen, head of the MCA's women's wing.

Syed Hamid said investigations would continue into the other two detainees and "if there is no reason to hold them they will be released within 60 days."

Opposition lawmaker Teresa Kok, 43, from the Chinese-based Democratic Action Party, a member of Anwar's opposition alliance, was arrested over allegations that she complained about the noise of morning prayers at a mosque.

She has said the accusation is "preposterous".

The third detainee is Malaysia's leading blogger, 58-year-old Raja Petra Kamaruddin, who has repeatedly targeted government figures on his website "Malaysia Today".

He has already been charged with sedition and defamation after linking Deputy Prime Minister Najib Razak and his wife to the sensational murder of a Mongolian woman.

Three Malaysian newspapers -- Tan's Sin Chew Daily News, The Sun, a free English-language daily, and Suara Keadilan, which is published by the opposition -- were also Friday threatened with suspension.

"This, together with the arrest of Raja Petra under the ISA, may be viewed as a chilling message that our fundamental freedoms are not secure," said Ambiga Sreenevasan of Malaysia's Bar Council.

1 out of 5 phschological traps

It has been very long since the last posting due to some problems I face.

Today i will be talking about the 5 psychological traps and how to aviod them with rational decision-making.

I will only be talking 1of the traps each day, so lets get started with the 1 trap which is Fears of Regret and Loss Aversion.

According to behaviourists, most investors tend to postpone selling losing stocks in order not to finalise errors that have been made. Not to mention it always happens to me. This is due to the fear of regret and loss aversion. The fear of regret can also occur when investors miss out on a stock that appriciates in value. To avoid the possibility of feeling this regret, these investors tend to acquire only stocks that are popular. Behavioural finance experts also find that investors are much less embarrassed about losing money on favoured stocks than from losing money on an unknwon or unpopular share.

The loss-aversion theory states that people experience different degress of emotion when gains and losses are made. A loss alsways appear larger than a gain of an equivalent size and this is why investors may choose to hold on to their losing stocks and sell their winners. This is also the reason investors often take on more risks to avoid making loss, prefering to hold on onto their losing investments in the hope that the price will recover. Gamblers on a losing streak exhibit this loss-aversion tendency, doubling up bets in a bid to recoup what they had already lost.

WHAT TO DO??

1. As a lot of money has been lost by holding on to a stock that is not appreciating in value, investing professionals advise investors to decide ahead of time which investment should be sold if it drops to a certain level during a market correction. A sudden drop in the stock market is not the time to be sorting out your portfolio. You want to treat any pullback as an opportunity to increase holdings of your favorite stock.
2. To prevent impulsive selling of securities that have made losses in order to avoid making a begger loss, investors should check if the fundamentals of the asset have changed. Advice to exit an investment, asset class or market, can be based on a market view or asset allocation reason. For example, switching the gains made by bonds to stocks tha t have not performed is to rebalanceyour portfolio. However, if bond fund have lost value due to the rising default risk, existing bonds and increasing equity exposure is due to a change in the fundamentals of the bond asset class.
3. Investors should also practice setting stop-loss orders before their investments. Think about you much you can afford to lose. Be disciplined if the stocks price does depreciate and sell at the point that you have planned.