cant buy me luuuuvvv, cant buy me…

I don’t care too, much for money, money can’t buy me love….

Which is just as well, since I have much less money today than yesterday! 🙂

More market craziness. shares are dropping like stones. And the really funny thing is, house prices, which started all the madness, seem to have dropped, but much slower and to a lesser degree. Property markets dont crash overnight, reflecting the relative lack of liquidity in them.  Sharemarkets on the other hand, where liquidity is prized, will crash overnight. This crashing effect must have a psychological impact on investors, that property investors in general will avoid.

So whats the point of sharemarket investing? We’ve already discussed that the risk in sharemarkets is basically unknowable, coupled with the liquidity characteristic means that wealth invested in sharemarkets can (and has) been wiped out overnight. So essentially, from a human psychology point of view, sharemarket investing makes much less sense than property investing.

WTF? Sharemarket investing should be much more rewarding than property investing. Shares are investing in productive assets, companies creating value, and jobs and innovation and progress. Property (at least residential property) is investing in unproductive assets. Why should sharemarkets be so much more volatile, higher risk (at least perceived risk), than investing in unproductive assets? Something is seriously, I mean, incredibly seriously, wrong with the markets. Not just the current crisis, but the sharemarket as a concept. How can the incentives to invest in property be so much more reasonable than shares?

huh? Am I missing something? The sharemarket appears to be failing to push capital to companies that need it to grow. Has it been hijacked by derivative players, speculators, and hedge funds? do we even need derivatives?

something is sick in the markets. Any ideas?

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cant buy me luuuuvvv, cant buy me…

3 thoughts on “cant buy me luuuuvvv, cant buy me…

  1. For one of my recent financial models I constructed a skew-normal distribution that fitted the S&P 500 returns for the last 62 years. The parameters I got were a drift (mean return) of 8.3%, a volatility (standard deviation) of 14.8% and a skew of -9%.

    Now, the S&P 500 is down 38% since a year ago. According to my model then, the probability of a loss that big or more is just 0.14%. So this year’s loss is way off the charts.

    Well, look at it this way: the risk you face on the stock market is still a lot less than the risk an entrepreneur faces. You could work really hard for years and invest all your money into a business only to suffer a 100% loss. And this happening is not a freak event, it’s actually rather likely…

    If investing in the stock market is dangerous, then being an entrepreneur is suicidal!

  2. well, i am known as a complete masochist, so thats probably why i’m doing the entrepreneur thing too!

    I guess my ‘gut’ feeling is that the further markets get away from the actual ‘stuff’ they are selling, the more risk there is of massive anomalies. There seems, at least in NZ, no particular reason that you would invest in the sharemarket as opposed to property, especially if you have any problems seeing your wealth vanish by 30%+. With property, you never truly know the market value, until its on the market.

    So I guess my question is, are derivatives good for the underlying purpose of the market? Or do they just increase speculation and chance of massive failure in the market?

  3. I’m no derivatives expert, but I understand basically what they do and how certain kinds work. Essentially they are just an abstraction, indeed that’s why they are called “derivatives” because they are derived from something else. That makes them a very powerful tool for certain types of operations, most of which have nothing to do with the current financial crisis.

    However, even the derivatives that are related to the current crisis, I don’t see the derivatives as the problem. The derivatives just allowed people to express their beliefs about the market (among other functions). In this case it was the market for bundled sub-prime home loan debt. In my opinion the real problem was not that derivatives could be used to express these beliefs, but the fact that these beliefs were completely wrong. That’s a deeper and much more difficult problem to fix as it stems from significant weaknesses in human psychology.

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