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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Reading markets: Red Indian way

Reading markets: Red Indian way

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1Reading markets: Red Indian way Empty Reading markets: Red Indian way Sat Nov 02, 2013 3:08 pm

The Alchemist


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
I just read a funny thread on red indians etc and it reminded me of this story. 
i searched the forum for this story but could not find it. sorry if its been duplicated, as it has happened once before. 


source - internet


A former colleague and a friend sent me the following story illustrating how the stockmarkets work. It is both funny and truthful.
And I think lots of people who get stuck with bad stocks because they bought it on a rumour will find the following quite educative. So here goes.


It was autumn, and the Red Indians on the remote reservation asked their new chief if the winter was going to be cold or mild. Since he was a Red Indian chief in a modern society, he had never been taught the old secrets, and when he looked at the sky, he couldn't tell what the weather was going to be.
Nevertheless, to be on the safe side, he replied to his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared.But also being a practical leader, after several days he got an idea.
He went to the phone booth, called the National Weather Service and asked "Is the coming winter going to be cold?" "It looks like this winter is going to be quite cold indeed," the meteorologist at the weather service responded.
So the chief went back to his people and told them to collect even more wood in order to be prepared. A week later, he called the National Weather Service again. "Is it going to be a very cold winter?"
"Yes," the man at National Weather Service again replied. "It's definitely going to be a very cold winter."
The chief again went back to his people and ordered them to collect every scrap of wood they could find. Two weeks later, he called the National Weather Service again. "Are you absolutely sure that the winter is going to be very cold?"
"Absolutely," the man replied. "It's going to be one of the coldest winters ever." "How can you be so sure?" the chief asked. The weatherman replied, "The Red Indians are collecting wood like crazy." 


The above tale demonstrates how cause and effect get mixed up in the stock markets. Those who trust rumours or 'tips' and see evidence of their correctness in the stock prices moving up or down may be caught in the same game. Investors, the medium- and long-term variety, must look at the fundamentals and past price behaviour before making any investments.
Many a times while the choice of stocks may be right, the timing of purchase goes wrong. Thus, investors end up buying stocks after the prices have moved up sharply and they get tired or depressed as the stock refuses to climb in the short term or declines. And they end up exiting the counter just as the valuation starts moving up again.
Of course, if you are a day trader the strategy is understandably reversed. That is you move with the crowd and exit at the first sign of stagnation in prices. In short, investors must decide whether they are buying a stock for trading or for the long term. Their buying and selling strategies for the two should be totally different.

2Reading markets: Red Indian way Empty Re: Reading markets: Red Indian way Sat Nov 02, 2013 3:13 pm

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
http://forum.srilankaequity.com/t7115-nothing-but-red-indians-theory-works-at-cse

3Reading markets: Red Indian way Empty Re: Reading markets: Red Indian way Sat Nov 02, 2013 3:20 pm

The Alchemist


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@ redbull - thanks for that. i remember one other article i duplicated and you immediately put the link ! can you pls advise me how you do it ? bcos before i uploaded this thread, i searched ".. red indian.." in search box on upper right corner of this page and it did no show any threads, although it does now !

4Reading markets: Red Indian way Empty Re: Reading markets: Red Indian way Sat Nov 02, 2013 4:25 pm

seek


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
I think the winter question should be modified. It is raining everywhere, Will there be a demand for hydro power?

5Reading markets: Red Indian way Empty Re: Reading markets: Red Indian way Sat Nov 02, 2013 4:49 pm

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
@The Alchemist wrote:@ redbull - thanks for that. i remember one other article i duplicated and you immediately put the link ! can you pls advise me how you do it ? bcos before i uploaded this thread, i searched ".. red indian.." in search box on upper right corner of this page and it did no show any threads, although it does now !
Searching is an art. Just kidding.

6Reading markets: Red Indian way Empty Re: Reading markets: Red Indian way Sat Nov 02, 2013 6:45 pm

K.Haputantri

K.Haputantri
Co-Admin
http://forum.srilankaequity.com/t8820-are-we-like-red-indians?highlight=red+indians

7Reading markets: Red Indian way Empty Re: Reading markets: Red Indian way Sat Nov 02, 2013 7:01 pm

besthope


Manager - Equity Analytics
Manager - Equity Analytics
Reading markets: Red Indian way N50bd7096ed5c5

Hallo paleface brother chemist, I chief Sitting Bull sends greetings and wants to invite to reservation to smoke peace pipe with you. please bring any chemicals if you are having. i am very worried about this red indians article you have put. if that squaw Chicken Little who calling himself Red Indian is collecting touchwood, it is not good mainly as that fellow no money la totem pole is broken.

many moons ago, when the Apache's roamed Sioux city, that fellow Red Indian appeared in forum under another name. he is actually Little Red Riding Hood who is a wolf in sheeps clothing. my half brother Redbull knows all. can you remember my other half brother Whitebull ? he also having many names and got caught with his horn down and got castrated.    

i am very old thats why they call me Sitting Bull. but my son Running Bull is waiting to take over but problem is that paleface fellow Casino Bill. He causing problems. Casino Bill brother is paleface Billy the Kid who's uncle is Jesse James (Packer). 

Only reason i want my son to take over is to teach that fellow raj a lesson. he thinking my son Running Bull will never become chief and it is a pipe dream. 

we will wait and see if it becomes cold in november & december as lot of wood is being collected. 

Adios Gringo

8Reading markets: Red Indian way Empty Re: Reading markets: Red Indian way Sun Nov 03, 2013 9:52 pm

D.G.Dayaratne


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Red Indian way in one aspect of market behavior in a free market. some people behave as describe in this story in a free market

Technical analysts can use their knowledge and make money. in this type of environment

Sri laka market is not  a free market now.It is  influenced and controlled by govt hand......... after 2009

Therefore we have to face highly complex situation



Last edited by D.G.Dayaratne on Sun Nov 03, 2013 9:55 pm; edited 1 time in total (Reason for editing : typing error)

9Reading markets: Red Indian way Empty Re: Reading markets: Red Indian way Mon Nov 04, 2013 10:57 pm

Liber Abaci


Senior Equity Analytic
Senior Equity Analytic
@The Alchemist wrote:
..........................
........................................
The above tale demonstrates how cause and effect get mixed up in the stock markets. Those who trust rumours or 'tips' and see evidence of their correctness in the stock prices moving up or down may be caught in the same game. Investors, the medium- and long-term variety, must look at the fundamentals and past price behaviour before making any investments.  ..............
........................
Sure..........., we all have forgotten  Eugene Fama . (But....... he has made a comeback).


........ In an efficient market, on the average, competition
will cause the full effects of new information on intrinsic
values to be reflected "instantaneously" in actual prices.
In fact, however, because there is vagueness or uncertainty
surrounding new information, "instantaneous
adjustment" really has two implications. First, actual
prices will initially over adjust to changes in intrinsic
values as often as they will under adjust. Second, the
lag in the complete adjustment of actual prices to successive
new intrinsic values will itself be an independent
random variable with the adjustment of actual prices
sometimes preceding the occurrence of the event which
is the basis of the change in intrinsic values
(i.e., when
the event is anticipated by the market before it actually
occurs) and sometimes following.


This means that the "instantaneous adjustment"
property of an efficient market implies that successive
price changes in individual securities will be independent
.
A market where successive price changes in individual
securities are independent is, by definition, a
random walk market. Most simply the theory of random
walks imphes that a series of stock price changes has
no memory—the past history of the series cannot be
used to predict the future in any meaningful way
. The
future path of the price level of a security is no more
predictable than the path of a series of cumulated
random numbers.
................

10Reading markets: Red Indian way Empty Re: Reading markets: Red Indian way Tue Nov 05, 2013 3:07 pm

The Alchemist


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@ Liber Abaci

Interesting take on the story. Just to clarrify, those were not my thoughts. i just found it on the internet and cut & pasted.

my thoughts on EMH etc are as follows - 

1. as you are aware, there are three forms of this theory for which Fama just recently won the Nobel. If he were to visit the Sri-Lankan Stock Market and witness the inefficiency, illiquidity, the manipulation in the dissemination of information & the distortion in the Index's etc, he may have a rethink on the EMH and run back to chicago ! :-) 
at the very best, it is a very weak form EMH.

2. On the other hand, philosophically speaking, a follower of Advaita Vedanta could 100 % concur on the Random Walk theory, believing in non duality, absence of free will & no doer and things just happen. The Deepak Chopra's & Ramesh Balsekars would subscribe to this theory. 
But then how would you explain Warren Buffet's Long term fundamental stock picking approach / strategy ? was it a aberration or anomaly ? 

3. the following article uploaded from the internet may be of interest to you 


Jack Bogle Has A 'Philosophical Disagreement' With Nobel Prize Winner Eugene Fama

"Professor Fama's groundbreaking work on asset pricing and markets inspired the founding of Dimensional, and his ongoing contributions have guided our investment approach for more than three decades." -Dimensional Fund Advisors

University of Chicago professor Eugene Fama was one of three people to be awarded the 2013 Nobel Prize in Economics.

Fama is known as the "father of the efficient markets hypothesis (EMH)," which asserts that all information is efficiently priced into the markets making it incredibly difficult to profit off of trading in the short run.
"These findings not only had a profound impact on subsequent research but also changed market practice," said the Royal Swedish Academy of Sciences in its press release. "The emergence of so-called index funds in stock markets all over the world is a prominent example."
However, Jack Bogle, the "father of index funds" was a bit surprised to hear that Fama would be associated with indexing.
"He's clearly a brilliant economist," Bogle told Business Insider in a phone call this week.  "He's right some of the time."
"When he had a chance to start an index fund, he did not do it," said Bogle.
Rather, Fama was part of the team that started Dimensional Fund Advisors (DFA), a money-management firm that seeks superior returns by increasing exposure to sectors they consider to be undervalued.
"Traditionally, managers do one of two things: they focus on picking individual securities, the antithesis of diversification, or they hold many securities but mimic arbitrary benchmarks," writes DFA on its website. "Dimensional chooses a different path. It structures strategies based on academic research rather than on speculation or commercial indexes. Small cap strategies target smaller stocks more consistently. Value strategies target value returns with greater focus."
Investing in "arbitrary benchmarks" or "commercial indexes" is what Bogle pioneered as a college student at Princeton and has been offering at a low cost for nearly 40 years. And anyone with the smallest amount of experience in investing knows how rare it is to outperform the indexes, especially when you're paying high fees to managers who believe they can beat the market.
"Don't spend too much time with EMH," said Bogle. "Don't focus on EMH, focus on CMH — the cost-matters hypothesis."
"EMH is sometimes correct and sometimes incorrect," he added.
Perhaps the most glaring problem people have with EMH is its interpretation of asset bubbles. How can markets be efficient if we experience bubbles?
"Dr. Fama doesn't recognize bubbles," criticized Bogle. "It's not very complicated."
Indeed, the recognition of bubbles made Yale economist Robert Shiller so famous. Shiller was one of the other economists awarded a Nobel Prize with Fama.
Many have noted the irony of Fama and Shiller being awarded at the same time.
Perhaps this just reminds us that the debate over EMH is far from over.

However, Jack Bogle's position on Fama and EMH is pretty clear.


"I have a philosophical disagreement."

Read more: http://www.businessinsider.com/jack-bogle-nobel-prize-winner-eugene-fama-2013-10#ixzz2jlHjthQy

11Reading markets: Red Indian way Empty Re: Reading markets: Red Indian way Wed Nov 06, 2013 11:01 am

gamaya


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Besthope, That was hilarious.
Thanks.

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