The conceptual framework for a man's search for meaning

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Of Greed and Fear

May 19th, 2013 by dimpledbrain

It is said that the two greatest emotions are greed and fear. It moves anything that has a price action in it. Which is exactly why and how the stock market, the property market, the foreign exchange market or any markets move through a cycle of ‘boom and bust’ (just as how the legendary George Soros coined it)

My instructor always tells me to think in term of information risk vs price risk. The consultant mind in me that I abhor so much will very quickly suggest either a 2*2 matrix or an inverse slope of a line on a graph to depict this piece of information. “Finish it with a touch of the sacred blue,” he added, virtually oblivious of my current state of mind.

What is information risk vs price risk?

Let us take the property market as an example. We will obviously choose a low information risk/low price risk over a high information risk/high price risk. That is to say we will choose to invest in A that is developed by Property Developer A, who has a good track record, sound financials and offers the lowest property price in the vicinity. Property Developer B is the exact opposite.

The dilemma will come in when we have to decide the in betweens, the ones that the average person can reasonably make money from. Property Developer C is a reputable developer ( low information risk) but the property price is fully valued (high price risk). Property Developer D is a new developer (high information risk because we don’t know much about it) but the property price is 20% cheaper vs Property Developer C (low price risk). Which one will you choose?

Well, one may very quickly argue that a reputable developer is more important as we hear a lot about abandoned developments. But rationally speaking, the now reputable developer has to be relatively unknown previously. If that’s the case, there must be relatively new but potentially good developers now that we can find?

That’s just the framework.

The main point is most retail investors seek to reduce information risk and not the price risk. How? By asking for tips and seeking for concurrence from people who don’t matter. Unless it’s an insider news, everything else is relatively futile. By the way, acting on real insider news is low information risk and low price risk. That’s if you are privy to it. Buying an IPO listing is low information risk but high price risk. Buying a guaranteed scheme is also low information risk but high price risk.

Generally speaking, everything that we hear will reduce the information risk and increase the price risk. Theoretically speaking, acting based on this piece of article will also increase the price risk of a chosen investment asset. Well that’s the beauty of humans, since we have an adaptive property, as described by a beautiful theory called the Complexity Theory. Well, the complexity theory is beautiful but I suspect it doesn’t have much predictive value in it. Hence it didn’t interest me to explore further.

When I say markets are moved by greed and fear earlier, that’s just because it’s an easily understandable term that we are used to. It is more correct to say that the market is moved by two kinds of fears, fear of missing out (greed) and fear of losses (fear). No wonder through some twisted logic, Storm Shadow (G.I. Joe) says, “Fear is a great motivator.” Always pay attention to what intelligent villains say.

I suppose we can better understand fear from a soldier? I was told that they are usually emboldened by drugs before going into a battle. It remains interesting to find out further. I also consider monks, but I feel this class of character is not really tested and proven in this aspect.

“You have a good move.” After some time, I saw the solution. I could sacrifice a checker, and he would be forced to jump. In checkers, the player who moves last wins. It was my first game from Dad, but he lost his life a few weeks later. I realized he had seen this final position many many moves before and purposely played toward it. His skill, not mine, gave me my first and final victory over him. And it was the most tactical checkers of his life. Victor Niederhoffer, The Education of a Speculator.





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