Caveat Emptor

Important points 1) Distinguish between Risk and uncertainty. It is possible to determine a low but imprecise probability of permanent loss.  The Cameron School of Business put forth an important perspective. In casinos, the odds of winning, while quite small, are clearly defined.  If one plays at the roulette table, one knows that there is a likelihood of 1/38 that one can beat the spinning wheel. Or in the game of poker, one can calculate quite accurately the probability of being given any particular winning hand. The players are facing the so-called “known unknowns.” The gamblers are facing Risk, where the odds are given, as opposed to Uncertainty, where they are not. However, the odds of beating the stock market are rarely clearly defined. As a result, many investors face Uncertainty as opposed to Risk. That is to say, the investors are faced with the “unknown unknowns.”  2) Market Prices / Sentiment may not coincide with economic reality. Loo...

The Blind spots of indexing The MSCI indices are  market cap weighted indices , which means that stocks are weighted according to their market capitalization, calculated as stock price multiplied by total number of  shares outstanding . Therefore, the stock with the largest market capitalization gets the highest weighting on the index. This reflects the fact that large-cap companies have a bigger impact on an economy than mid- or small-cap companies. A percent change in the price of the large cap stocks in an MSCI index will lead to a bigger movement in the index than a change in the price of a small-cap company. Each index in the MSCI family is reviewed quarterly and rebalanced twice a year. Stocks are added or removed from an index by analysts within MSCI Inc. to ensure that the index still acts as an effective equity benchmark for the market it represents. When an MSCI index is rebalanced,  ETFs and mutual funds  must also adjust their fund holdings since they are...

Priced for Perfection October and November passed by in a blink of an eye due to increased work responsibilities. There were many weeks whereby I ended the day mentally drained. Making the decision to blog on a monthly basis is the correct move. I can focus more on portfolio allocation decisions and record tracking in this blog, and granular analysis and peer feedback of the thesis of individual stocks in that financial community. Making Macroeconomic forecasts is not my forte. As countless shrewd fund managers and economists continually made predictions and yet again missed out on the important boom / bust periods, I am wary that I will fall into the same trap. Nonetheless, portfolio allocation decisions based on risk-reward analysis is still pertinent for the purpose of value investing. The 8-10 years macroeconomic cycle is on its late periods, and there is considerable risks, leverage and fiscal deficits incurred by the governments (sovereign debt, US debt ceiling) as well as ...