Friday, December 21, 2007

Final 2007 Portfolio Update

As the year closes in a week time, this post will provide a final update to my portfolio. My current holdings are:

Cacola
China Precision
Fujian Plastic
Hongwei
Valutronics
Two HK stocks

Transactions made since last update:

Sold: Hengxin
Partial Sold: China Precision, Hongwei, one of the HK stocks
Added: Valutronics
Newly added: Cacola

The selling was done partially to fund the purchases and partially to reduce positions that are subjectively less desirable compared to other holdings.

Overall, my year-to-date returns (based on unit value method) is similar to year-to-date Sesdaq returns.

Friday, December 7, 2007

Book Review: The Panic of 1907

"The Panic of 1907", by Bruner and Carr, depicts the monetary panic in USA during 1907, where lack of monetary liquidity, trusts and bank runs come after one another. Due to the lack of liquidity, the stock market has also crashed severely during this period. The liquidity shortage was so severe that the brokerages have to borrow from Mr JP Morgan and the banks such that the brokerages can pay their counterparties and the stock exchange can continue to function.

Overall the book is a very interesting read, especially for those who are interested in monetary economics or the markets. The book is available in NLB.

A short summary of the lessons from the Panic of 1907:

1) For a panic like 1907 to occur, there must be a system-like architecture in place that allows troubles to spread and probably also allow the amplification of these troubles (e.g. self-reinforcing loop). Also, the system may be complicated in the manner that it may be difficult to know the location and the nature of the trouble in the first place.

2) Bouyant growth should occur before the trouble. Bouyant growth lead to excessive optimism and create a demand on the liquidity that may cause strains on the financial system.

3) Inadequate safety buffers are also present as crashes or panics may not occur if there are shock absorbers in place to prevent the trouble from spreading. For example, deposit insurance has prevent bank runs from spreading. (But the point is that we do not know if the shock absorbers are sufficient or even necessary until a crash. There is a cost in setting up and maintaining shock absorbers.)

4) Adverse leadership may be present during shocks/crashes. The book explains that the actions of political and economic leaders may increase the risk of crisis.

5) There is a real economic shock to the system for a 1907-like crash to occur. The shock should be large and costly, unambiguous and surprising.

6) Excessive fear, greed and pessimism are in place.

7) The failure of collectivism or the simultaneous actions by individuals in choosing to run from the crisis (selling stocks and withdrawing money from banks) so as to save one's wealth first may lead to decreased overall net worth for all and increased chances of a crisis. The book further explains this point through the use of a prisoner's dilemma example.

The above points seems to be present in the current subprime issues (except for pt 4, depending on how you look at it). Would the subprime incident lead to a liquidity crash? I don't know.

Saturday, December 1, 2007

Book Review: Super Crunchers

This is a review on the book "Super Crunchers" by Ian Ayres. "Super Crunches" is available in NLB at 519.5 AYR

Super Chrunchers describes how regression and randomization has been applied in reality. For people who are studying or have studied statistics or econometrics, the book will show you how these statistical stuff are applied in reality. Overall, I find that this is a fascinating book. However, if you do not understand regression/randomization or if you hate numbers, you may not like this book.

Some interesting points:
1) Companies are using algorithms or super crunching to exploit the long tail. In other words, super crunching may help companies to sell the same product to different customers closer to the customer's reserve (maximum price that the customer is willing to pay).

2) On the other hand, super crunching also helps customer to discern price differences better. Examples are Priceline etc.

3) Randomization (Real-life small scale experiments using randomization principle) may shape government policies as government can test-run certain policies in reality and observe whether the intended policies are beneficial or not baased on the experimental outcomes.

4) Equations (aka regressions, randomization etc) is more likely to outperform a group of experts in predictions. This is especially so if the underlying database is relatively free of errors.

5) Standard deviation can be thought in the following way. That is, 95% of the outcomes roughly fall in between 2 standard deviations of the mean. (assuming that the event belongs to a normal distribution.)

The book also discuss how Larry Summers reasoned out very roughly why hard sciences tend to have more male academics than female academics. (The reasoning is logical and very smart but it is also very sketchy.)

The author, Ian Ayres, has also some interesting prediction tools (weblinks) on this website. (http://islandia.law.yale.edu/ayers/predictionTools.htm)