One of those Septembers

Historically, September sticks out as a noticeably poor month in the stock market. In fact, it is the only month that has yielded a negative return on average since 1926. This September is likely to reinforce that statistic. The current slide in the stock market may have more to do with unusual events than with seasonality, but then again it may not. The credit crisis has been unfolding for over a year and it is quite possible that an already weak market was pushed into distress by seasonal weakness. In other words, it did not necessarily have to come as a surprise that stock and credit markets would be pushed to their limits in September.

To trade or to invest

Different factors affect stock prices in the short run and the long run. In the short run, recent and imminent developments as well as investor psychology matter most. In the long run, however, the fundamental viability of a business matters more as the intrinsic value of a business is realized in the market sooner or later. In the words of Benjamin Graham, known as the father of value investing: “In the short run, the market is a voting machine but in the long run it is a weighing machine.”

Graham and his disciples, the most famous of whom is Warren Buffett, choose to focus on the long term by finding stocks that are underpriced relative to their intrinsic value. For Buffett and many others, this has worked very well. Of course, many have also done well by focusing on shorter term price movements in the markets. While this is frowned upon by some value investors and not always feasible for casual investors, people who are serious about their involvement in the markets have all the options at their finger tips. They only need to think clearly about their time horizons.

Playing the bear market rally

The recent slump in the market occurred rapidly and indicates oversold conditions. My preferred method of monitoring — and acting on changes in — momentum in the market is the Stock Market Momentum Indicator (SMMI), as constructed and calculated by CRB. I had been anticipating a signal and it finally appeared after yesterday’s close.

The last time this indicator flashed a buy signal was on August 31 of last year. I wrote about the signal at the time and gave my reasons for taking action cautiously. In short, the market was still near peak levels, a credit crunch was starting and the economy seemed to be heading towards a recession. The caution was warranted, as the signal, which closed on May 29, turned out to be the only unprofitable such signal since the indicator’s inception in 1994.

Investing in Africa

As discussed in my last post, getting exposure to the markets’ least developed economies is hard to do with exchange-traded funds. The African continent seems to garner only slightly more investor interest than Antarctica and that interest has thus far mostly been focused on Africa’s most developed countries.

Emerging, Frontier, and Obscure Markets

Emerging markets have had their moment in the spotlight for some time now and have provided a welcome alternative to the more established and developed markets of the U.S., Western Europe, and Japan.

After a very strong run in recent years, the emerging markets are hardly an unknown place to invest and it is certainly too late to get in on the ground floor.

It may be time to take a look at the lowest rung on the ladder of developing countries: Frontier Markets, or Frontier Countries.

Green light turns red

On August 31^st 2007, I wrote about a buy signal in CRB’s stock market momentum indicator (SMMI). The indicator gives a buy signal when momentum is low but rising. Conversely, a sell signal is generated when momentum is high but falling. A more precise description of this system is given on CRB’s website.

A sell signal came into effect after yesterday’s close. Leading up to that, the buy signal was open for 272 days and yielded a negative return of 5.0%. This is the first time that acting on this indicator, which has been calculated since 1994, would have yielded a negative return. Prior to this, the lowest return had been 1.6% and the longest a buy signal had been effective was 191 days.

This negative return has not changed my opinion on the SMMI as a useful timing tool. As discussed last August, there were reasons to be careful and not overly enthusiastic about the buy signal. I will keep tracking the SMMI and notify of future signals with commentary based on current conditions.

The Icelandic job

Yikes! Where did all the money go? Recent events have left many Icelandic investors feeling like victims of a robbery. While most of the world’s markets have been hard hit in recent months, few have been crushed in the way the Icelandic market has.

The rise…

For those less familiar with the Icelandic economy and stock market, I will start with a little background information. The country has been on a tear since 2002. That is not due to any amazing increase in exports, but rather by an explosion in the availability and use of credit and the ability to participate in global financial markets. An ability Icelanders were long deprived of and have now embraced enthusiastically. This led to a surge in equity and real estate prices.

Volatile markets and behavioral biases – Part II

In my last post I discussed how it is useful to be aware of one’s behavioral biases, especially during a volatile market like the one we are experiencing currently. I then went on to list some relevant emotional biases. Now it is time to discuss cognitive biases.

Anchoring and adjustment bias

This bias refers to a tendency to “anchor,” or rely too heavily, on one piece of information, and then adjust from that reference point when estimating the value of something. For instance, if you buy a stock for $100 per share and it later reaches $200 before falling down to $150, the high of $200 could serve as an anchor and have an unreasonable effect on the investor when evaluating under what circumstances the stock can be sold.

Volatile markets and behavioral biases

After years of low and declining volatility, investors have had some adjustments to make in the last six months or so. Volatile markets, especially falling ones, can play tricks on the mind. None of us are immune to the various behavioral biases that have spawned the now popular field of behavioral finance. Being aware of those biases should help, however, and I recently decided to review the literature to be better protected from my own rationality. As a guide, I used Behavioral Finance and Wealth Management by Michael M. Pompian, which I would recommend as an introduction to the field.

Out of the 20 biases Pompian discusses, I have singled out 8 which I consider most relevant at this time. In order to keep my blog posts within reasonable length, I will divide these into two sections. The biases are separated into emotional biases and cognitive biases. This post will deal with emotional biases and the next one with cognitive biases. I am not making any specific recommendations, but merely reminding you to be aware of these common pitfalls.

2007 Recap

Now that 2007 has come to an end, I would like to sum up how my stock recommendations from the year fared. There is no denying that my buy recommendations proved to be poor in that period. The following table summarizes my picks.

 

 

While none of the stocks has performed particularly well, with Tsakos Energy Navigation Ltd. (TNP) being the only one to outperform the market since the date of recommendation, Syneron Medical Ltd. (ELOS) has suffered a particularly steep drop since my September 20 recommendation.