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Fear & Greed

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"Financial intelligence is 90% emotional IQ and 10% Technical IQ. …

"Financial intelligence is 90% emotional IQ and 10% Technical IQ.

What determines what we do and who we are, is how we as individuals respond to our emotions".

Robert Kyiosaki

Whether we’re talking about economic confidence or investor optimism, emotions drive the marketplace!

Published in: Business

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  • 1. Fear & GreedIntroducing the Bull/Bear Ratio Mark Weetman Vunani Private Clients
  • 2. Introduction"Financial intelligence is 90% emotional IQ and 10% Technical IQ.What determines what we do and who we are, is how we as individuals respond toour emotions".Robert KyiosakiWhether we’re talking about economic confidence or investor optimism, emotionsdrive the marketplace!
  • 3. Understanding risk?
  • 4. When the bubble bursts!Prior to 19th centuryThe Roman denarius was debased over time.The 1340 default of England, due to setbacks in its war with France (the Hundred Years War;).Seven defaults by Spain, four under Philip II, three under his successors.1637: Tulip mania in the Netherlands1720: Bursting of South Sea Bubble (Great Britain) and Mississippi Bubble (France)19th centuryDanish state bankruptcy of 1813Panic of 1819 – pervasive USA economic recession w/ bank failures; culmination of U.S.s 1st boom-to-bust economic cyclePanic of 1825 – pervasive British economic recession in which many British banks failed, & Bank of England nearly failedPanic of 1837 – pervasive USA economic recession w/ bank failures; a 5 yr depression ensuedPanic of 1847 – a collapse of British financial markets associated with the end of the 1840s railroad boom.Panic of 1857 – pervasive USA economic recession w/ bank failuresPanic of 1866 – the Overend Gurney crisis (primarily British)Panic of 1873 – pervasive USA economic recession w/ bank failures, known as the 5 yr Great Depression or the Long DepressionPanic of 1893 – a panic in the United States marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failuresAustralian banking crisis of 1893Panic of 1896 – an acute economic depression in the United States precipitated by a drop in silver reserves20th centuryPanic of 1901 – limited to crashing of the New York Stock ExchangePanic of 1907 – pervasive USA economic recession w/ bank failures1910 – Shanghai rubber stock market crisisWall Street Crash of 1929, followed by the Great Depression – the largest and most important economic depression in the 20th century1973 – 1973 oil crisis – oil prices soared, causing the 1973–1974 stock market crashSecondary banking crisis of 1973–1975 – United Kingdom1980s – Latin American debt crisis – beginning in Mexico in 1982 with the Mexican WeekendBank stock crisis (Israel 1983)1987 – Black Monday (1987) – the largest one-day percentage decline in stock market history1989–91 – United States Savings & Loan crisis1990 – Japanese asset price bubble collapsedearly 1990s – Scandinavian banking crisis: Swedish banking crisis, Finnish banking crisis of 1990s1992–93 – Black Wednesday – speculative attacks on currencies in the European Exchange Rate Mechanism1994–95 – 1994 economic crisis in Mexico – speculative attack and default on Mexican debt1997–98 – 1997 Asian Financial Crisis – devaluations and banking crises across Asia1998 Russian financial crisis21st century2000–2001 – Turkish Crises2000 – late 2000s Recession2001 – Argentine Crises2001 – Bursting of dot-com bubble – speculations concerning internet companies crashed2008-2009 - Icelandic financial crisis2007–12 – Financial crisis of 2007–2012, including the 2010 European sovereign debt crisis
  • 5. Selective Lessons from the Market Crash 0f 1987Streetdogs, Businessday 25th October 2012 “… On Oct. 19, 1987, the Dow plunged almost 23%, its largest one-day percentage-point drop ever. Lessonslearnt, and warnings:Stay objective. You’re never going to be right all the time and things can go wrong, so you have to have theconfidence that your investment portfolio can stay intact to sustain yourself through illogical times.Buy on fear. One of the big things you realize is that if you just stick with the long-term portfolio you’ll beokay, after 1987, large-cap stock prices rose about 12% in 1988, and about 27% in 1989.Make a shopping list. Don’t wait until the market tanks to decide what you want.There’s no such thing as ‘cant happen.’ The 1987 crash was a 25-sigma event, or 25 standard deviationsaway from the mean. In other words, a virtually impossible occurrence.Tune out the daily noise. Corrections of 10% are common and typically happen about three times a year.You’ve got to stay focused on the long-term and not get wigged out by the short-term noise.Don’t bail. After Black Monday, an army of economists warned that the financial world was coming to anend. Investors who believed them missed out.”Adapted from 10 Lessons from the Market Crash of 1987 by Wallace Witkowski
  • 6. Is he really my Buddy! “Stockbrokers more competitive, Willing to take more risks than psychopaths" University of St. Gallen, Switzerland• professional stock traders actually outperform diagnosed psychopaths when it comes to competitive and risk-taking behaviour.• traders showed a higher degree of competitiveness than the psychopaths• willing to cause harm to their competitors if they thought it would bring them an advantage• In 2005, a study found that traders who are unable to fully feel their emotions due to brain damage end up performing better on the market -- possibly because they experience less anxiety about risky trades.• Another research project that concluded in 1996 found that some percentage of both stockbrokers and politicians display many traits characteristic of psychopathic personality, including a willingness to take risks and an interest in wielding power• In 2001, a study found that many young Wall Street stockbrokers got little sleep, often reported for work even when suffering from the flu or a virus, and were much more likely to experience symptoms of depression than average Americans.• In fact, the study found a 23% rate of major depression within the group of young male stockbrokers
  • 7. Trading cycle
  • 8. Why are you here?
  • 9. Bull/Bear ratio
  • 10. Pivot points
  • 11. Maureen’s Traffic lights Mixed (Neutral)A GREEN Signal with a STAR (*) is a Buy Signal above the 21 day Moving Average and therefore a stronger Signal than a Green Signalbelow the 21 Day Moving Average.A RED Signal with a STAR (*) is a Sell Short Signal below the 21 Day Moving Average and therefore a stronger signal than a Red Signalabove the 21 Day Moving Average
  • 12. Share Traffic Control
  • 13. Volatility
  • 14. Put/Call Ratio
  • 15. Trading Pitfalls! Asset management who participated in the survey • Coronation Fund Managers • Investec Asset Management • Old Mutual Investment Group (Macro Strategy Investments) • Momentum Asset Management • Sanlam Investment Management • Stanlib Asset Management • Element Investment Managers
  • 16. Trading Pitfalls!
  • 17. Trading Pitfalls!
  • 18. Equities high/low roadRolling twelve months equity performanceBase case Spot Rolling twelve months ending: Rolling 2 yr 28-Sep-12 28-Sep-13 29-Sep-14 average/yearFTSE/JSE Alsi Index 35758 39379 46654Exit PER (X) 13.70 13.6 13.9EPS 2610.83 2888.9 3358.9EPS growth (%) 6.88 10.7 16.3Growth in FTSE/JSE Alsi index (% ) 10.1 18.5 14.30Bull case Rolling twelve months ending: 28-Sep-12 28-Sep-13 29-Sep-14FTSE/JSE Alsi Index 35757.98 46110 54480Exit PER (X) 13.70 16.0 16.2EPS 2610.83 2888.9 3358.9EPS growth (%) 10.7 16.3Growth in FTSE/JSE Alsi index (% ) 28.9 18.2 23.55Bear case Rolling twelve months ending: 28-Sep-12 28-Sep-13 29-Sep-14FTSE/JSE Alsi Index 35757.98 32648 38828Exit PER (X) 13.70 11.3 11.6EPS 2610.83 2888.9 3358.9EPS growth (%) 10.7 16.3Growth in FTSE/JSE Alsi index (% ) -8.7 18.9 5.12
  • 19. Main sectorsOIL & GAS Spot Rolling twelve months ending: Rolling 2 yr 28-Sep-12 28-Sep-13 29-Sep-14 average/yearIndex 28173 30319 36669Exit PER (X) 8.81 9.0 10.6EPS 3199.51 3368.8 3459.4EPS growth (%) 46.74 5.3 2.7Growth in Oil & Gas index (% ) 7.6 20.9 14.28MINING Spot Rolling twelve months ending: Rolling 2 yr 28-Sep-12 28-Sep-13 29-Sep-14 average/yearIndex 30687 32662 40889Exit PER (X) 10.54 11.0 12.0EPS 2910.92 2969.3 3407.4EPS growth (%) -12.42 2.0 14.8Growth in Mining index (% ) 6.4 25.2 15.81FINANCIALS Spot Rolling twelve months ending: Rolling 2 yr 28-Sep-12 28-Sep-13 29-Sep-14 average/yearIndex 27016 32294 38374Exit PER (X) 12.53 12.8 13.0EPS 2156.38 2523.0 2951.9EPS growth (%) 17.60 17.0 17.0Growth in Financial index (% ) 19.5 18.8 19.18INDUSTRIALS Spot Rolling twelve months ending: Rolling 2 yr 28-Sep-12 28-Sep-13 29-Sep-14 average/yearIndex 41916 45343 51976Exit PER (X) 18.28 17.5 17.0EPS 2292.96 2591.0 3057.4EPS growth (%) 18.43 13.0 18.0Growth in Industrials index (% ) 8.2 14.6 11.40
  • 20. Expected asset class performance
  • 21. Recommended Portfolio Distribution Benchmark Recomm. Relative to Relative to Intended tilt changes Multiple Multiple (%) Weight (%) Benchmark Benchmark over next 3 months. This Month This Month This Month This Month Last Month Last Month SA 77.5 75.4 -2.1 0.97 -2.6 0.97 Cash 12.5 6.7 -5.8 0.54 -6.5 0.48 0 g Bonds 10.0 9.0 -1.0 0.90 -0.5 0.95 -1 m Quoted Property 5.0 4.5 -0.5 0.90 0.2 1.04 -1 m Equities 50.0 55.2 5.2 1.10 4.7 1.09 0 g Total Offshore 20.0 22.6 2.6 1.13 2.6 1.13 Offshore Equities 15.0 17.6 2.6 1.17 2.6 1.17 0 g Offshore Bonds 5.0 5.0 0.0 1.00 0.0 1.00 0 g Offshore Cash 0.0 0.0 0.0 - 0.0 - 0 g NewGold 2.5 2.0 -0.5 0.80 -0.5 0.80 0 g Total 100.0 Updated: 2nd Oct. 12 on 30th Sept. 12 closes.
  • 22. CommentaryCash Higher risk justifies incrased cash holding.Bonds Bonds ran hard - retain underweight.Quoted Property Bond yield prospects calls for caution on listed property…Equities We remain overweight…Offshore Equity Appealing from current levels; our preferred overall asset class - overweight… In spite of global sovereign debt concerns its lack of correllation with domestic equities justifies aOffshore Bonds fairly high holding - retain neutral..Offshore Cash Not worth while… Potential for PER rerating coupled with weak earnings prospects suggests a neutral allocation to beSA Resources justified.SA Financials Good prospects from oversold levels; still our preferred domestic equity sub-sector…SA Industrials Demanding PER; recommend underweight to neutralSA Med/Small Increasingly appealing as a late-cycle runner…CompaniesNot-my-base case Early domestic interest rate hike…
  • 23. Diversify Top10 APN, ASR, AVI BTI, DSY IPL, IVT MPC, NPN, SHP
  • 24. Have a plan“No guts No glory!” Sir Francis Drake STrades are fairly short-term ( ) in duration (2 days – 6 weeks) TSignals are mainly technical in nature ( )Look for a 3 –5 % move on underlying (U)So depending on gearing we hope to achieve a 30% - 60% move on geared position ( G)Look for at least a 2:1 return/risk pay-out (preferably a 2.5:1) ( R) EExit ( ), we always set take-profit and stop-loss levels. Usually dictated by technical levels I.e.previous support/resistance levels ASometimes use ( ) trailing stop. Once we are in the trade we may take profit early if marketconditions or the share’s price action dictates LPrefer the liquid ( ) stocks, unless we have a very strong signal
  • 25. What kind of Investor are you?Investment Style• Active vs Passive InvestmentTime frame• How much time do you want to spend on investing?• How active do you want to be?• When do you need your invested monies?Risk tolerance• Various instruments have different degrees of risk• Are you comfortable with short term decreases in investment valueReasons for becoming a trader• Results-orientated trader vs ego-driven trader
  • 26. Trading Pitfalls!Pitfall 1: Not having an exit plan before buyingPitfall 2: Portfolio imbalancesThey purchase entirely too large a position in a single stock.They do it all at once.Pitfall 3: Failing to cut lossesPitfall 4: Selling too soonPitfall 5: Buying shares that continue to fallThe slide will end. A surprising few number of shares never do until they become worthless.Timing of when and at what price the share’s slide will end.Pitfall 6: Adding additional loosing shares to your portfolioPitfall 7: Emotional attachment to a shareOnce you have sold a stock, forget it, whether it was sold for a profit or a loss.
  • 27. The Traders Creed!You and you alone are responsible for: all your actions. all trades that you make. doing your own research, due diligence and analysis of trends, markets and specific shares.
  • 28. Mark Weetman Vunani Private Clientsmark@vunaniprivateclients.co.za 011 384 2920/30