Wednesday, December 22, 2010

Overestimating Risk

In the 2007 bull market, investors clearly underestimated the risk of financial instruments they were buying. Share prices of mid cap and small cap companies sky rocketed, as also real estate.Investors were not understanding the risk they were actually taking in.

Now, after a severe bear market, the opposite may well be true. Investors are fighting shy of taking any risk. It appears that the recent financial crisis may have changed saving and investment behavior. The discovery that the world is more uncertain than earlier thought of, may have resulted in a preference for more liquid savings and fewer risky investments.

A generation of investors grew up with two financial crisis periods - the 2000-2001 tech bust and then the 2008-9 bear market. This generation may have developed an aversion to risk, having seen how terrible the consequences of financial crisis can be.

Now, awareness of risk is good, because it ensures due diligence and allocation of capital to more desrving assets. But, fighting shy of taking risk is also a recipe for below average returns. All said and done, risk is what brings higher returns. Just be prudent.

5 comments:

Nirav said...

Dear Sir,

I want to ask you about trading method/system. Suppose I have one method which gives me Buy/Sell signal. Now my question is if I want to back test it then for how many years I should take and which years should I take i.e. bull, bear or side way market? And another question is if it gives me a profitable results in back testing then how can I assure that it will give profitable returns in future also? And if it start to give negative returns then how much time I should give it or when to stop using that method?

Do reply.

Thanks,
Nirav.

ANAS said...

Respected Sir, its me again.......

I hope that you are best at your health, and high in your spirits...

I was looking at the chart of SESAGOA. The following took place, in the scrip, on which I would request your attention.

1) the scrip made a low of Rs. 332.15 on 29th JAN 2010

2) It made an all time high of Rs. 495 on 9th April 2010.

3) The JAN 2010 low was significantly broken, when SESAGOA made a low of Rs. 308.20 on 9th SEP 2010

4) On 15th OCT 2010 . It made a high of Rs. 383,65 (but lower than previous recorded high of Rs. 495)

5) Lastly, it made a lower low of Rs. 285 on 29th NOV 2010


MY OBSERVATION ..

1) SESAGOA , has broken its higher high & higher low pattern , when it did fall to Rs. 285 on NOV 2010


MY QUERY IS ..

1) CAN THE WHOLE MOVEMENT BE CONSIDERED AS A CHANGE OF TREND, OF SESAGOA. From BULLISH to BEARISH..


YOUR, VEIWS ON MY OBSERVATION, WILL BE HIGHLY VALUABLE.

Thank you once again, for staying in touch with us...

Wishing you MERRY CHRISTMAS & A VERY HAPPY WEEKEND.

YOURS TRULY,
Anas Elias Batla.
Kolkata,
9830022702

just wanted to mention, that I had bought SAMSUNG GT- C3222 dual sim handset last Sturday. It had some manufacturing defect, due to which incoming & outgoing calls were not possible sometimes.
However, the company has agreed to replace it today, with a new one (which, hopefully I wil get before NEW YEAR)

gourv said...

Hell Sir,

Merry christmas to you and your near and dear ones.

Regards
Gourav

jagjit said...

It is said that history repeats and same is true for the stock market. Market saw a huge sell off from 21206 in 2008 to drop till 7697--a massive cut, So the former level can act as a huge resistance in the coming future. Market may not easily overcome it. And may correct--which some say up to 18000 or more in panic. But again history will repeat itself. The resistance will be overtaken in a few more months. And as the index moved from 2594 in 2001 to 21206 in 2008 it will move up again and open new horizons on the charting canvas, with nice long green candles overtaking nice long red candles ruthlessly, for some years at least. I think an investor need to stay calm..which we become after some years in the market.

Gulshan said...

Sir

may I seek your help to decide which trade to take on SBI, it is going in narrow trading range day-by-day, I have calculated the trading range which will decide the next move is 2800-2700, am I correct. If not, please provide your views on the same.

Thanks

Gulshan