INDEXES VS. STOCKS

Quite often I am asked why I prefer index buying instead of single stocks. I do believe I have some reasonable answer for that and here below I am gonna summarize my approaches.

1.       Hard to collect the relevant information

You are aware that I am so bullish on the stock market. But honestly I never buy any single stocks just indexes. Cause I don’t like the luck in the trading and investing. In the single stock trading I see many risk, namely I don’t have enough relevant information about that certain company. Is there any crazy guy in the board, is there any risk behind the curtain, is there any risk on the management ... etc. On one single stocks I cannot see the risks well, but on the indexes I just need to open FT or WSJ and read the relevant information in 20 minutes about DJIA or DAX. You will not find a simpler solution to diversify and reduce the risk with indexes. Honestly I don’t need to know anything about the single companies at SP500, what I only need to have is a general view about the direction of the market.

2.       Volatility

The volatility is much bigger on single stocks than on indexes. You can make a fortune on 3D printing companies this year over 100-200% profit. I am happy if you did that. Or if you bought Tesla or Starbucks you have made over 50% in this current year. But never forget this is an optimal scenario, but sometimes will come the worst case scenario when you can lose 50% easily on some single stocks. Just remember for Apple, Enron, Arthur Andersen, Nortel ... etc. On stocks the volatility is much bigger than on indexes that is the reason why I am buying only index. I can’t do 100-200% per year, but honestly I don’t really want to do that because it is too risky. The flip side is that I cannot afford to lose 50% neither. If you are super lucky, never forget will come the super unlucky days too. That is the behaviour of this business.

3.       Which indexes we trade?

We only forcusing on the flagship indexes and don’t care about the small composites. We trade DJIA, SP500, Nasdaq, FTSE, DAX, CAC40, Nikkei, Hang Seng. There is no sense to trade belgian or greek markets because all the markets are correlated so sooner or later the arbitrage is disappearing.

Those are my biggest reason why I am trading indexes against the stocks. But I have a piece of good news there is one huge common thing. The market is so bullish. So bear in mind and buy the dips.

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The BFM Assets Team.

THANKSGIVING AND BLACK FRIDAY

Today, tomorrow we have a space being a bit relaxed. Today the US markets are closed, tomorrow only half day opened. We don’t expect big moves further in the last two days which rest.

The volumes in US markets yesterday was so light. Nasdaq jumped up again and SP500 and DJIA recovered from previous day diving. If you look at the chart below you see the correlation has gone, the Nasdaq over performed the SP500 and DJIA. That was a good arbitrage deal in the last couple of weeks because Nasdaq had been lagging and now over performing the two others. There is some divergence now.

Take a break for this week and focus on the next week market movements. Don’t forget anybody says it is bubble. Don’t believe them. It is not. It is merely a bullish market.

And what is our behaviour on the bullish market?

• Very bullish or
• Bullish or
• Neutral

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The BFM Assets Team.

NASDAQ IS OVER 4.000

After 13 years the first time traded the Nasdaq over 4.000. The index yesterday closed at 4.017 with a daily gain of 0,58%. The lowest rate was in the last 52 month was at 2936. It is more than 50% gain. That is brutal. So most of investors get started talking about the bubble effects. Just take a look behind the curtain and look at the core facts and try to summarize a bit.

In 2000 at the Dotcom Bubble was the price last time here at 4.000. Let’s look at some data comparing that period and the recent one. In 1999 and 2000 the market was super overvalued. I remember well that time there was a real euphoria, everybody just closed the eyes and was buying like an idiot. That was one of the most crazy bubble in the history of markets. Now is perfectly different. I don’t see the same investor attitude around me.  I don’t realize that the markets are overheated.

	December 1999	Today
P/E ratio	29.7	19.1
CAPE  - Shiller PE ratio	44.2	24.4
Price/Book Ratio	5.1	2.6
Price/Sales Ratio	2.4	1.6

All in all today the Nasdaq is far less overvalued than it was in 1999 and 2000. The market’s current valuation is still solid and seems no extreme at all.

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The BFM Assets Team.

SOME BUBBLES FROM THE LAST DECADES

I love George Soros’s quote about why we surprised when burst the bubbles. He said once “The only surprise is that we are always surprised.”

Frankly in each last four decades we have had some kind of bubbles. We have seen few bubbles during those periods.

• 70’s: there was GOLD bubble price gained from 35USD up to 850USD.
• 80’s: Nikkei went up from 8000 to over 40000, before crashing with 80%.
• 90’s: Nasdaq dotcom bubble index went up from 440 to 5000 – 80% loss finally
• 2000’s: Housing bubble in US, Dubai, Spain, Iceland. Gained 200-500% the prices 

The US stock market crashes happened in 1987, 1998, 2000, 2008. The difference between them each time was that these bubbles driven by different stocks, industries. What is the common thing? It is us, the investors, the human beings with our all irrationality, inconsistency and in some case incompetence. Look at the chart below how big is the correlation between three crisis 1929, 2000, 2007. That is shocking how same we act as a herd.

There is no doubt. Bubbles happen again and again thanks to our common greediness. Plus there need 4 other things occur bubbles:

• Strong fundamentals behind the market 
• Optimism about the new age 
• Huge liquidity of cash 
• People start to think this time is different 

We are recreating in each decade a new bubble because we love the hypes. The only problem is that. Most of us don’t make money in bubbles but make a brutal loss. We have to learn how to avoid those losses.

Take a look at our Swiss fund and begin to invest with us!

The BFM Assets Team.

AGAINST ALL THE BUBBLE CONCERNS...

The SP500 is up 9 points, Dow up 70 points. What a crazy rally today again. The Iran nuclear agreement pushed higher the prices. On the other side pushed down the TWI oil with 1%.

The Citi’s Panic/Euphoria level close the red level which has not seen since 2007/2008.

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The BFM Assets Team.

 

HOW CAN YOU BE EASILY BETTER TRADER?

Forget the past. I would say forget the losing position and forget much faster the winning one. Why? Because our memory is our biggest enemy. Keep us focusing on the past not the current position.

According to one Stanford's study in 2005 it proved one very impressive thing. Scientists gave a group of participants $20 each. They were then made an offer: You can flip a coin up to 20 times. If you lose the coin toss, you owe $1. If you win, you get $2.50. Everyone in this situation should make as many tosses as possible, since there's a 50/50 chance of accurately guessing a coin toss, and the reward for winning is far larger than the penalty of losing. But the researchers found only one group of participants willing to make large numbers of tosses: Those with a lesion in the area of their brains that controls emotion. Participants with normal brains threw in the towel after flipping a few losses in a row. People don't like losing money, and even if you know the odds are in your favor, a couple losses will turn you off. But those whose brains suppressed emotions kept on betting, regardless of past losses. Not surprising, given the odds and payoffs of the coin-toss game, they ended up with more money.

We're as human beings more likely to remember negative, emotional events than ordinary or positive ones, especially in the short run. So our memory is one of the most frightening things in trading.

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The BFM Assets Team.

NIKKEI FORECAST FOR 2014

Since last October when Nikkei violated the long short term channel has been gained more than 70%, since this January more than 50%. Since end of this May Nikkei has been been only ranging and consolidating. What seems now clearly there is a key resistance at 15.700 now the price is fluctuating around 15.450. Can be sure if that resistance is taken the bullish run continues further. We are so close for that level, less than 2% so it might happen any day. If it is broken the next target for Nikkei must be the 20.000. Still we are far from the historical high which was above 40.000.

And what is the realistic scenario for 2014? There are some argues about this year 50% gain means the market is overbought, meaning bubble. I am convinced about that is not bubble yet. It is only a kind of strong run after almost two decades of falling market. Normally after this sort of bullish year in the following year keep going the bullish upside run. Maybe not that strong as this year but still produce nice returns.

The upside potential is still strong in 2014. So the long term opportunities are very good regarding the Nikkei.

Fundamentally there are few remarkable datas:

• The growth – this year Japan GDP is in 3,5% plus 
• Inflation – the prices after decades started to rise again, which boost the corporate profits up 
• Aggressive asset buying program by BoJ – which offers cheap money for the market 
• P/E ratios are big time lower than in US – most of company shares are good bargain 

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The BFM Assets Team.