#Fincabulary 24 – Bagel Land

Meaning – A slang term that represents a stock or other security that is approaching $0 in price. Arriving in bagel land is usually the result of one or more major business problems that may not be resolvable. This term is typically used to describe an asset that has fallen from grace as opposed to a penny stock or other historically cheap security.

If a stock or other asset is headed toward bagel land or is approaching $0 (resembling the hole in the middle of a bagel), investors generally feel that the security is nearly worthless. In such cases, a company may be nearing bankruptcy or facing major solvency issues. While returning from bagel land is possible, the likelihood that equity investors will lose their entire stakes in the company becomes very high.

 

TOTAL RETURN INDEX

 – By Gyan Anand, T. A. PAI MANAGEMENT INSTITUTE, Manipal

 

“Sir, our scheme has beaten the nifty year on year”

“Our fund manager has a reputation for generating regular alpha”

Claims as these by investment firms, mutual funds, or insurance providers are regularly seen. The clients often fall for it as they see these claims as something done right by the managers.

However, there exists a catch to this, general understanding. The aim of this paper is to remove the exploitation done, using such claims by companies.

Stock Index

The practice of using a set of stocks to represent the performance of the market was started by Charles H Dow, a financial journalist in 1896, who built the first stock market index The Dow Jones Industrial Average, which was an average of the top 12 stocks in the market. This index was calculated by taking all of the stock prices, adding them together and then dividing them by the number of stocks.

The methodology has changed with the passage of time but the true sense of the index remains intact. Today almost all the major indexes in the world are price indexes, including likes of S&P 500, Nifty, Dow Jones, NASDAQ etc.

The index provides a benchmark against which performance of various investment opportunities is measured. It is a tool which is put to use by investors, financial managers and the likes of them to describe the market and measure performances and returns on various instruments. For instance, mutual funds create portfolios which are actively managed by portfolio managers. When an investor needs to measure which mutual fund has better performance, he needs a benchmark, this is where the ‘Indices’ come in handy. Since an index is a mathematical construct it cannot be traded directly, so various instruments try and imitate the index and if possible beat it (generate alpha).

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WHAT MAKES AN INVESTOR TICK?

-By Shruti Dhumal & Ryan Rego (SIES College of Management Studies, Mumbai)

INTRODUCTION

Conventionally under traditional finance, it is assumed that people are rational and make logical decisions while investing and that they are unbiased when it comes to determining the price of a security.  However, that is not usually the case. There are certain psychological and emotional factors that influence investors. Many times, investors derive their own set of rules that supposedly govern the movement of a particular stock which is also known as heuristics.

Behavioural finance is a field that combines psychology with economics and finance to try to provide explanations as to why a person takes an irrational decision

ROLE OF BEHAVIOURAL FINANCE IN STOCK MARKET

It can always be seen in the stock market that emotions and not the fundamental or technical changes are the reasons for the sudden short-term changes. It might be observed in such cases that whenever an analyst is questioned as to why the market was up/down, he/she doesn’t have a specific reason. It’s actually the euphoria or fear amongst the people that drive the market. Investors think irrationally and tend to make cognitive errors. Due to this tendency, it can be concluded that markets cannot be efficient when it comes to information.

Investor’s emotions and their behaviour play an important role in every step of their investment portfolios. At the time of portfolio building, it is important that investors discard their traditional heuristics of their wealth building processes. For long-term investments, it is necessary that the investors have long term perspective rather than short term emotion driven decisions. Sometimes people tend to react collectively because the others are behaving in a particular manner. It could be due to the occurrence of sudden events such as the Brexit. All such reactions are short term and people should not be carried away by the collective emotional decisions of the crowd.

Hence, wisdom is accepting the reality rather than thinking how it should have been.

Shruti

Figure 1: Sensex growth May-June 2017

The above graph shows the Sensex graph for the month of May 2017. One can clearly see a drastic rise in the Sensex since 25th May 2017 and 2nd June 2017. The stock market has been attaining new heights every day. And every moment we tend to see more euphoria driven results.

One can notice a similar phenomenon in the Bitcoin market; one of the main reasons for the Bitcoin boom is that it has been hyped up to a great extent.

An increasing number of investors are also hopping on the Bitcoin wagon and investing due to the fear of missing out on opportunities. This drive creates more momentum thus creating a snowball effect. Bitcoin prices shot up by more than 120 percent in 2017, after gaining 125 percent growth in 2016. Recently Bitcoin has been increasing in the 4000 and 5000 level which is a whopping growth rate.

Shruti dhumal

Figure 2: Bitcoin prices’ variations

On 29th August, 2017 Mumbai faced a heavy downpour followed by floods and the citizens were panic-struck. This incident instilled fear in the minds of Mumbaikars, because of which they opted to stay home the next day despite there being no rains. This is a typical behaviour observed even in the case of investors during market cycles-sell when there is panic in the market, but don’t buy when share prices have reached an all-time low because of fear.

Another example would be the recent missile firing by North Korea towards Japan. Japanese markets were down by only 0.45%, India’s Sensex on the other hand, fell down by 1.2%.Behavioural finance also explains the occurrence of asset bubbles, one of the most famous bubbles that occurred was the American housing bubble in 2006.

CONCLUSION

Behavioural finance tries to identify and study the irrational behaviour of the masses with the hope of correcting such irrational behaviour.It also seeks to provide measures to identify and possibly prevent asset bubbles from occurring and curb the unwanted speculations which ultimately lead to losses.

#Fincabulary 14 – Bagel Land

Meaning – A slang term that represents a stock or other security that is approaching zero in price.

This term is typically used to describe an asset that has fallen from grace as opposed to a penny stock or other historically cheap security. If a stock or other asset is headed towards bagel land or is approaching zero, investors generally feel that the security is nearly worthless. In such cases, a company may be nearing bankruptcy or facing major solvency issues. While returning from bagel land is possible, the likelihood that equity investors will lose their entire stakes in the company becomes very high.

#Fincabulary 12- Aunt Millie

Meaning – A slang term for an uneducated or unsophisticated investor.

The term is considered a derogatory remark in the financial sector, often used to refer to poor investment choices. Financial professionals might recommend an “Aunt Millie” investment to clients who are unfamiliar with investing. Analysts may use the term to berate a stock or other security. For example, one may say that investing in a certain stock is so foolish, only Aunt Millie would buy it.

#Fincabulary 11 – Champagne Stock

Meaning:  A slang term used to describe a stock that has appreciated dramatically.

A champagne stock is typically one that has at least doubled or tripled in value in a relatively short period, creating a huge profit for the company’s shareholders. The term is used because individuals who hold such stocks will often order an expensive bottle of champagne to celebrate their good fortune.