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September 15 2008 was one of the most extraordinary days in global financial history.A simmering credit crisis exploded into a full-blown apocalypse in the global financial sector when Lehman Brothers filed for bankruptcy.  

With assets of $639bn and a further $613bn of debts, it was the biggest corporate bankruptcy in the US. The collapse of Lehman had immediate repercussions, frightening financial markets around the world, but with hindsight its demise has come to embody the failure of investment banks to adequately assess risk and invest accordingly.

Market Performance (from the close before Lehman BK) – Silver +71%, Gold +61%, S&P +58% ( For S&P the dividend are accounted for dividend it will be close to 88%)

Here is a must watch documentary of 60 min : “The West is done, it’s over! We screwed it all up. Do you want your great-grandchildren speaking Chinese :)

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Warren buffet: A good business that can be purchased for less than the discounted value of its future

George Soros: An investment that can be purchased (or sold) prior to a reflexive shift in market psychology/fundamentals that will change its perceived value substantially.

Benjamin Graham: A company that can be purchased for substantially less than its intrinsic value.

Some other examples are:

The Corporate Raider: Companies whose parts are worth more than the whole. View full article »

Here is a classic case study how the famous brokerage firm Knight capital failed. More than 2 years ago, Knight Capital blogsuffered a loss of nearly half a billion dollars and needed to sell itself after a defective software resulted in nearly $7 billion of wrong trades. The US SEC issued an order against Knight Capital that described exactly what happened this is interesting:

  • Knight used a software called SMARS which broke up incoming “parent” orders into smaller “child” orders that were transmitted to various exchanges or trading venues for execution.
  • SMARS used to have a functionality called “Power Peg”. Knight stopped using this functionality in 2003, but the code was neither deleted nor deactivated. A decade later, the code was still sitting in the servers waiting to spring into action if a particular flag was set to “yes”.
  • “… [A]s child orders were executed, a cumulative quantity function coun View full article »

Expected Return and Risk

The thumb rule that we know higher expected returns are related to higher risk. There have been claims like risk is more thanblog just volatility. Was going through a journal Journal of Portfolio Management, and realised arguing that risk is more than just risk. The term is unnecessarily narrow; securities offer returns for reasons other than risk, as the word conventionally is used.

The four sources of unattractiveness that I came across from the journal:

  • Economic–The common notion of investment risk. The danger that a security might not be able to make required current payments, that these payments might not prove as valuable as expected (as caused, for example, by inflation), or that projected future payments might be less than anticipated. As Ibbotson and Idzorek write, people naturally do not seek these attributes and wish to be compensated for owning them. 

View full article »

Most investors are no doubt familiar with the standard disclaimer “Past performance is not indicative of future results.”  This blogcompliance truism tends to stay in the fine print, both on paper and in investors’ minds, when they make decisions on the basis of real-time market dynamics.

Even if investors purport to buy into the logic of the “random walk” argument about security prices, in practice they tend to extrapolate recent history into the future (termed recency bias in behavioural finance) when making portfolio decisions — for example, believing that if stock prices have gone up recently, they will continue on that upward trajectory. View full article »

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