Today's a Bear Rally

If i'm not wrong, today's rise in the stock market is a bear rally. The rise is majority due to short sellers covering their shorts. Although I made abit of money when I tested "be greedy when everyone is fearful", I do not see genuine buyers although the stocks are very cheap indeed, below their intrinsic value, for some.

But this rally will not be sustainable, because the higher it goes up, the magnitude for a downturn will be more serious. The market mentality is to short sell at lower highs and cover at higher lows.

Those without investment knowledge will not enter the market in the near future. I can see it when I interact with my mum, who lost quite abit in Lehman's Minibonds, which I also thought is a bond, how smart to call it minibonds, giving it the perception that it is a bond. BUT, it is actually a stuctured note - CDO. The interest earned is in fact a "Risk Premium", that we take the risk for Lehman for that punitive 5% return pa. Shocking...

However for the short term, it is not too late to join in the rally because the next few weeks are most probably positive because all stocks are technically very oversold, and as the paradox of people "chasing the highs", buying stocks only when it gets higher is "human nature". Futhermore, the 4th quarter are generally a postive quarter for shares - the effect is in fact man made because most people know that these are the best months and the herd mentality gets working.

However, in people's mind, there are still US$500 billion to be unwind. The strange thing is that once CBs start to fix the problems, people immediately think that everything will be ok. But the thing is that they are doing in an ad-hoc manner, there are bound to be somemore mess to be reveal.

Even if the mess make by investment banks have been corrected, we must still note that the people with lots of debt in the US have little money to spend to boost the economy. And the DJIA is still trading at a higher P/E ratio. Furthermore, earnings are set to shrink.

I still believe that the end of the bear market is where no one wants to be in the market at all and will wait for that moment. But for now, dollar cost averaging down is a fine strategy.

For those without enough sufficient money like I do, it is better to be invested in unit trust although I dont like the way it is operated and DCA it down to the bottom. ETFs are better because it is more cost efficient but you can't DCA it like unit trust.

"The boy cried wolf 3 times. After that, when the wolf really came, he cried wolf, but no one believed in him. He perished. In a Bear Rally, the bull rages 3 times, trying to stage a comeback but went back to nurse its wounds when the bear's claws are too strong for it to bear. The bull awaits, waiting for the bear to hibernate again."

PS - Why I do not like unit trust?
Because it is costly, lack transparency, inefficient, and the ultimate reason is that transactions are SLOW.

The fallibility of man

As a man myself, I know that we are not perfect in anyway. It is good that we strive for perfection as it benefits everyone in certain ways. But one must know our own limitations, because perfection is an ideal.

For example, in the process of the dotcom boom and ultimately the bust, interest rates were cut too low and stayed low for too long. This created a platform for a housing bubble to emerge. This created a cycle perceived to be virtuous but in fact is vicious in reality. As housing assets gained appreciate in value, people were able to get more bank loans or refinance their debt to get more. That became their atms and ultimately became their source of complacency.

Once it became a "habit", people dont see the wrong that they have been doing. But take note that when I say that it is wrong, the opposite, of not having any loans does not mean that it is right. The thing is that it was overdone.

So far, I've just stated an introduction.

As you can see, this is human nature. The thing we can do is to consciously monitor oneself of what we are doing.

As humans, we will soon forget this incident because we are programmed not to dwell in this crisis. The reason is because when you think of it, it makes you feel unhappy, your body produces certain chemicals that makes you feel unhappy.

So, you want to think of something happier, if not, do something that stimulates the same feeling. Just as woman likes to go shopping because it makes them feel good. There is a biochemical reaction to the things we experience.

If we can follow positive virtues and avoid negative vices, we can stabilise ourselves.

Why is Berkshire Hathaway so expensive???

To what I think, its because of investor's psychology. The reason is that an investor is more likely to invest in a "cheaper" stock in terms the market price because he can invest in more quantities of shares.

To prevent the stock from experiencing bubbles and ultimately a crash, BH has not done a stock split. The high price prevents investors with little to spare to speculate on the stock. It also prevents the stock from being overvalued as the price is already so high.

Investors generally will be more comfortable owning 50000 shares at $1 than 1 share at $50000.