Widespread ire at the scape goats for the developed world's financial mess is more than understandable - it's justified. (Of course it would help if all the scapegoats were vilified in the same way (politicians, unions, regulators, civil servants etc) but that's another issue...)
But this list of demands from the "Occupy Wall Street" movement is so silly it's actually quite funny.
Sure there's a lot wrong with the world and a lot that needs fixing but rubbish like this is, at best, a demonstration of the failings of an education system, the absence of a moral framework and an abrogation of personal responsibility for ones self. The only thing missing from the list is the author's right to have someone else cook and serve his meals for him.
Maybe I should come up with my own list.
Thursday, October 06, 2011
Banning short selling is a bad idea
There have been calls from several broking houses to follow the examples set by some European and Asian markets and either ban or further restrict short selling on the Hong Kong stock market.
A ban on short selling would be short sighted and detrimental to the market and investors generally.
To begin with, short selling in Hong Kong is already tightly regulated:
1. only designated securities may be short sold - all large cap liquid stocks
2. naked short selling is illegal - if you want to sell short, you have to borrow the shares from someone else first
3. short selling requires disclosure - short sales have to be reported on a daily basis and insiders have to publicly disclose short positions
At the risk of stating the obvious, short selling provides many benefits including:
1. a more liquid market with reduced spread - not only due to short selling in expectation of falling share prices but also short selling for abritrage purposes, the smaller spreads actually help long only investors
2. reduces the potential for market manipulation (although this is more of an issue in smaller cap stocks which are not eligible for short selling anyway)
3. reduces the risk of the market becoming over valued (or at least offers the potential to reduce the extent to which the market may become over valued) . Put differently, short sellers give long only investors an opportunity to buy at better price than would otherwise be available
4. provides the potential for support when the market has fallen - at some point the borrowed shares have to be returned to their owner which will require the short seller to go out and buy (or repurchase) the necessary shares. Every short seller becomes a buyer at some point
5. produces a more transparent market and incentivises companies to be more open and honest - allowing short selling gives investors an incentive to look for problems with a company and to invest accordingly
Jake van der Kamp's piece in this morning's SCMP made the excellent point that professional shorts produce some of the most thorough investment research and that such research goes a long way towards exposing issues with listed companies and protecting investors.
Also Sprach Analyst made the valid point that banning short selling simply does not work.
Suggesting that short selling should be banned is nothing new. Hopefully the government and the regulators will ignore the calls.
The really really depressing thing about the calls for a ban on short selling is not the general ignorance that is implicit in such calls, but that it is brokerage houses that are supporting them. These people should know better.
A ban on short selling would be short sighted and detrimental to the market and investors generally.
To begin with, short selling in Hong Kong is already tightly regulated:
1. only designated securities may be short sold - all large cap liquid stocks
2. naked short selling is illegal - if you want to sell short, you have to borrow the shares from someone else first
3. short selling requires disclosure - short sales have to be reported on a daily basis and insiders have to publicly disclose short positions
At the risk of stating the obvious, short selling provides many benefits including:
1. a more liquid market with reduced spread - not only due to short selling in expectation of falling share prices but also short selling for abritrage purposes, the smaller spreads actually help long only investors
2. reduces the potential for market manipulation (although this is more of an issue in smaller cap stocks which are not eligible for short selling anyway)
3. reduces the risk of the market becoming over valued (or at least offers the potential to reduce the extent to which the market may become over valued) . Put differently, short sellers give long only investors an opportunity to buy at better price than would otherwise be available
4. provides the potential for support when the market has fallen - at some point the borrowed shares have to be returned to their owner which will require the short seller to go out and buy (or repurchase) the necessary shares. Every short seller becomes a buyer at some point
5. produces a more transparent market and incentivises companies to be more open and honest - allowing short selling gives investors an incentive to look for problems with a company and to invest accordingly
Jake van der Kamp's piece in this morning's SCMP made the excellent point that professional shorts produce some of the most thorough investment research and that such research goes a long way towards exposing issues with listed companies and protecting investors.
Also Sprach Analyst made the valid point that banning short selling simply does not work.
Suggesting that short selling should be banned is nothing new. Hopefully the government and the regulators will ignore the calls.
The really really depressing thing about the calls for a ban on short selling is not the general ignorance that is implicit in such calls, but that it is brokerage houses that are supporting them. These people should know better.
Tuesday, October 04, 2011
Confessional - I got it very wrong
Over the last few months, I've had the distinct displeasure of watching the value of my investments take a very significant reduction in value. Not only did I not sell anything when prices were much higher, I kept convincing myself that shares were, if not cheap, at least good value in the context of a market that was trading at below its long term averages (in terms of PB, PE etc). In rather blunt terms, I got it very very wrong.
I spent a significant amount of time over the weekend crunching numbers and working out where I stand in terms of my possible retirement in early 2012. While the numbers still make sense on paper, the margin of safety has largely evaporated and, subject to finding a job when I go off contract, I will likely continue working until that margin of safety is restored.
I have also considered where we will be if I find myself dealing with an extended period of unemployment. Some back-of-the-envelope calculations suggest that I would have enough cash on hand in Q1 next year to cover about 42 months of living expenses (including mortgage payments) if I don't pay off the home mortgage or 14 months of living expenses if I do pay off the home mortgage in full. (These numbers assume no new investments made and no existing investments sold.) Given the number of variables involved, I need to put together a spreadsheet to get a more accurate picture but it is unlikely that I will have any kind of near term cash shortage.
Lastly, I have to consider whether I should keep buying shares, take the losses on some of the existing portfolio or just do nothing and let the cash build up. I have not reached any conclusions on this issue.
I spent a significant amount of time over the weekend crunching numbers and working out where I stand in terms of my possible retirement in early 2012. While the numbers still make sense on paper, the margin of safety has largely evaporated and, subject to finding a job when I go off contract, I will likely continue working until that margin of safety is restored.
I have also considered where we will be if I find myself dealing with an extended period of unemployment. Some back-of-the-envelope calculations suggest that I would have enough cash on hand in Q1 next year to cover about 42 months of living expenses (including mortgage payments) if I don't pay off the home mortgage or 14 months of living expenses if I do pay off the home mortgage in full. (These numbers assume no new investments made and no existing investments sold.) Given the number of variables involved, I need to put together a spreadsheet to get a more accurate picture but it is unlikely that I will have any kind of near term cash shortage.
Lastly, I have to consider whether I should keep buying shares, take the losses on some of the existing portfolio or just do nothing and let the cash build up. I have not reached any conclusions on this issue.
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