Our Addiction To Financial Porn

This post was written for www.hnworth.com, a site targeting high net worth individuals in Singapore.

Have fun reading !

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The talk of the town as far as personal finances are concerned would still be about the Chinese stock rally and most people I have spoken with are still bullish, looking for that extra leg up in profits or hoping for cheaper levels to load up.

The idea is to buy or buy more, of course.  That is because certainty levels have become set in stone that China will be included in the MSCI global benchmark indices on June 9, after the FTSE increased the weightage of China A Shares to 50% of their FTSE Emerging Index.

With China’s weightage in the MSCI All Countries World Index at less than 3% at the moment, we are talking about a potentially big adjustment for the world’s 2nd largest market in capitalisation, after the US.

We wrote about the Monkey Trading Challenge for Chinese stocks some time back and how what we perceive as irrationality could blind us to profits especially when the rest of the world is behaving “irrationally” which challenges the fundamental rule of majority wins and thus, must be “rational”.

Like monkeys, investors are now zoning in on the index because time is of the essence and the risk of not buying is far greater than the risk of buying with a millionaire born every minute as the belief that the government will continue to encourage the rally grows. Even the highly educated financiers who acknowledge to their close friends that personal computations of the actual P/E of the SHCOMP is closer to 300 times than the official 13.5 times, are all leveraged to the hilt on stocks because the fear of losing out to their peers is greater than the fear of loss. Because when everyone is long, it becomes the government’s problem !

Thus, the once in a lifetime opportunity of free money which is limited by as much as you put in for even as China’s billionaires lost US$ 6 bio in the market rout last Thursday for they are still up US$ 83 bio for the year.

Contrast the current sentiments to 2 years ago, when many a brow furrowed in dismay watching the S&P meteoric rise against the SHCOMP’s flailing returns . Sadly, some gave up before the rally began earnest in Dec 2014, glad to have their money back, which demonstrates logic does not really play a part in investor behaviour much as we love the CAPM model and the core assumptions of rationality and risk aversion.

It is financial porn that rules the world.

My preferred definition this one.

 

The new age of social media is responsible for the proliferation of financial porn as information overload occurs in our brains. In the past where we had a chance to take a breather between the daily newspapers and tv reports, we were able to have time to think. Now it is a constant bombardment.

Even for traders, I remember those Reuters pager days that gave us an edge over the man on the street who had to find the nearest Dow Jones news wire as Bloomberg TV and CNBC were not yet available.

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