Category: Banking

Patience Tames the Beast

 stock market crash illustration with graph going down and bear As a child, I often recall adults saying “Patience is a virtue,” or “Good things come to those who wait.” Living in a society whose zeitgeist revolves around the individual and instant gratification, patience tends to fall by the wayside. While there is inherent importance in risk-taking in order to achieve greatness, sometimes simply biding your time is the best thing to do. One of the caveats of playing the stock market is its incredibly volatile nature; you mess with the bull, you get the horns. To become a wise investor, you need an equal measure of risk-taking and knowing when to be patient. 

What Causes Volatility?

In terms of a volatile market, we have to look at both the short and long-term fluctuations of market value. The simplest way to address short and long-term volatility comes with an understanding of supply and demand. Prices are driven up when demand is higher than the amount being sold; inversely, prices drop when more people want to sell than buy. The effects of supply and demand on the market can be seen daily in the market’s closing numbers.

Many believe that a company’s valuation largely determines the stock price, but many are wrong! A company’s value (price multiplied by outstanding shares) does not determine the stock price; rather, it is the opposite. Another important key concept is a company’s earnings. In theory, earnings should be the limiting factor for why a stock rises or falls. Au contraire, mon frère. The earnings determine the ability for the company to turn a profit, while the stock price is determined by the interest placed in the stock by investors.

Long-term stock fluctuation (positive or negative) relies on supply and demand principles, as does short-term stock fluctuation. However, there can be factors outstanding as to why a market would go through a period of intense highs or lows. During times of war, low economic prosperity due to unemployment, or periods where foreign trade decreases, the market (usually) tends to take a decline due to investors not putting money back into the market. On the flip side, periods of intense prosperity seem to drive market values higher, due to investors having more money to spend.

How Do We Counteract Volatility?

Short-term volatility really has no way of being stopped or counteracted. The market will always undergo some type of decrease, increase and leveling out, stemming from fickle investors just like ourselves. We all try to increase our profit margins in the long term through wise investing, but short-term money can be made through incremental buying. If you don’t have a broker and rely solely on your own wisdom and whatever you can glean from your TV financial news channel, incremental buying should be the ace up your sleeve. As the market ebbs and flows from hour to hour, buying one-hundred shares per hour (more or less, depending on the current price) allows you to increase your chance of making larger gains. Buying stocks hourly allows you to decrease the overall money spent per stock when price decreases and increase overall profit per stock when price increases.

Incremental buying works nicely for the long-term effects of a volatile market as well. However, the best tool you can use to curb the effects of long-term volatility is patience. When experiencing a difficult market similar to the one we have now, sometimes the best thing to do is just wait. I would personally advise taking the incremental route, primarily as a mid-risk/high-reward option. There’s always the chance of catching the stock at a low point, right before the soar. But patience is one of the greatests tools in a good investor’s arsenal. I stress the importance of patience for two reasons. First, history shows that markets trend toward stability. Second, rash decision-making backed by poor market understanding makes you no money. Riding the wave to shore works better than fighting the current.

When Will It Stop?

BlackRock Inc. has called for a halt on the market if volatility increases. A halt on the market would cause a temporary cessation of trading in order for investors and companies to get things figured out and back on a stable track. This would include a ‘limit-up/limit-down’ clause where the market would be halted if securities drop or rise above a certain threshold. Experts are saying that the market should calm down once the Federal Reserve raises interest rates. An increase in interest rates would benefit those so-called thoroughbred stocks due to the sense of surety that investors attribute to them. The market beast may be wild right now, but it won’t stay that way forever. Starting this fourth quarter and looking towards the end of the year, keep an eye open for the market to be tamed.  

FacebookTwitterGoogle+PinterestRedditShare

Top 9 Reasons To Read Books On Money

image

Whether it’s the debt crisis in Greece, navigating our personal finances, bootstrapping revenues for our small business, or the emergence of alternative forms of financial transaction…. money is constantly at the forefront of our minds. Here are a few great books that offer a wide swath of perspectives to boost our financial understanding and keep us grounded in the midst of unprecedented domestic and global change.

1. Breaking Banks: The Innovators, Rogues, and Strategists Rebooting Banking by Brett King

The banking and financial services industries are facing tumultuous disruption amid evolving consumer demand. With insights from many of the world’s leading innovators in financial technology,

The Problem with Capital Controls

Grexit Greece Euro CrisisGreece continues to face a potential default by the end of this month, prompting many Greek citizens to withdraw their savings from banks. This in turn has led to intensified calls for capital controls. Capital controls are seen as a necessary action by many banks and government finance ministers. However, they are not a solution to the underlying problem and will only create more distortions and economic problems the longer they remain in place.

Greece’s IMF repayment is due by the end of this month, and if a deal with their creditors is not reached they will likely default. The possibility of default or removal from the Eurozone has caused many Greek citizens to withdraw their savings for fear of bank closures or currency devaluations.

Zimbabwe Ditches Hyperinflated Currency

Zimbabwe is infamous for its hyperinflated currency, with its citizens carting wheelbarrows full of money to the market just to buy a loaf of bread. The country’s hyperinflation hit a peak in 2008, reaching 5 billion percent, making the Zimbabwean dollar virtually worthless. After that, citizens began using foreign currencies, such as the U.S. dollar and the South African rand.

640px-Flag_of_Zimbabwe.svgNow, the Zimbabwean government is finally ditching the currency, offering a deal to citizens in which they can convert their bank account balances to USD. Accounts with balances up to 175 quadrillion Zimbabwean dollars will receive USD$5; accounts in excess of 175 quadrillion Zimbabwean dollars can convert their money to USD at an exchange rate of USD$1 for 35 quadrillion Zimbabwean dollars. People who still hold old Zimbabwean dollar notes can exchange 250 trillion old notes for USD$1.

Zimbabwe’s disastrous hyperinflation is a textbook example of the dangers involved with using fiat currency. Granted, Zimbabwe’s monetary horror story occurred because of extremely irresponsible policies that are not present in the developed world. However, strong currencies like the US dollar are not very different from the Zimbabwe dollar in terms of fundamentals. Both currencies are managed by a central bank and can be printed at will, with no restriction on supply. The only real differences between the two currencies are that the Federal Reserve is better at managing its money supply, and the political climate in the U.S. is much more stable than in Zimbabwe. But those two things could change at any time, placing the U.S. in a similar situation to Zimbabwe.

The only way to guarantee a reliable currency is to completely get rid of central control over money. Arguably, the best way to accomplish this goal is by adopting a currency with a limited supply, as well as preventing banks from issuing money substitutes in excess of real cash. That way, the money supply cannot grow beyond the amount of cash the banks have in reserves. Under such a system, not only would it be impossible for banks and government to create destructive inflation, but volatile business cycles would likely be prevented as well.

Historically, “sound money” has been synonymous with gold. However, as modern technology progresses, the market has produced potential alternatives to gold. Zimbabwe’s move to the United States dollar will undoubtedly be a welcome change for the country’s economy. However, Zimbabweans should understand that the USD is not fundamentally different from their own failed experiment with fiat currency. In the future, they should seriously consider a sound money alternative to fiat currency.