Optimal Portfolios -- Investment and Life

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The Smart Investor — Fri, 01 Dec 2006 10:32:00 PST

Couple of chart that appeal to me. By: Optimal Portfolios

Inividual Irrationality

The Smart Investor — Fri, 13 Oct 2006 11:29:00 PDT

Cialdini's book Influence: The Psychology of Persuasion listed six human behavioral tendencies that defies rationality.

The six tendencies and my interpretations are:

Reciprocation - We want to give something back when we received a favor. Investment implication: We tend to loose up our discipline after a big gain.

Commitment and Consistency - We hate to change our decision or believe once we are committed, especially when we make the commitment public. Investment implication: We tend to commit to a winning stock and refuse to change our commitment.

Social Validation - We tend to follow what the majority of the crowd do. Investment implication: We want to follow tips, buzz, hot picks by professionals, etc.

Liking - We tend to say Yes to the people we like. Investment implication: We tend to buy the stock we like without doing adequate research.

Authority - We tend to follow orders from higher authority even if the order is obviously wrong and ridiculous. Investment implication: We tend to follow analysts' recommendations.

Scarcity - We find scarce things more attractive. Investment implication: We tend to believe scarce information. By: Optimal Portfolios

Thoughts on Market Efficiency

The Smart Investor — Thu, 12 Oct 2006 14:49:00 PDT

In both of my finance and economics class, professors argue that the stock market is efficient at least in a "Semi-Strong" form. This means that all publicly available information is fully reflected in the current stock price, making future performance totally random.

In plain words, both techincal and fundamental information are useless in predicting future stock prices.

After some reading on the "efficient market hypothesis", it appears that one of its main arguements is the existence of arbitragers would eliminate any inefficiencies.

Now let's pause a moment and think about it ...

Arbitragers keeps the market efficient ...
Arbitragers makes money from the inefficiencies ...

Conclusion:

If the market is indeed efficient, arbitragers would starve because their efforts would yield no profit. The fact that there are arbitragers means the market must be inefficient.

So what is reality?

I believe the efficiency of the market and the number of arbitragers are in an evolutionary equilibrium. When the market is more efficient than the equilibrium, arbitrage opportunities would decrease, causing the population of arbitragers to shrink. The decline in arbitrager population will decrease the efficiency of the market, bring it back to balance. By: Optimal Portfolios

Good Business on Bargain With Markowitz Sharpe Optimization

The Smart Investor — Sat, 28 Jan 2006 22:41:00 PST

This analysis is performed over a list of stocks that are fundamentally undervalued based on the P/E ration, Return on Capital, and Profit Margins. By holding this portfolio, the downside risk is minimized in according to both fundamental and markowitz analysis.

Money to Invest:	100000		2006-1-29

Stocks	Weights	Entry Price	Shares
LNCR	1.54%	42.89	36
INGR	4.21%	37.32	113
MLAB	5.96%	15.15	393
CECO	3.39%	32	106
BR	6.68%	91.63	73
OXY	6.40%	91.21	70
PG	15.29%	59.74	256
BRG	1.08%	56.8	19
KSWS	0.79%	31.79	25
ESI	2.94%	59.27	50
MSA	3.36%	39.49	85
MBT	2.21%	38.14	58
AEY	2.38%	7.31	326
BRO	8.93%	29.39	304
HSY	18.41%	51.68	356
CRFT	2.09%	20.3	103
MTSC	1.85%	37.19	50
KOSS	7.17%	28.7484	249
K	3.31%	43.75	76
NOBH	1.46%	26.45	55
CYD	0.54%	7.95	68

Portfolio Monthly Return:	2.2131%
Portfolio Variance:	0.0385%
Portfolio Std Dev:	1.9611%
Sum of Weights:	1

Annual Risk Free:	2.5000%
Monthly Risk-Free Rate:	0.2060%
Reward/Variability (Sharpe):	1.0235

Annulized Return:	30.0401%
Historical Data Used:	5 Years

Monthly Return 95% Confidence Interval
Upper Limit:	2.7093%
Lower Limit:	1.7169%

Good Business on Bargain

The Smart Investor — Sat, 28 Jan 2006 18:59:00 PST

Following are stocks that are fundamental health and below their business valuation. In a long term, stocks like this will give you a handsome return.

Money to Invest:	100000		2006-1-28

Stocks	Weights	Entry Price	Shares
MDC	3.33%	63.78	52
TOL	3.33%	34.72	96
AFL	3.33%	47.5	70
OFIX	3.33%	42.28	79
LNCR	3.33%	42.89	78
WLS	3.33%	104.3	32
CHKP	3.33%	22.44	149
CGI	3.33%	54.47	61
LOGI	3.33%	40.77	82
INGR	3.33%	37.32	89
MLAB	3.33%	15.15	220
DST	3.33%	57.79	58
CECO	3.33%	32	104
PLT	3.33%	35.26	95
APOL	3.33%	55.9	60
TSM	3.33%	10.82	308
NKE	3.33%	83.15	40
UNT	3.33%	58.68	57
CUZ	3.33%	31.4	106
GSK	3.33%	52.16	64
IBM	3.33%	81.02	41
PII	3.33%	53.12	63
PMD	3.33%	14.4	231
BBBY	3.33%	37.56	89
CCRT	3.33%	39.61	84
BR	3.33%	91.63	36
IBA	3.33%	16.67	200
TBL	3.33%	34.42	97
JNJ	3.33%	58.71	57