Tuesday, August 25, 2009

Where do we go now?

I remember a interesting exchange that Taleb had written in one of his books either the “ Black Swan” or “ Fooled by randomness”, I cant recollect which one.

In one of the customary morning meetings that are part of all securities firms one of the traders asked him what would he assign a higher probability to the markets going up or down next week. Taleb’s view was that he would assign a higher probability of the markets going up.

The trader asked him his follow up question on what Taleb’s position was. He replied he was going short on the market which of course perplexed the trader.

It is a interesting exchange. The trader of course missed the point that what is important is not just about the probability of the market moving in a particular direction but how much can the market move in a particular direction.

So there could be a 70% probability of the market moving up 10% and a 30% probability of the market moving down 40%. The payoff in the probability matrix of the market moving down is much higher.

Why did this thought cross my mind? The current market seems to be poised at a interesting juncture. Though the momentum seems to indicate a higher probability of it moving up, the quantum of downside if it plays out will be much higher.

Where do we go
Where do we go now
Where do we go
Sweet child o' mine - Guns & Roses


VISHNU said...


Correct. But still there are lot of Individual issues where you can find bargains (though they are becoming 70 cents to 80 Cents bargain).

Ex: Gwalior Chemicals.


Ninad Kunder said...

Hi Vishnu

You are right there would always be cases where there are discount available like gwalior Chemicals.

But as the momentum picks up those discounts will shrink and hence the margin of safety.



Daniel M. Ryan said...

An interesting juncture indeed. Myself, I thought the rally would be ending about a couple of weeks ago. I was wrong about that.

Rohit Chauhan said...

ninad / vishnu
this rally has been quite different from the one in 2007. the 2007 rally was in large caps and in specific sectors.

this time around i have seen undervaluation correct across sectors and market caps. at the same, quite a few stocks have gone from undervalued to fully valued. in most cases i dont see too much overvaluation.

that ofcourse does not help us as there is no margin of safety in buying


Nandy said...

Ninad, you've actually given a wake up call in your own style - to check out what needs to be sold in the light of limited upside and wait for the market to throw up 'Discount Sale'.

Ninad Kunder said...

Hi Daniel

I am not looking at timing the market but the overall risk reward tradeoffs dont look as good as they were a few months back.



Ninad Kunder said...

Hi Rohit

You are right that there are still a lot of stocks which are displaying undervaluation but at the same time there are stocks where valuations appear rich particulary the large caps.

We are not at the state of a runaway market where all logic is thrown out of the window but the downside if it plays out will be significantly higher than the upside that is there.



Ninad Kunder said...

Hi Nandhitha

How I wish the discount sales are back. The markets should oblige atleast twice a year :-)



REVerend said...

Hi Ninad

The gwalior chemicals business transfer to Lanxess has been concluded according to the info given on their website...any updates?

Ninad Kunder said...

Hi Reverend

You are right on that information. The deal is on track. The first tranche of the payment has come thru. I expect the remaining payment will come thru within a month on completion of the deliverables.

I was on a break hence the delay in responding. Will be putting across a updated post on the company.



obsessivegiantscompulsive said...

FYI: It was in Fooled by Randomness.

Ninad Kunder said...

Thanks Obsessive