Appendix 4: "Perception can matter more than the Truth" : Tuesday, 21 February 2017: (11:37 )

The majority, including me, do not like banks. Banks are considered as our enemies who are constantly trying to get benefits from us. Especially when loans are taken, we are required to pay them back plus the interest and been stressed about the set deadlines for every instalment loan. I do not have a loan but still don’t like when the bank is on charge of my own money. For example, I wanted to sign a phone contract with O2, however Lloyds did not approve it. The reason??? Well, I have no idea why I was not allowed to use my own money for the transaction I needed them for.

On the one hand economic crisis terrifies us but on the other hand is a nice feeling knowing that your “antipathy”, in this case the banks, is on discomfort like in 2008 economic crisis. From 2000 till 2007  mortgages and credit cards were in fashion. Every individual wanted this “easy” money without worrying the repayment since it would be requested in the future.

But why were the banks sharing these “easy” money?? The more money were given to  public, especially for mortgages, the greater banks’ cash generation were. Price of houses indicated a constant increase, without salaries following the same upward trend, and ultimately reached the peak on 2007.

Lehman Brothers Bank, the fourth largest investment bank in U.S, was the one introducing 2008 crisis and the largest bankruptcy recording a 75% stock drop in five days.  Lehman used to be a high-class profile company, which is generating profit and keeps its shareholders happy (premium risk). However, its first quarter on 2008 had a $3bn net loss and started selling its assets to cover its financial gaps. Lehamn liquidated its assets in order to keep its WACC stable, in order lenders who have priority to be paid while shareholders to be happy with their returns.

 These losses were the first sign of its tumble. Its constant negative financial performance indicated a very high default risk. Share prices were reduced as long as shareholders were eliminated.

The main problem was mortgages offered to everyone, even to those who were not able to repay them. Mortgages were categorised  according to their risk, and sold to investors. The investors' benefit were the securities. However, the majority of clients lied about their financial situation and as a sequence not being to repay it. Consequently, security holders neither were getting any benefits back nor could sell the houses at the original price.

Now Lehman had a huge loan on its back while was constantly loosing investors.  Probably the company’s accountants did not pay attention on the financial distress occured since 2006. CEOs should probably create a happy, colourful environment for its accountants instead of allocating them to dark and depressing rooms causing them “chemical imbalances”. One day they will destroy everything, as history has taught!

Fed organised three days before the bankruptcy a meeting with Lehman’s main competitors. The purpose was to rescue Lehman. Either to invest at SpinCo, Lehman’s possible subsidiary in order its poisoned assets to be assigned at. Or Lehman to be sold to Barclays. Knowing Lehman’s financial position none of the competitors wanted to put in danger their own shareholders and participate to this investment. Ultimately, its sale to Barclays was decided. However, due to legislation it could not be accomplished in one-day time. 

I guess, it was meant to be!

The main conclusion after watching “The Last Days of Lehman Brothers” is to predict before it happens. There were figures indicating a downward trend of the bank's ratios. Why the CEO did not changed his strategy to the new data released? For example, decreasing mortgages while increasing their securities. They would have loose customers and investors indeed but would have survived, probably!!

The conclusion is that an empire requires years to be build but could be destroyed in just three days. 

Appendix 3: Let's plan our next holidays!: Saturday, 18 February 2017: (05:31)

Today is the first sunny day of February and I’m denying to talk about anything else apart from vacations. Soooo... somehow I have to correlate diversified portfolios with my future holidays for this spring and summer. As an investor and a traveller, what I have for sure is the price I am going to pay. These prices constantly fluctuate on daily basis or even more frequently. The reason? Because they are dependent on the demand. The more popular the destination or share is, the higher the price will be. They also depend on the company’s demand for cash. If a company needs cash immediately, the company reduces the prices to attract more investors/travellers.

I aim to buy the share with the highest return and for the destination with the most beautiful beaches. However, what I do not know is if I’m taking the most privileged decision. How will I know the specific share will provide me the most promising (by companies) high return? Most importantly, how will I assess if the visiting place is as exotic and fun as it is described by the agencies?

Let’s see what a diversified portfolio is and what it could teach us for our next holidays.

Markowitz’s portfolio theory described it as “the ability of investors to diversify away unsystematic risk by holding portfolios consisting of a number of different shares”. Portfolio theory is a modern way to eliminate the risk taken on investments, unsystematic risk, since beliefs of past trends and collective wisdom have been debunked. After 2008 economic crisis, investments are funded under lots of consideration.

Investing on two  expensive, cheap and particularly international projects simultaneously, which are independent (zero correlation) from each other is considered a more secure investment portfolio. It is very important the portfolio to be “lazy” otherwise the shares will lose their added value. It is also essential to invest in different markets, as independent shares’ result is not affected by companies’ events, but are directly affected by market events.

How do I decide where to invest my money though? It is definitely not an easy decision. It would be helpful,  each investor to develop an “efficient frontier” representing a combination of efficient portfolios, which are expected to maximise the return for a given standard deviation.

The collective wisdom is to invest on “unicorn” companies, start-up companies valued at more than a billion dollars, like Snap Inc. Snap Inc negative financial performance has a positive attractiveness to investors probably because is the only one currently selling its shares. This investment has two drawbacks though, first too many investors with who I have to share  the returns! But I don't like sharing! Second, I don't think the returns will be high at all, works better for me to invest to a less expensive project promising lower returns. But I will (probably) stick to it expecting high returns in long term.

Projects, which are cheap and are expected to have a low return ultimately, are the ones, which issue the highest performances. When a company claims low dividends and share prices, the upward trend for them is inevitable. The keys are diversity, being constantly updated and time. Especially the last element, perfect timing (or luck) makes a huge difference. Ideally, the investor has to buy when the price is low and sell when the price is high.

Now let’s imply all this finance theory for our own “leisure benefit”. Let’s say I want to have the best holiday without spending all my money. It is reasonable to start checking prices now, perfect timing, especially morning times when holiday packages tend to be cheaper. If I'm not satisfied with the prices given for the most popular places, where all our friends are going, I could try something different this time. Instead of spending all of my money to one popular place, which might not be as fun as I expected. I could use these money for three completely different, but cheaper places, diversity.  Be careful and check the reviews first!!!! being updated. 

The concept is about gaining experiences; one place is the least possible to provide me with more experiences than what other three places will do.

The reason I keep saying three places is because even if I love travelling, at some point it becomes very tiring and I do not want these beautiful destinations to lose their value.

Investing and travelling are poles apart. From the first, one is expected to “earn” money and from the latter, one is about to “waste” money, but the similarity between their procedures is surprising!!

Appendix 2: Markets will always reflect better than they predict: Friday, 10 February 2017: (05:22 )

On Wednesday 8^th of February, MPs, members of parliament, voted the beginning of procedural of the English – EU divorce. A divorce asked by the public, which emphasises the democratic nature of the party. This democracy though is coming into contradiction with the voting system since the majority of the Lords were opposite of leaving EU, only 122 out of 494 agreed to start setting a deal otherwise it will ultimately leave without it.

The pound’s value has been fallen however, the Bank of England is estimating an investments increase for 2017, indicating an inefficient market which is not influenced or at least immediately by the news released. Probably due to many information released for different markets, like Brexit, German and French elections related to EU market, election of Trump related to American and South American market and ISIS for the Middle East market, have cancelled each other’s importance and the market has decided to wait. – “Defence for EMH”

Even if the stock market advisers have to quickly analyse and quickly act to the new info released, the events are far beyond the situation leading to random walk when share prices will be totally independent of the last pieces of news and there is going to be not systematic correlation between the one movement and the subsequent ones as Kendal stated. For instance, since summer 2016 all the political news published are negatively affecting investors’ perception about market opportunities especially in USA and England. An investor cannot be lead by any rationality, to invest at a specific market. Subsequently, investor's best rationale is to remain the same currently “safe” shares.

From a personal perspective, I’m an international student graduating “hopefully” this July, the principle plan was to stay in UK and have a prestigious, profitable, managerial job… However, when the Brexit was announced I started making plans/dreams to move to USA but after Trump’s election I ended up to the initial plan. The reasons?? Well… I already live here, I speak the language, I know the culture and “currently” is in a better economic situation than most of European countries. This is called “compromise” and takes place only when events are beyond the situation and only if a guaranteed and safe opportunity comes up further actions will be taken. Even if this was my initial plan and I decided to make it three years ago at the end became a compromise due to the increase of its or any other plan’s risk and lack of evidence about their results in other words uncertainty about future start to exist.

It is the same philosophy for investors, the majority of them tries to avoid high risk investments and invests where the rest does, herd instinct. Or they invest to “unicorn” companies who are expected to raise their value due to their previous negative returns on assets, previous capitals are raised and show positive price momentum.  However, this contradicts the nature of stock market: the higher the risk taken is the higher the return will be. If all investors invest to the most favourable projects then they have to share the returns but if one takes the risk to invest to something different that individual will join all the returns.

Lee and Li argue that companies with “sexy” products can lure people into repeatedly overpaying for stakes. Robin Greenwood and Andrei Shleifer found that survey-based measures of expected returns were the exact opposite of “expected” returns according to the textbooks.

Stock market is like assignments both of them are dependent to luck, whenever you expect a good grade you almost fail but when you think you have failed you get the best mark in class. The variables are who, when and quantity, for share prices’ return depends on who you invest if it is favourable or not, how many others have invested at the same project and finally when you do the investment are there any expected info to be released? Now for the assignment, who is marking the assignment is the person favourable or not, how many other assignments have the person read before and finally when is the individual reading it, was the person in a good or bad mood that day and time?

The conclusion? Always have the opposite expectation from the desired return, it works!! J