A FORECAST ON VND/USD WITH REGARD TO FUNDAMENTAL ANALYSIS

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Global Macroeconomics and Currency Analysis – 2015 Review and 2016 Outlook

Fooled By Randomness by Nassim Nicholas Taleb – One of the smartest books of all time

He was a trader, in an intensive way, so to say. He wrote books about trading, markets and more specifically, randomness is his favorable playground. Since his debut bestseller – Fooled by randomness, Nassim Taleb increasingly won the public attention and praise for later books. One of them – The Black Swan was awarded as one of the most influenced book since the World War II. Regardless of what people appraise, Nassim Taleb prefers to be considered as an essayist. This book review is about his debut bestseller: Fooled by randomness.

This is a decent book about traders. To be precise, it is about traders who are fooled by their knowledge in the world of randomness. Or at least, knowledge is what they name until it screws up their assets and careers. This is how Nassim Taleb linked traders with his favorable topic – randomness:

At any point in time, the richest traders are often the worst traders. This, I will call the cross-sectional problem: At a given time in the markets, the most successful traders are likely to be those that are best fit to the latest cycle. This does not happen too often with dentists or pianists – because these professions are more immune to randomness.

As he was a trader in most of his career path, Nassim Taleb viewed this connection (traders and randomness) from the very insight.

Source: Yen Tran

Nassim Taleb started this book in a pretty attacking way: My motto is “My principal activity is to tease those who take themselves and the quality of their knowledge too seriously.” You will see how strong he committed to accomplishing this task throughout the book. To some extent, he did it quite well. Always keep yourself and your knowledge skeptical is what came up to my mind on reading this book. Thanks to history, people draw conclusion of thing’s nature. However, later on we have to change our knowledge since future events occur differently from what they were. To be more detailed, what you see decide thing’s nature, not the features of things themselves. And there is nothing you can do to change it. But in this book, Nassim Taleb showed us the way to protect ourselves from being trapped by the illusion of knowledge. Lessons are not for free. People have to exchange their precious things for it, i.e. time, money and very frequent, their confidence. As someone said, “Nowhere in this world, the price of lesson is as high as in the trading exchange”. Nassim Taleb told us stories of market participants those made fortune in years and ruined life career within days. What did they do wrong? What lesson can we learn from their mistakes? Also, the price they paid for these lessons, how high was it? Most importantly, is it true that this world is full of randomness? And if so, how do we survive in it?

Carlos and John were traders who became specialists in their field for gaining huge profits for their employers over years. Yet, they blew up their fortune and careers in quite similar way. “Carlos had earned for his bank close to $80 million cumulatively in his previous years. He lost $300 million in just one summer.” The same tragedy happened to John – a respectful and considered-skilled trader for years. The question is that, when will they recover from this failure? Perhaps never, replied Nassim Taleb. The fact that he blew up wiped out his confidence. More importantly, John might be never skilled in the first place. We tend to think that traders were successful because they are good. Perhaps we have turned the causality on its head; we consider them good just because they make money. Does this conclusion evoke some thought for you? Heroes are heroes because they are heroic in behavior, not because they won or lost. Survivorship bias and mass media nowadays distort our judgement about things in life. The viewers are only told about stories of winners. We view one’s life story because one makes fortune. We like being told about success, not failure. And for that reason, we learn nearly nothing from history except for satisfying our entertaining demand.

A significant side effect that you cannot miss in this book: Nassim Taleb changes the way we judge this world. He introduced us the judgement methods that we seemed to take for granted. You will be surprised by how exactly he defines out loud our mental bias, i.e., highsight bias – the “I knew it all along” effect. A mistake is not something to be determined after the fact, but in the light of the information until that point. Our minds are designed not to understand how the world works, but to get out of trouble rapidly. Even when you get failed, say, kicked ass, you seem not to understand what really happened (Still, you think you finally get the point since you pay a high price for it. Sorry folk, you do not!). What you see is all there is, said Daniel Kahneman in his bestseller – Thinking, fast and slow. For the ones who look for a judgement (or research) method in academic world, Nassim Taleb rejected induce methodology and introduced Popper’s theory. Basically, a theory cannot be verified since it is never proved to be right, i.e., we will never know if all the swans are white. On the way to prove the precision of a theory, your approach is already wrong.

According to Popper, there are only two types of theories:

1. Theories that are known to be wrong, as they were tested and adequately rejected (falsified).
2. Theories that have not yet known to be wrong, not falsified yet, but are exposed to be proved wrong.

This is one of the most skeptical research approaches ever. I believe that Nassim Taleb made this point clearer and more persuasive in his masterpiece: The black swan. Currently, we would have it pended for that blueprint.

There is one characteristic that all good books contain: thought-provoking. Fooled by randomness is such a book. Nassim Taleb is certified as a brilliant essayist, the hottest thinker in the world. He is solid and aggressive in his opinions. In the World Economic Forum in 2009 in Davos, he was treated as a rock star and aggressively criticized the bankers. Also, Nassim Taleb called for cancellation of Nobel Prize since the damage of economic theories can be devastating. One step further, Nassim Taleb refuses all awards and honours as they debase knowledge by turning it into competitive sports. To me personally, it is very nice to know Nassim Taleb via his blueprints. I hope you agree on this once you take time to read his ideas.

YEN TRAN

*I would like to thank my partner – Tran Nguyen for her support. I owe a lot to my editor – Xuan Nguyen for helping me complete this review.

Sources I found helpful for your financial research journey

1. Damodaran Online: has been online since 1998. Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University. You can find here models for most of conventional valuation models, such as Dividend Discount model, Free Cash Flow model, Option Pricing model, Private Firm Valuation model, etc. Once you generate necessary inputs, the models will yield sufficient outputs.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/spreadsh.htm

2. Reuters Finance: I believe this is one of the most useful free website about market data of finance. Reuters Finance generates update and detailed data and news of listed companies, their analysis, etc. Once you do financial analysis on your own, this is impartial source to refer.

http://www.reuters.com/finance/

3. Bloomberg Industries: Once you conduct the industry analysis, you will figure the free data of this section is poorly few. Perhaps because it is more difficult to generate data of the whole industry, these packages of data are normally for sale. Fortunately, Bloomberg Industries offer us a free source of such data. Most of industries with market leaders are pointed out with equivalent market weight.

http://www.bloomberg.com/visual-data/industries/

4. Yahoo! finance: A collection of free website for finance data cannot lack of Yahoo! Finance. This is one of the most convenient, broad and free sources you have ever found in internet. It offers market data of most of financial instruments, i.e. stocks, bonds, options, ETFs, etc. You can adjust the date range to extract historical data into excel files. Very convenient and helpful! Also, the summary of industry performance is freely accessed.

http://finance.yahoo.com/

This list will be frequently updated together with my financial research journey.

Yen Tran

Thinking, Fast and Slow by Daniel Kahneman – A thorough journey into human mind

I would start my review on this book by a line from Steven D.Levitt, co-author of Freakonomics: [This book is] a lifetime’s worth of wisdom. Since its publication of 2011, Thinking, fast and slow has been located among best psychological books. The author, Daniel Kahneman is a Nobel laureate for his contribution in psychological applications in economics.

Daniel Kahneman introduces to us two systems that administrate our mind. System 1 operates automatically and quickly with little or no effort and no sense of voluntary control.  In the meanwhile, System 2 allocates attention to the effortful mental activities including complex computations […] choice, and concentration. In short, when you see this calculation 4 + 4, system 1 automatically works on it for the result of 8. With 12 x 26, system 1 immediately tells you that “No, I cannot make it without a pencil and a sheet of paper” while system 2 makes you sit down and work on this calculation. While your System 2 works on this multiplication, your pupils dilate. Your pupils contract when you get it done or you give up. You should bear in mind the difference of these two systems to go through the whole book.

Source: Yen Tran

As I consider this book as a channel to understand human’s thinking path, I would raise the questions that we mostly have in common. I believe that after all, you would agree with me that this book completes its role as a bridge of mysterious human mind and scientific knowledge in an extraordinary way.

What makes you believe in a story? The accuracy of that story? Not at all. We tend to believe in a story because of its consistency. The solid link among events contained in a story decides how persuasive it is to readers, not the reliability of each event. Let’s consider an example.[1]

Jerom died on February 13, 1996, ten days shy of his fourteenth birthday. The teenager was dull, bloated, depressed, sapped, anemic, and plagued by diarrhea. He was not in fresh air for eleven years. As a thirty-month-old infant, he had been intentionally infected with HIV virus SF2. At the age of four, he was infected with another HIV strain, LAV-1. A short of five, he was infected with yet third strain, NDK.

How do you feel right after reading the paragraph above? You might feel pathetic, angry and some of you might think of children in their miserable lives. Here is the rest of the story: Jerom is a laboratory chimpanzee. He is one of eleven great apes kept in the Chimpanzee Infectious Disease building of Emory University. You now feel less pity. System 1 leads you to emotional expression without your acknowledgement. You also make judgement right after reading the story without considering the facts in the story. In your judgement, Jerom was human. He was a miserable teenager who died at the age of fourteenth. For some reason, Jerom was infected with HIV on purpose when he was so little and this activity was crucial, guilty and unacceptable. System 2 which is in charge of doubts and unbelieving is sometimes busy, often lazy. Also, it always comes after System 1. When you are deep in emotion, System 2 is very weak. The next question will discuss about the case system 2 totally involves.

What do you really know about the meaning of probability? The book suggests an appealing experiment. On reading a research result that kidney cancer is higher in rural than in cities, what initially comes up to your mind? You automatically try reasoning for this result: People lack of medical service in rural; their daily diets are not nutritious enough; etc. Let’s change the condition: what if the study shows the opposite result that the incident of kidney cancer dominates in cities than in rural. You quickly think of the terrible situation of air pollution, water pollution and intense working atmosphere in cities. There might be something wrong here. One cannot reason it in both ways. The author suggests us another solution. The cases of kidney cancer in rural and cities are quite similar but the population in rural are much fewer than in cities which make the percentage of ill people in rural are higher. The author then sends questionnaires among researchers and experts asking about how they choose the sample size for their studies. The result shows that most of them take the sample size based their intuition instead of significant computation. Even experts make mistakes in their major. This arouses the question of whether human mind can take over statistics by nature. This experiment together with some other ones supports the supposition that even experts with long-time training are not sure about statistics.

These two questions are among a great number of questions that Thinking, fast and slow address the answers on. The outcomes from psychological experiments might surprise the readers. Throughout the book, by his whole-life wisdom, Kahneman points out various traps of our thinking and shows us the way to get out. If you are the one who always bear in mind the question of “Who am I?”, Thinking, fast and slow surely lightens your interesting adventure into human mind.

[1] The example from the book is long and quite complex. Instead, I quote this story from another book called “Who am I and if so, how many?” of Richard David Precht, Hachette UK, 2011.

YEN TRAN

*I would like to thank my partner – Tran Nguyen for her support. I owe a lot to my editor – Xuan Nguyen for helping me complete this review.

REPORT OF COCA-COLA CO. STOCK ANALYSIS AS OF JULY 9TH 2015

A PDF version of this report can be found as:

REPORT OF COCA-COLA CO STOCK ANALYSIS as of July 9th 2015

How I became a quant by Richard R. Lindsey and Barry Schachter – Choice of life and hand of fate.

In 1980s, it was a trend in Wall Street to hire people with non-finance background but excel at maths and physics. Most of you watching the movie “Margin call” might remember the smart guy who figured out mistakes of the valuation model. He was educated to be a missile engineer before coming to Wall Street. Yeah, I agree, not a bit relates to finance. Here is the reason. The recruitment trend evoked from the triumph of Efficient Markets Theory. In case you have no idea about this term, check out my review of Irrational Exuberance. Briefly, economists and investors at that time strongly believed that they could build models to measure asset prices precisely. These models were highly complex and needed to be controlled by quantitative people. As a result, people with background on maths and physics satisfied this requirement. Given the advent of derivatives instruments in the late 1980s, needs on quants have been stronger.

Source: Yen Tran

Twenty five stories were told by twenty five experts of the industry whose influences are confirmed by the amount of assets they are managing. I am not telling you that their talents corroborate their opinions but I am sure that you will enjoy their life stories. Who don’t like stories? Here and there in the book, the writers made clear to us about the draught of their studying and working paths as a quant. “Nobody said it was easy” as a line in Scientist by Coldplay. Here and there you catch a scene of an undergraduate from an Ivy-League school pondering about life’s goal and having no idea of the next move in his life. Even the smart person has no preparation for such a thing like occupation. As a young person, I believe we all share the same concern. “Fate takes a hand in every person’s career” a saying by Mark Anson – a fund manager. He is one of twenty five elites mentioned in the book. His past life confirmed the effect of fate’s choice into human’s life. Whether you like it or not, this idea was shared by many other elites in the book. “I did not plan to become a quant. I don’t think any of us did”, an experience from Bjorn Flesaker – Senior Quant from Bloomberg L.P. So, be ready for any instant and significant change in your path career. You and I, at our young age, we have no idea of how our lives might become. Under this highly sad uncertainty, we can employ a wise strategy which you have been told uncountable times: enjoy the moment.

If you ask me a reason for digging into this book regardless of projects moaning to be accomplished, I would say: you read this book and learn from elder business persons’ experience. Sooner or later, you step on their paths. They had their own plights and made moves sometimes in the dark. Reading their situations and reasons for their destinations, at least, we have a clearer view on our current position. The downside of reading this book? I have to warn you about the slight depression you may get. Twenty five life stories of twenty five top managers of Wall Street are not something mediocre. Their paths were virtually extraordinary from the very beginning. So, don’t expect it fits your shoe but a pushup to yourselves to find a motive for trying harder on everyday working.

Yen Tran

An overview of beverage sector: S&P 500 price index performance

To start, we provide general information about the whole S&P500 beverage sector in order to illustrate the big picture of this industry since it was accounted into S&P 500 index.

Figure 1: Overview of S&P500 index – Beverage sector

Irrational Exuberance by Robert J. Shiller – The striking critics against conventional wisdom

Professor Robert J. Shiller of Yale University is well-known for being the Nobel laureate in 2013 for his contributions in asset pricing. Irrational Exuberance is his masterpiece which was firstly published in 2000 and widely gained the interest of the scholars for succeeding in accounting human’s psychology in explaining the market crash.