Tag Archives: stock market

(Revised 1) Rising Interest Rates and Stock Market

The S&P 500 set an all time record as of yesterday, Janurary 14th, reaching a high of 1848.38 barely beating the previous high by .02 from Dec 31st. (http://online.wsj.com/news/articles/SB10001424052702304419104579322302381985992?mod=WSJ_Markets_LEFTTopStories&mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304419104579322302381985992.html%3Fmod%3DWSJ_Markets_LEFTTopStories) Both other key performance indicators, the Dow Jones Industrial Average and the Nasdaq Composite Index were also on the up and up. The market has finally rebounded to pre-recession levels, and the S&P grew almost 30% in 2013 alone. Of the biggest winners in the market were the tech companies, including Apple.

Although the stock market is in such great shape, some still worry that an artificial bubble has been created from the Feds quantitative easing strategy. The Fed has announced that they plan plan on backing off the quantitative easing strategy and allowing interest rates to rise. With the Fed ending its quantitative easing strategy will the stock markets artificial bubble come to an end?

A little background on the Feds strategy and how it effects the stock market. After the great recession of 2009 the government looked for ways to stimulate the economy. The Fed came out with the strategy of quantitative reasoning, where they would buy up bonds and keep the interest rates artificially low, targeting about 1 point above the federal funds rate. With low interest rates and more money circulating, consumers were able to spend more, hence stimulating the economy. The stock market grows in two ways from the low interest rates. With interest rates rising, it is speculated that people may avoid making bigger purchases which could end the “artificial” bubble the FED has created.

The first reason the stock market grows with low interest rate, is it is viewed as more favorable than federal bonds. As stocks are more favorable than bonds, the demand grows and the prices continue to increase. The other reason stock prices soar is because of market speculation. When analysts see low interest rates they speculate that the consumers will spend more on big ticket items, and take out loans to finance these purchases. This means that the predictions from the analysts will be more favorable, which in turn will boost the stock market.

An article from CNN Money on the rising rates (http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2013/05/24/will-rising-interest-rates-hurt-the-stock-market) argues that the rising interest rates will not have a negative effect on the market. A study conducted by JP Morgan showed that over the past 50 years 10-yr treasury bonds actually have a positive correlation with the S&P 500. They speculated the reason to be the FED works to relieve the economy in hard times by lowering interest rates. Although raising interest rates mean less big purchase spending, it also signals that the economy has recovered. Analyst see this as a good sign and the market continues to grow. Although the interest rates are at an all time low, as the rise it is unlikely that we have any major market meltdown.

In my personal opinion, I believe that the Analysts will way both the quantitive easing and the stronger economy when betting on the market. I believe that they will be a little more hesitant as interest rates will begin to rise, however I think they will bet bigger on the rebounded economy. I wouldn’t be surprised if long term the market continues to grow, but at a slower rate than we have witnessed in recent months.

(Revised 2) College Grads Financial Disaster

With a presumably large portion of this class expecting to graduate college in the near future, one common worry is our financial success after we walk down the isle and pick up our diplomas. Graduating for many marks the first time they will be out on their own, either entering the workforce or moving on with their schooling taking out substantial loans to pay for the continuance of their studies. Just like all other new beginnings, this one will be scary at first.

On top of being financially independent for the first time, there are many other complicating factors. Our economy is finally recovering from a recession and the job market looks optimistic for many. However we are all at an age where we understand what just happened. Seeing the market dive in 2009 has left many of us skeptical of investing money in stocks. A study found that most millennials are investing like their grandparents losing significant gains. Buying into an exchange-traded funded following the S&P 500 would have realized a 30% return, while many millennials money sat on money in savings accounts realizing very limited returns. After a shaky January the account would be down 4%, still having a sizable advantage over the out dated savings fund.

Aside from the market being a big scare, we also face the new age of electronic money. Something not many our age are afraid of and most of us embrace, however when not used properly it is easy to find ourselves in a financial disaster. If the class is anything like me, cash is becoming a scarcity in my wallet with most purchases being funded through debit or credit cards. As college graduates, its not likely were going to make a big ticket purchase right off the bat and bankrupt us for the future, however it is easy to lose sight of the every day purchases. The purchases add up over the month and it don’t have to be faced until it is summed at the end of the month in our bills. It’s likely that electronic currencies such as bitcoin will only further complicate this making it even more difficult to track our spending.

As scary as the first portion of this may seem, all hope isn’t lost for us. By acting responsible with our finances we can set ourselves up for long term success. The first recommendation for college grads is to get educated on personal finances and the stock market. I’d say our class has a solid leg up on our piers, however it is important that we remain informed about the status of the economy post graduation. The second piece of advice is to to work with a financial advisor and set  goals for yourself, both long term and short term. Weather its paying off grad school loans, owning your first home, paying for a big wedding, or retiring to a home on the beach in Florida, you just need something to work towards. Working towards your goals will not only help you eliminate impulse spending but also be rewarding when you finally reach them.

 

Although we will be up on the stock market, saving for things like retirement can be tricky. When we graduate it may seem to early to start saving, but if you have the extra money the investment could pay dividends in the long wrong. The problem is we most likely be as informed on the retirement type funds as some seasoned financial advisors. They will be able to explain the differences between 401(k)s, IRAs, Roth IRAs, and emergency savings funds. There is no perfect combination to use, each individual can use a unique combination to maximize their investment. Financial advisors can also help decide the benefits between things like professionally managed mutual and funds following a set index.

My last piece of advice is to have faith in the stock market. We’ve seen the troubles its caused in the recent years which scares us, but remember there were booming times too that we are too young to remember, and these times will return.

Defining Insider Trading

Recently there have been a slew of insider trading probes and lawsuit against Wall Street traders.  The recent surge of cases has lead to some interesting questions regarding what is and isn’t insider trading.  The case at the center of the questions is a 2012 case against two traders, Todd Newman and Anthony Chiasson, who were convicted of insider trading.  They have since appealed their conviction on the grounds that they received their non-public information not from the original leaker, but indirectly through a network of analysts.  They claim that since they didn’t know the the original source personally benefitted, they didn’t commit true insider trading.  There are other cases waiting on this appeal to provide more legal clarity about what should be counted as insider trading.

The above case is certainly not a cut-and-dry case of insider trading.  Some cases are easier to determine.  For example, a BP employee recently agreed to pay over $200,000 to settle an insider trading charge relating to the 2010 BP oil spill.  In this case, the employee had access to private information on how much oil was leaking, and responded by selling off a large amount of shares anticipating a huge drop in BP’s stock price.  BP stock lost 48% following the oil spill crisis, saving the man and his family hundreds of thousands of dollars.

The presence of intermediaries between he original leak and  Newman and Chiasson acting on the information makes their case more foggy when it comes to determining right from wrong.  When a trader gets a piece of information from an analyst, how are they supposed to determine if that information was truly private.  Firms have been known to intentionally leak information, and therefore it can be difficult for a trader to determine what is really private information and what isn’t.  If the trader doesn’t act, they are mission out on lost profits on information that wasn’t actually “insider”.  Not to mention that if many people know about a leak, the information ceases to really be insider.  As one organization put it, “At some point, a leak of nonpublic information about a company’s anticipated results…becomes just one more piece of market intelligence that is circulating among analysts and portfolio managers.”  When does proprietary information become public?  If that line isn’t clearly drawn, I believe that honest people search for profits could be punished for something that isn’t insidious at all.

On the other hand, if a trader know they have information that is non-public, one might argue that they just simply shouldn’t use that information to their advantage because it is wrong.  However, I don’t really think that this is a plausible solution.  Once someone knows a piece of private information, they know it, and cannot un-know it.  Regardless of their desire of whether or not to use that information to their advantage, that information can guide other decisions they make without them really even knowing.  I think its not too far of a stretch to believe that a lot of traders make a lot of indirect insider trades without realizing it.

Furthermore investing, at its core, is about having a more accurate idea about a firm that the next person.  But at some point, the government has said that having too much information should be illegal.  I agree that there are many instance where insider trading feels wrong and that a select few are talking advantage of a much larger shareholder base, I’m not sure I believe that insider trading is as odious as some make it out to be.

 

Is E-Finance Moving Stock Market’s Cheese?

Within less than 9 months, Yu’ebao, the poster boy of e-finance products, has attracted more accounts than those in the China’s stock market. This mostly attributes to Alibaba’s (parent company of Yu’ebao) huge user base. At the same time, Yu’ebao’s convenience, high profitability and low entry barrier are also driving reasons to this success. Without doubt, the fast rise of Yu’ebao and every other e-finance product are surely disrupting the game of traditional financial markets.

This disruption has struck a few nerves. Naysayers state that e-finance, instead of revolutionize the finance industry, it is killing the industry. Or, in a more specific way, it is destroying the stock market by drawing cash away.

To these opinions, I disagree. The defeat of China’s stock markets and commercial banks wasn’t because of the disruption of e-finance, but because of themselves.

Due to the government’s interference, these traditional financial industries have long been unable to meet people’s expectation on profitability. The stock market was prosperous because there was no other option to make money. Now with the debut of e-finance, people realized there’s a much more profitable while safer way to invest. It’s only natural to see the disruption.

So it all comes down to the rate of return. If the stock market can perform better and produce a rate of risk/return at least neck to neck to the e-finance products, this “disruption” should stop. In fact, the 6% annual return of Yu’ebao isn’t that high for a financial product. It was only popular because of the low risk. This so called “e-finance revolution” reveals problems of China’s stock market: the return and risk are unpredictable.

Like it was mentioned above, this unpredictability was because of the government’s interference. Unlike it is in most developed stock markets where the primary function is to allow companies to raise capital for profitable investment opportunities, China’s stock markets, was created to recapitalize and restructure large state-owned enterprises that otherwise would have gone under. These state-owned companies, by nature, rely on state subsidies and governmental deals. That is to say, the growth of these companies depends on policy makers’ decision rather than the market. This is unpredictable to normal people. Since the stock market is driven by these state-owned enterprises, it inherits the unpredictability as well.

So who’s actually responsible for the disruption on China’s stock market? The stock market itself, and, of course, the government. After seeing two decades of unstable performance, people have realized the truth of the stock market. There have always been problems on the stock market system. E-finance only magnifies them to the public. Now with PBOC finally set its mind to make changes, let’s hope e-finance will survive and serve as a catalyst, too.

Alibaba, E-Commerce legend in China

Can anyone imaging that a company who generates 2% of total China’s GDP and whose transaction volume is one-third larger than that of Ebay and Amazon’s last year combined, is created in a small apartment by this small, thin man?

Jack Ma started Alibaba.com in his apartment in 1990, and vowed to build Alibaba into the greatest Chinese-made company in the world.  The 49-year-old Mr. Ma is a tenacious, charismatic leader, and he keep his words. His Alibaba now handles roughly 80% of all online shopping in China, which some analysts say is already the world’s largest market for e-commerce. Tmall, a website under the name of Alibaba, has about 800 million product listings from seven million sellers who pay Alibaba for advertising and other services.  Although its profit is not comparable to Amazon, its deserve the name of the most busy online market in the world.  It is also of growing potentials, given that hundreds of millions of Chinese still haven’t shopped online. Yahoo reported late Tuesday that Alibaba’s revenue jumped 66% from a year earlier to $3.06 billion, and profits more than doubled to $1.35 billion.

What’s the story behind this success?

Alibaba has never been a market changer as Apple or Google. Rather than inventing revolutionary products, Alibaba often adapts existing technology to serve China’s fast-growing e-commerce market. Taobao (now known as Tmall ), which means “searching for treasure,” was created to sell directly to consumers as the Internet emerged in China.

Alibaba doesn’t own the merchandise it sells. The company is a middleman, making most of its money from charging merchants for marketing and ad services so they can stand out in the crowded marketplace. Sellers on Tmall and Alibaba.com pay annual fees. Alibaba is tiny in revenue compared with Amazon because the Seattle company sells products to consumers.

Taobao allowed sellers to list their products free rather than pay a fee. He said Taobao wouldn’t try to turn a profit for three years. “I know the Chinese user market and users better than Meg Whitman, ” Mr. Ma said about eBay’s chief executive at the time.The company was in business for three years before it posted its first annual profit: $1 in 2002.”Alibaba has played the scale game really, really well,” says Paul McKenzie, an analyst at Hong Kong brokerage firm CLSA in Hong Kong. “They created a virtuous circle of more merchants attracting more shoppers, which in turn brings in more merchants.”

Taobao, the online version of a raucous Chinese street market, quickly leapfrogged eBay in China. But Alibaba executives worried that the site would be a turnoff for big, brand-name companies because they wouldn’t want to be associated with tiny, unknown sellers. Mr. Ma sent a team of about 30 engineers back to his old apartment to develop a site that would win over the big names. “Jack’s apartment was reserved only for the most important projects,” says Wang Yulei, an Alibaba vice president who was one of the engineers on the team. “It’s a spiritually important place.” Officials at companies that Alibaba hoped to attract often visited to tell the engineers what they wanted. “When they walked into the apartment and saw our messy rooms, they looked very curious,” Mr. Wang recalls.

Even after stepping down as chief executive, Mr. Ma exerts his influence at Alibaba’s headquarters campus in Hangzhou, designed with a Silicon Valley feel that includes brightly colored cafeterias, gyms and recreational areas with pool tables.

No one lives in his old apartment, but Alibaba uses it occasionally to work on new projects. Mr. Ma has said he wants to turn it into a museum someday.

How long will the bull market continue?

Today, a wsj article said that we are approaching 7th inning in our bull market before the level out. As we learn of the efficient market theory and other assumptions that many economists use like rational expectation, I would like to show what the stock market has fared recently in relation to the theories mentioned above. Also at the end, I would like to add my thoughts looking forward as there has been many factors that influenced the stock market in past few months.

So, how have we fared in the lens of long term? Ever since the end of recession in 2009, the stock market had performed fantastically. Just to look at few indices, the S&P 500 showed 113% increase and the Dow Jones showed 101% increase in value over the past five years (see graph below). That is about 16.40% and 14.74% compounded annualized return, respectively.

Screen Shot 2014-04-14 at 8.44.18 PM Screen Shot 2014-04-14 at 8.46.25 PM

Well, what are some of the factors that carried this high growth rate in the market? First of all, as I and numerous others have pointed out, the easy money policy or the quantitative easing, coupled with zero lower bound interest rate had a significant effect in the economy. Also, a large sum of money that was used in fiscal policy financed many investments and purchases of assets kept the economy from completely falling. Despite the down trodden conditions after 2008, fiscal and monetary policy supporting the economy had put us back on track on recovery. It is true that there are much debates about whether the magnitude and degree of recovery track we are on is enough, but what we all agree on is that we are coming back.

How does this tie back into the rational expectation and efficient market theory? What investors were most interested in during the past 5 years was to see what the federal reserve was going to do. To put myself into an investor’s perspective, the quantitative easing and the zero lower bound would mean it is very cheap to do many kinds of investment activities. Therefore, firms in the US might take this opportunity to carry out some projects they had in mind previously. Now if we can blow this up into macro perspective, many firms would be spending money as necessary and the spending of many firms would fuel the economy.

Another twist to this account is that even though this may seem like zero lower bound and easy money would surge the inflation rate, the interest rate that banks receive from the Fed simply by putting them in the vault had risen to a positive number. In other words, financial institutions were lending only those money that are deemed viable. This decreased the velocity of the money all the while having much of necessary investments being financed.

Knowing these information as an investor, people who handle money would have allocated money right back into the stock market–or at least keep it there–after the announcements from the Fed. This, according to the efficient markets theory and rational expectation in force, would have corrected the stock prices immediately so that people only benefit the “normal” return.

But, we see that this is not the case in many accounts as investors. Anyone who went into the market in 2009 was deemed as a contrarian and was considered very bold. We see that the two indices enjoyed 16% and 14% annualized return which compared to 10 year annualized return of around 4% for each indices if they had kept the money. We know as humans it is hard to keep our animal spirits inside us and be cool headed in times of recessions or extraordinary booms.

I personally agree with what the author of the article in the beginning said. The bull and bear can only last for so long. The bull we see today is only the ramifications of the trough we saw 5 years ago. So, if you do not have the guts to be a contrarian–not many people do and you can still make a good sum of money without being one– I suggest like the random walk theory or the efficient market theory suggest, invest in indices and keep your head cool.

Investment Appeal

I was researching topics to write my latest blog post on and an article about Kraft foods caught my eye. You are probably well aware that over the last few days the NASDAQ has taken quite a hit. The major tech and bio tech companies in this index haven’t been preforming so well in the previous days. In contrast, some of the top preforming companies over the past couple days have sat outside the banking sector, notably Kraft foods. The company known for its Kraft Mac and Cheese, not only held its on in the recent plummet, but actually has realized a 2% net increase in its stock price.

It is clear that at a young age, investing in the stock market is a way to realize great returns over future years as we are able to ride out the highs and lows. Is it more promising, however, to invest in more boring stocks?

Appealing stocks such as Telsa and Netflix have experienced drops in stock price since the start of 2014, while the Utilities Select Sector (SPDR) fund has risen almost 9% since the start of the year. The biotech boom that the stock market faced in late February/early March has come to an end, with many companies looking at pre January stock prices. And many investors are feeling the pain as they bet on the high profiled companies, expecting the prices to continue to soar.

One investor who isn’t facing the problem is Robert Brown, Chief Investment Officer of Northern Trust.  Browne said he’s stayed away from many tech stocks with valuations he had trouble justifying. He instead likes to get paid in dividends, because they tend to instill discipline on company management.

In my personal opinion at a young age it isn’t a terrible idea to invest in companies that have potential for tremendous growth in the future. It is unlikely that utility companies will grow at the high rates some tech and biotech forms will undergo. Utility stocks are more of a safe, mid range bet. You will most likely experience a modest return on these stocks barring financial crisis. The down side is your money wont be growing at a top speed. As a prepare to leave college I am okay with placing money in tech and bio tech stocks hoping for the high gains over the next decade, however I realize it is likely that some companies will bust and I will lose on some of the bets. As I get older with more responsibilities I will be looking to move my money to companies that are showing modest long term gains, much like Kraft.

Buying High and Selling Low

Stock buybacks have occurred at a faster pace this year than last year. According to the Wall Street Journal, “Companies in the S&P 500 increased share repurchases by 29% during the three months through January 2014 compared with a year earlier”. During a stock buyback, a company purchases outstanding shares at current market prices and pays stockholders cash for their shares. The repurchased shares are placed in the company’s treasury stock, which means they are no longer considered outstanding shares. According to the Wall Street Journal, “In theory, buybacks are nearly equivalent to dividends as a way to return cash to shareholders”. Both cash dividends and stock buybacks provide investors with a cash payment based upon the number of shares they own. Cash dividends, which are decided upon by the company, are usually a small fraction of share price. On the contrary, stock buybacks occur at market prices that are determined my market forces. Although investors prefer stock buybacks when stock prices are high, corporations should prefer repurchasing their own stock when it is cheap. However, companies are performing stock buybacks while stock prices are very high – this rewards investors while the company takes unnecessary risk.

Besides returning cash to shareholders, companies have other incentives to conduct stock buybacks. With less shares outstanding, stock buybacks artificially increase earnings per share (EPS). According to the Wall Street Journal, “By reducing shares outstanding, repurchases flatter earnings per share, making stocks look more attractive. During the reporting season that just ended, earnings growth slowed to a crawl and likely would have been negative without buybacks”. A company’s business model should prioritize producing goods and services. A successful business model will exhibit continuous growth in earnings. When organic growth slows, however, companies can propel stock valuations through stock buybacks. Although buybacks can inflate EPS and push up a company’s stock price, it can be a risky strategy that can cause problems in the future.

Despite the bull market and lofty stock prices, companies have been conducting a record amount of stock buybacks. According to the Wall Street Journal, “Buybacks and bull markets are self-reinforcing”. During a bull market, companies feel pressure to keep increasing EPS (and subsequently increasing stock price) and to put all of their cash to use. Unfortunately, spending too much on stock buybacks benefit the short run while causing damage in the long run. According to the Wall Street Journal, “If share repurchases consume too much of companies’ excess profits, the underlying businesses might end up starved, which could lower future returns”. Although companies might wish to perform buybacks and boost EPS in the short run, it can be a waste of cash that would otherwise be spent to increase EPS in the long run. Companies should be careful in how much money they spend on share repurchases, which are not essential to day-to-day business operations. Corporate spending should prioritize other expenditures before stock buybacks.

Ironically, companies would get more bang for their buck if they conducted buybacks when they feel least comfortable (i.e. during bear markets when stock prices are low). According to the Wall Street Journal,

During the previous bull market, buybacks peaked in the same quarter the stock market did. Less than two years later, during the quarter in which tock prices bottomed, companies spent 83% less on buybacks. That is despite the fact they would have gotten far more earnings-boosting effect at those low prices for each dollar spent.

When done at the right time (i.e. when stock prices are low), stock buybacks can be more effective and less risky. In order to time buybacks right, management must be patient and not give into short term temptations. Although it can be tough (or even impossible) to determine the exact value of a stock, companies should be able to tell if their stock price is roughly overvalued or undervalued. Even when stock prices are low and stock buybacks would make  sense, the economic climate and outlook might be more negative causing companies to make conservative decisions. Stock buybacks might be hard to time, but I think it is pretty clear that companies should avoid buying high and selling low.

Why do people use active managers?

activepassive

The question about whether to use active managers or passive managers when it comes to the stock and bond markets is one that has been discussed over and over on out class blog.  A few weeks ago, I wrote about how some managers thought this was a good year for stock picking due to lower market correlation.  Such theories have no statistical weight behind them; most active managers are outperformed by simple index funds each year, even before their higher management fee are considered.  Despite the superior performance of passively managed funds, more people use active funds than passive funds.  While I think the active versus passive question has been thoroughly settled, not as much discussion has taken place about why people use actively managed funds.  This blog will provide a few theories for why people use actively managed funds rather than passively managed funds.

  1. Ignorance/Fear: The average American probably knows very little about the stock market and how it works.  Sure, many people track the DJIA or S&P500 and perhaps know how the market is doing on aggregate, but that doesn’t really qualify as understanding the market.  Thus, when they do want to invest their money into the stock market they feel like they have no other option than turning to the professionals for fear of losing everything that they invest.  These professionals, probably seeking a management fee for themselves, point them to an actively managed fund.
  2. Clever Marketing: Investment firms certainly work to perpetuate the idea that investing in the stock market requires a professional.  Such an idea is critically important for the health of their business. Every firm likes to tout how they beat their Lipper averages, which are a comparison to similar investments.  Unfortunately, comparing an actively managed fund to other actively managed funds doesn’t tell an investor anything about how well they do relative to other types of investment vehicles.  Especially with a market in 2013 where everyone brought in huge returns, brokers could easily advertise that their funds gained 25% in 2013, without their clients knowing they lost to the market by 7%
  3. People are willing to take the risk for higher return: Both Burton Mankiel and Professor Kimball recommended Vanguard Group for low cost index funds.  In fact, Vanguard invented the index mutual fund!  But even Vanguard offers actively managed funds in additional to passive index mutual funds.  They admit that, “while Vanguard believes there’s a very persuasive argument for index investing, that argument doesn’t rule out well-executed active management at a reasonable price.”  Some people may know that index funds generally outperform active funds, but they may be willing to take the risk that their active fund manager will hit it big one year.
  4. Not all markets are equally efficient: As a recent WSJ article suggests, some people believe that only some markets are efficient.  Namely, markets with extremely high volumes, like large cap companies and bond markets are generally quite efficient.  In recent years, even emerging markets have become quite efficient.  But some investors question whether smaller markets like small cap stocks might still leave opportunities to find undervalued stocks.  I personally believe that this theory may have a grain of truth behind it.

There is also one more important thing to consider: passive funds need active funds.  If everyone just bought stock indices and then did nothing, the market wouldn’t react to economic changes, and then would hardly produce any returns at all.  In order for a stock price to go up, there must be active managers willing to be a stock at a higher price than what the price is currently .

Russia’s stock market – what should investors do?

The dispute in Crimean peninsula is a worldwide issue that involves not only Russia and Ukraine, but also other European countries and even United States. Many ECON 411 colleagues have mentioned about these disputes in their blog posts, explaining how Russia is pressuring European countries by discontinuing the export of its natural gas; and how US tries to pressure Russia by making plans to export its shale gas. It is interesting to see how territorial disputes eventually affect economy of different countries. Recently, Wall Street Journal article The World’s Riskiest Stock Market? pointed out that Russia’s stock market is one of world’s cheapest, yet risky market.

Russia’s RTS (Russian Trading System Cash Index) is down 21% this year, mainly due to the fear of Ukraine crisis. The article denotes “This year, more than $600 million has left exchange-traded funds and mutual funds that invest primarily in Russian stocks, according to EPFR Global in Cambridge, Mass.” And, it pointed out that investors can find good returns in Russian stocks because of this geopolitical event. The diagram below shows how Russian RTS index dropped from 1,400 to 1,136 in less than two months. The steep decreasing slope due to Ukraine conflict means that investors can earn reward if they invest in Russian market.

russian rullete

I tried to relate this situation to the book “A Random Walk Down Wall Street” by Burton G. Malkiel. The author emphasizes “risks has its rewards.” Especially, chapter 9 – Reaping Reward by Increasing Risk explains that in order to get a higher average long-run rate of return, one must increase the risk level of the portfolio that cannot be diversified away. The author classifies risk into “systematic risk (or market risk)” that captures the reaction of individual stocks to general market swings (as in Russia’s situation, regarding Ukraine dispute) and unsystematic risk due to factors peculiar to a single company (such as a strike, or discovery of new product, etc). And, as the systematic risk increases, the return from market increases as well, which supports the article’s point (The graph between systematic risk and return from market is shown in Pg.223).

“No risk, no profit” is a common sense to investors. Therefore, for investors Russian-Ukraine dispute can be a great opportunity to invest and earn larger amount of return. However, investment always comes with a risk. Especially, as Russia’s systematic risk is quite substantial right now, I think it is important for investors to diversify their portfolios (by not only investing in Russia, but also investing in markets with less risk), in order to avoid heavy loss while aiming for higher return.