Comments on: Ten Notes on Risk in the Markets

By: Doug

Doug — Mon, 14 Sep 2009 20:36:00 +0000

I would re-characterize #10 into three categories:

1) Investors (Same definition as you)
2) Speculators – People who attempt to make money by betting on asset prices.
3) Gamblers – People who, on the surface, “act” like investors or speculators, but who participate purely for emotional fulfillment. (A gambler who speculates is pretty easy to imagine. A gambler who invests could be someone who invests in long-shot IPOs for the status, etc.

Investors and speculators want to make money. Gamblers also want to make money, but not at the expense of getting “action.”

When 1, 2, and 3 all line up on the same side of the trade, then you have a problem.

By: David Merkel

David Merkel — Mon, 14 Sep 2009 16:33:54 +0000

Gamblers don’t always bring liquidity — they often take it. Do short term speculators tend to use limit orders to enter positions, which offer liquidity? They more often use market orders, which consumes liquidity. In exiting positions, do they use limit orders or market orders? There, more often limit orders — though not always — if a stop is triggered, more often, a market order is generated, taking liquidity.

My experience is that long term investors tend to use limit orders more, which offer liquidity. Speculators/gamblers tend to use market orders, which consume liquidity.

As an aside, with bid/ask spreads so small, it is one reason why market makers are a smaller part of the market. When margins are so narrow, no MM will put up significant size.

By: EmGuy

EmGuy — Mon, 14 Sep 2009 16:18:56 +0000

hi david – great blog. i’d add to your nice list the massive amount of insider stock sales. what do you make of them?

By: Arnaud

Arnaud — Mon, 14 Sep 2009 08:27:27 +0000

“gamblers” as you call them bring also liquidity, which in a sense reduce the risk for the investors.

By: Steven Milos

Steven Milos — Sun, 13 Sep 2009 21:52:42 +0000

David,

On your point #6, John Jansen referenced on his Across the Curve blog this week that a recently issued Colgate-Palmolive bond traded through the relevant Treasury issue (I think it was minus 14 bps). It’s not particularly arbitrageable, just like the swaps, but wow…trade about a relative value trade!

Steve

By: Vincent C. Fulco, CFA, CAIA

Vincent C. Fulco, CFA, CAIA — Sun, 13 Sep 2009 18:54:46 +0000

Dear David- I very much appreciate your diverse and well grounded perspective. So what will be the end result looking out 3-5 years? If we assume mortgage equity withdrawals and new fangled securitization products drove an extra 2-3% GDP for at least most of the 2000s, does the govt hope to somehow replace such malinvestment with a new drive to artificially enhanced single digit GDP growth? Too many institutions continue to reject allowing assets to find their proper level (lower) while numerous problems remain nearly insurmountable. Low discount rates alone is a poor panacea for what ails us. Global competition continues to intensify, the populace at large is in a weakened state of eroding incomes (potentially permanent), employment conditions and employer/employee negotiating power has dramatically worsened, higher taxes are expected at all levels, and the education system is well established but perplexingly little promise of providing a proper return for one’s time put in and exorbitant debt incurred. I won’t lengthen this by adding my thoughts about the financial system restructuring which is critical to our survival. As a nation we are simply not investing in an efficient and focused manner to drive sustainable wealth generation for all. The republic is rotting from the inside out.

By: hedged

hedged — Sun, 13 Sep 2009 12:20:25 +0000

great points but number 10 sounds too glib to me. Investors in new projects/investments (VC, entrepreneurs, project lenders, etc) reallocate money from low risk to higher risk uses.

For people who only play in existing traded products, your observation sounds right