“I would be bum on the street with a tin cup if the markets were always efficient” Warrant Buffet

 Market Asymmetry is reality. 

Buffett's statement suggests that if markets were always efficient, meaning that all available information was accurately and instantly reflected in stock prices, there would be no opportunity for investors like him to find undervalued stocks and make profits. In such a scenario, he implies that his skills as an investor would be rendered useless, and he would have no choice but to rely on charity, metaphorically depicted as being a bum on the street with a tin cup.

Sunshine and Stock Returns

 

Professor Hirshleifer at Ohio State University found that morning sunshine correlates with stock returns. He examined 26 stock market indices around the globe for the period of 1982 to 1997. He looked at sunshine versus some cloud cover in the city of a nation’s largest stock exchange. “In New York City, the annualized nominal market return on perfectly sunny days is approximately 24.8 percent per year versus 8.7 percent per year on perfectly cloudy days.” He cites evidence that sunshine improves investors’ moods. When their moods are elevated, investors are less risk averse and are more likely to buy.

(Source, Book Inside Investor's brain, Chapter 1 by Richard L. Peterson)

What is Mental Accounting?

 

We often assign a different value to

different things but that can sometimes

lead to a negative

consequences.

 

Mental accounting refers to the way

different people tend to perceive

the value of money this is usually

due to individuals subjective criteria

which greatly varies from one person to

another due to many factors for an instance you

might value dollar differently when it's earned

through work compared to when it's

given to you these differences in the

way we classify funds tend to make us spend more and

make irrational decisions about the money a good example

of this is when the person saves up for a vacation

and uses his savings john while having a

considerable credit card debt

at the same time he would probably

categorize his savings money

differently from the money he uses to

pay his debt

and so be left with piling interest

while having some money

sitting in his jar in the end he could

have just

used the money to pay off his debt than

to pay a lot more

interest just to have his vocation fund

separately right the solution may seem

straightforward but people still don't

follow it

another example when a person makes a

rational decision is after receiving

his bonus in his mind this money is just

additional cash so he can waste it

without feeling

guilty about it as a result mental

accounting often leads to poor financial decisions

that will only make your financial situation

worse so be sure that you treat all your

money equally and if you have extra money then

you should use it wisely

 

Relationship between prospect theory and motivation of investor

There is a prospect theory in finance which means “a theory that describes decisions between alternatives that involve risk”. This was the meaning which some websites use to describe prospect theory. In simpler words however prospect theory is decision making under risk. The alternatives out of which we have to decide about, one of our best possible alternative to choose are uncertain, we only know about the probabilities of uncertainty for example this alternative security is 25 percent risky or this one is 60 percent risky etc. Prospect theory directly addresses how these alternatives, which present at the moment are framed and evaluated in the decision making process.

Now we’ll come to the second part that is motivation of investor. To see how prospect theory will affect the motivation of investor we shall first have to see the type of investor. There are two types of investors. One type is related to “risk takers” and other is related to “risk averse” investors. These two terms are self-explanatory so we shall now see how the motivation level of these two types of investors is related to prospect theory.
If the investor is a risk taker then in the presence of many risky securities for the investment purposes, he would go for the risky one alternative.

 For him, the principle would be

“Higher the risk, Higher will be the rate of return”

For him the motivation level will be high, his decision making would be stable. On the other hand a risk averse investor, who avoids risk, will have a low motivation level, because from the ample alternatives available to invest, he may not select any one of them or the chance is that he may select the least risky alternative. That leads to low motivation level to invest.

When we talk about risk, we did not specify it by saying political risk, exchange rate risk in case of international investor or default risk, or the risk inherent in the investment.  At the macro level, in our country or at the micro level, in our organizations, where we urge to motivate investors, so that they come and invest, offering them other benefits and lowering the interest rates in case of investment securities may not be the only attraction for the investors to invest. It depends on the type of investor which affects the decision making and motivation of the investor

 to invest.

So which type of investor are you?

What are Index Funds?

 

Funds that track a market index, such as the S&P 500®, are known as "index funds."

Index funds include both index mutual funds and index exchange-traded funds, or ETFs.

These funds typically use a passive investing strategy, which means their objective is to

deliver returns similar to an index of investments.

However, index funds usually deliver returns that are slightly lower than an index due

to fees associated with these funds.

 

Simply put, index funds are built to have a similar performance to that of a major market

index.

This means they tend to be diversified in securities across that index and include a

number of investments.

There are many market indices, and index funds that follow them.

For example, if you want to invest in U.S. stocks, you might invest in a fund that tracks

an index like the S&P 500, which follows the 500 largest stocks in the market; the Dow

Jones Industrial AverageSM, which includes 30 large-cap industrial stocks; the NASDAQ-100,

which follows 100 large-cap technology stocks; or the Russell 2000®, which tracks 2,000

small-cap stocks.

For international stocks, an example of a widely tracked index is the MSCI EAFE, which

includes large-cap stocks in developed countries across Europe, Australia, and the Far East.

For U.S. bonds, an example of a widely tracked index is the Barclays Capital Aggregate Bond

Index, which includes a mix of government bonds, mortgage-backed securities, and corporate

bonds with different maturities.

As you can see in these examples, index funds can track different assets, including stocks

and bonds.

There are even index funds that follow commodities, currencies, and other assets.

But regardless of which type of asset they track, an index fund still has its risks.

Put simply, index funds are exposed to the same risks as the index they're following.

For instance, if the S&P 500 declines in value, then the index funds which track it will follow

suit.

An index fund that tracks bonds is at risk if interest rates rise and bonds decline in

value.

Some investors are willing to accept these risks and choose to invest in index funds

because of the potential benefits they might offer.

A primary benefit is the typically lower expense ratio—which is the ongoing cost of investing

in the fund—compared to actively managed funds.

As the name implies, actively managed funds use an active investing strategy.

This means that they frequently buy and sell investments.

This typically results in higher costs, or expense ratios, and can be a drag on a portfolio's

performance over time.

Because index funds are passively managed and simply track an index, they generally

have a low portfolio turnover, which means they infrequently buy and sell investments.

Infrequent buying and selling typically translates into low expense ratios.

The low expense ratios of index funds can possibly lead to more growth when compared

to the higher expense ratios of similar actively managed funds.

Let's look at an example.

Suppose an investor purchases $50,000 of two funds that both grow 7% per year - before

expenses - over the next 30 years.

The funds are similar in all respects except expense ratio

Fund A is an actively managed fund with an expense ratio of 1.2%.

This fund would grow to $ $271,356.

Fund B is an index fund with an expense ratio of 0.2%.

This fund would grow to $359,838.

That's a difference of $88,482, and it's all thanks to a low expense ratio.

The low cost of passively managed index funds can make a difference and is a reason index

funds may outperform actively managed funds over long time periods.

This is why some investors take the "if you can't beat 'em, join 'em" approach

and use index funds to simply track market indices.

 

What is Finance? Part 2

 

Assets can be classified into two

types current asset and fixed asset so

the current assets are the assets having

shorter lives usually less than one year

for example cash accounts receivables

and inventories the other type of asset

is the fixed assets which has longer

lives for example equipment, machineries,

building patterns

these acids normally have life more than

one year now if we focus on the right

hand side the first thing is current

liabilities which contain the

liabilities of the firm that must be

repaid within one year period for

example accounts payable among the long

term depths we can give example like

corporate bonds or long term borrowing

from the banks okay so these are the

liabilities that does not have to be

repaid within one year and the owner's

equity are essentially the claims of the

owners okay maybe it is their investment

or maybe the profit generated from their

investments for example common stock or

retained earnings so these are the

components of the balance sheet and. These components can also be related to

different areas of finance for example

the fixed assets are related to capital

budgeting because when the firm decide

in which assets which long-term assets

that form should invest they actually

determine the fixed asset component of

the business organization so this is

related to capital budgeting.

 Now the long-term depth and owner's equity these

part of the balance sheet is related to

capital structure decision because if

the firm decide how much to borrow and

how much to get from the owner okay that

is essentially the capital structure of

the firm now the remaining portion

current assets and current liabilities

,both of these two have shorter

lives less than one year one year or

less,  so the management of current

assets and current liabilities this is

related to the working capital

management area of business finance.

 

 

What is Finance? Part 1

 

Finance can be defined as the science and art of managing money in order to achieve the appropriate objective you can see that there are two components two important components in the definition one is managing money therefore finance involved with managing money and the other component is appropriate objective that means finance involve managing money with an appropriate objective in mind.

Finance is a wide area and it can be it can be thought in different contexts like from personal context government, context or business context from personal context if you think about finance it is the management of money for personal objective for example if you are thinking about personal finance perhaps you will think about how to earn adequate amount of money how much money to spend and save how much to borrow if necessary how much money to invest if you have extra and if you want to increase your consumption in future where the in where to invest the money when to invest the money so these are the these are some examples of questions that you answer if you are dealing with personal finance.

 

Government context in government context the finance will be dealing with a generating government revenue for example by deciding how much to tax public spending the amount of public spending budgeting government depth production distribution of public goods and if we think about business context of finance then it will be dealing with for example in what fixed assets should we invest our money how to raise money for the investment of the business how to manage the short-term cash flows how much to reinvest in the business if you want to expand the business so these are the different context of finance but now we are going to focus on business finance and learning about business finance can also help you to understand the finance in other context so what are the areas of business finance.

One is capital budgeting capital budgeting answers in what fixed asset and when a forum should invest the other relative related area is dividend policy when a firm makes profit the firm will normally distribute the profit to the owners but if the firm decides to reinvest how much of the profit should be reinvested so if the firm reinvest the dividend will be lower so these kind of decisions are the area of dividend policy then again the area of capital structure which deals with raising money how to raise money for the investment and it also involved deciding when to raise the money from which sources the firm should raise money should it should the firm raise money more from the owners or more from the creditors and the other area of finance is working capital management which is related to the management of short-term assets more particularly short-term cash flows so it involved for example cash budgeting, managing of current assets, managing up current liabilities etc so these are the areas of Finance which can be related with the balance sheet of a business organization you know that the balance sheet of a business organization has two sides the left-hand side contains the assets and the right-hand side contains the liabilities and owner's equity.

In other words we can say that liabilities and owner's equity x' are the sources of fun because when you are liable to someone that means you are supposed to pay that means you have other people's money borrowed from them and equity is also other people's money but it is the owners money that you have in your business.  so we can say that the right-hand side of the balance sheet actually indicate the sources of money the business organization has and the left-hand side of the balance sheet contains the assets which are essentially the uses of money because how do you use the money normally you buy different types of assets so this type of assets are contained in the left hand side so a business organization can have assets only if the business organization has money in the first place then the organization then the firm can use the money to buy assets. This is why the sources of money and the users of money should be equal and this is why the left hand side and the right hand side of the balance sheets balance sheet are equal if we focus on the left hand side of the balance sheet we have assets.