Friday, June 20, 2008

basketball, investing and life

Getting emails from readers and maybe some avid readers really puts a smile on my face. :) thank you so much for giving me a piece of your mind. :) and a reader sent me a mail today and maybe i could say “challenging” me to use the 2008 nba finals for tips on how to invest. :) well dear sir i am up to the challenge of doing so and it really got my juices flowing to write this article. :) im sure you might have noticed that i am a basketball freak from a few articles of mine about basketball. :) im going to write about the 2008 nba finals, the boston celtics and the los angeles lakers. We will use basketball to learn more how to deal with life and how to invest better. :)
during the regular season of the nba the boston celtics were able to have the league's best record with 66 wins and 16 losses and a very big improvement from last year's record of 24-58. the team before the season started was bolstered with trades for kevin garnett(one of the most versatile big men the game has ever seen but has never had any playoff success) and ray allen(one of the deadliest shooters the game has seen but also has never been to the nba finals). The celtics was one of the favorites to win the championship at the start of the season with the new player additions but there were also doubts if the three big stars could play together. :) they showed everybody that they were serious of winning a championship and played beautifully together leading to the nba's best record. :) los angeles on the other hand had a shaky start to the season with kobe asking the team that he be traded. But all ended well when trade talks ended up empty and the lakers got lucky and were able to trade for the spaniard pau gasol from the memphis grizzlies. The trade definitely strengthened the team and instantly made them championship contenders. :) with this we see management coming into play and how important it is in both team's succes. With danny ainge and boston coach doc rivers they were able to get three great players(i should also say future hall of famers) to play together and blend their talents with the rest of the team and eventually win the nba finals trophy. :) the los angeles management and phil jackson on the other hand were able to let kobe stay with the team and surround him with players that would complement him. So here is my point when it comes to investing, good management will always go a long way. :) and my next point is that good management also needs a good product in order to succeed and in basketball it is the players that is their asset. :) good products and good management are important ingredients for success just like both teams we mentioned. :)
at the start of the playoffs everybody started doubting boston already because they barely got eliminated in rounds one and two with supposedly “weaker” teams but they started playing better in the eastern conference finals dispatching the powerhouse detroit pistons and played even better in the nba finals. The los angeles lakers on the other hand continued their beautiful play from the regular season easily defeating their opponents denver and utah in rounds one and two. They even eliminated the defending champions san antonio spurs in just five games. :) there are a few factors on why the boston celtics were able to beat the lakers. :) ive read expert articles and predictions before the start of the finals and according to the so called experts in almost all the positions the lakers had the edge and 80% of them predicted that los angeles was going to win in six games. :) but what happened????? boston won it in six games with some of the factors that i am going to mention. Home court advantage as they say there is no place like home. :) boston has always been known to have one of the best fans in the nba and with your city behind you it even makes you wanna play harder. :) boston wanted it more, they just wanted to win more and it is very evident with the way they play. The perfect example was paul pierce in game one when he sprained his knee but opted to continue playing cause for him it was now or never in winning a championship which really inspired his team. They played more intense, more passionate and with more desire. Players like rondo and perkins also got injured during the series but continued playing and helping their team and i could say that they were in inspired by their leader. The team with more desire to win the game will surely win it. :) it seemed to me the intense play of the celtics “rattled” the lakers and lead them to fall apart. It is not enough to have a plan because what is really essential is having a great plan and being able to put it into action and the lakers failed in this for they got away from their game plan. :) boston's bench outplayed la's bench. During the regular season the lakers played really well because they had great support from their bench but in the finals the la bench was really outplayed what could be the reason???? i really couldnt explain but i think it boils down to who wants to win more. Boston was able to control superstar kobe bryant and he never dominated the series. How did boston do this??? by scouting and studying their opponents carefully. :) just like in investing everything starts with research and i believe is a very big factor in success. :) they controlled kobe forcing him to be more passive in offense and pass off to his teammates and make them beat boston and they never stepped up and maybe i could say they were demoralized too seeing their leader having a hard time with the celtic defense. :) if you really look at the celtic team there is nobody who could defend kobe one on one. What boston did was to have a first defender and behind him was a second defender and the rest of the team waiting for him. This is teamwork at its best. :) boston had a good plan and executed it to perfection. :) boston really played like a team passing the ball, everybody contributing and playing their roles well and playing good team defense. :) in the nba it is not enough to have talent but also to have the heart and will power to win. It is what separates the good players from the great players of the game. :) these are the players that inspire the rest of the team to follow their lead to victory. :) the 2008 boston celtics i believe was one of the best teams that this league has seen in a very long time, one with talent and heart. This was really displayed during game4 of the finals when boston overcame a 24point deficit to win the game(mind you on their opponent's home court) and only great teams have the character and capacity to accomplish feats like this. They just might have destroyed the morale of the lakers organization just like the dallas mavericks when they had their game3 blunder against the miami heat in the 2005 nba finals(the organization was never really able to recover from that loss). Hopefully this does'nt happen to the los angeles lakers for i have been a big fan since the 80's when kareem and magic were still playing but i decided this time to root for boston because i know that my “best friend” (who is a traitor) bet a lot of money for the lakers to win the series(if my sources are correct around P120K). :) and another reason for cheering for boston was that the big 3 kevin garnett, ray allen and paul pierce are all gentlemen of the game and truly deserve to win championship. :) in the more than 50 years of the nba boston and la met each other in the nba finals for the eleventh time and after this series boston has dominated la 9 wins to 2(of the 17 championships of boston 9 were at the expense of the lakers). why is that so???? i believe it is in the philosophy of the organization. Boston has always been team oriented, efficient and has always been known for their defense while la on the other hand has always been known for their big name superstars and their offense. Just a brilliant example that most of the time defense will always win over offense because with defense the margin of error is lower. :) i hope you enjoyed reading and this helps you with your investments and in life. :) good luck
ps. i didn't bet any money on the series. Hehe im just happy that boston won. :) for any comments, suggestions or questions please email me at compounder888@gmail.com. :) to a few who asked about oil, gold, biodiesel(luckily ive been researching on the subject for a few months now), commodities, food prices, food crisis and about some stuff ill try to find time to write about it. in chiefstocks we just dont talk about stocks and business but also about life and how to make it better for everyone!!! good luck and God bless you!!! till next time. :)

Wednesday, June 11, 2008

The Law of One Price

prices and economic incentives:
comparing apples and assets
We expect the same thingto sell for the same price. This is the Law of One Price. Why should this be true? Common sense dictates that if you could buy an apple for $0.25 and sell it for $0.50 across the street, then everyone would want to buy apples where they are cheap and sell them where they are priced higher. Yet this price disparity will not last: as people take advantage, prices will adjust until apples of the same quality sell for the same price on both sides of the street. Furthermore, a basket of apples must be priced in light of the total cost of buying the fruit individually. Otherwise, people will make up their own baskets and sell them to take advantage of any mispricing. the arbitrage relationship between individual asset prices and overall portfolio values is explored later in this chapter.
The structure imposed on prices by economic incentives is the same in financial markets as in the apple market. Yet a different approach must be taken to determine what what constitutes the “same thing” in financial markets. For example, securities are the “same” if they produce the sane outcomes, which considers both their expected returns and risk. They should consequently sell for the same prices. Similarly, equivalent combinations of assets providing the same outcomes should sell for the same price. Thus, the criteria for equivalence among financial securities involve the comparability of expected returns and risk. If the same thing sells for different prices, the Law of One Price is violated, and the price disparity will be exploited through arbitrage. Thus, the Law of One Price imposes structure on asset prices through the discipline of the profit motive. Similarly, if stocks with the same risk have different expected returns, the Law of One Expected Return is violated.

Economic Foundations of the Law of One Price
The Law of One Price holds under reasonable assumptions concerning what investors like and dislike and how they behave in light of their preferences and constraints. Specifically, our analysis assumes the following:
More wealth is preferred to less. Wealth enhancement is a more comprehensive criterion than return or profit maximization. Wealth considers not only potential returns and profits but also constraints, such as risk.
Investor choices should reflect the dominance of one investment over another. Given two alternative investments, investors prefer the one that performs at least as well as the other in all envisioned future outcomes and better in at least one potential future outcome.
An investment that generates the same return(outcome) in all envisioned potential future situations is riskless and therefore should earn the risk-free rate. Lack of variability in outcomes implies no risk. Thus, strategies that produce risk-less returns but exceed the risk-free return on a common benchmark, such as the U.S. Treasury bills, must involvemispriced invesments.
Economic incentives ensure that two investments offering equivalent future outcomes should, and ultimately will, have equivalent prices(returns).
The process of a short sale are available to the investor. This assumption is easiest to accept for large, institutional investors or traders who may be considered price-setters on the margin. Even is this assumption seems a bit fragile, market prices generally behave as if it holds wel enough. The nature and significance of short sales are discussed more later in this chapter.

Systematic, persistent deviations from the Law of One Price should not occur in efficient financial markets. Deviations should be relatively rare or so small as not to be worth the transaction costs involved in exploiting them. Indeed, when arbitrage opportunities do appear, those traders with the lowest transaction costs are the ones likely to be the only one who can profitably exploit them. The Law of One Price is largely-but not completely-synonymous with equilibrium, which balances the forces of supply and demand.

This article was in response to an email sent to me asking if there was a law(like supply and demand) that could support value investing. Then here it is for everyone to read. This was taken from the book “understanding arbitrage: an intuitive approach to financial analysis” pages 5 to 7 by randall billingsley. Wishing you all good luck on your life and in your trades and investments. :) for any comments, questions or suggestions please email me at compounder888@gmail.com