markets

When Gucci and Louis Vuitton Handbags Serve as Collateral for Loans

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Say hello to the handbag-backed loan. A company in Hong Kong, Yes Lady Finance Co., provides loans to customers if they’re able to bring in their beloved handbags as collateral.

Yes Lady provides a loan within half an hour at 80% of the bag’s value—as long as it is from Gucci, Chanel, Hermès or Louis Vuitton. Occasionally, a Prada purse will do the trick. Secondhand classic purses and special-edition handbags often retain much of their retail prices.

A customer gets her bag back by repaying the loan at 4% monthly interest within four months. Yes Lady says almost all its clients quickly pay off their loans and reclaim their bags.

The company recently lent about US$20,600 in exchange for a Hermès Birkin bag, but Yes Lady’s purse-backed loans start at about US$200.

This is bizarre, and one of those “markets in everything” phenomena. The best part? Some people try to get away with bringing in fake luxury handbags. You should read the article on how Yes Lady handles those scenarios…

The Financial Markets in 2011

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The best summary of what happened in the financial markets in 2011 comes courtesy of James Surowiecki at The New Yorker:

In 2011, the S. & P. 500 finished the year where it started. (To be precise, it fell 0.003 per cent.) But it was anything but a placid year in the stock market. Instead, there was extraordinary tumult throughout 2011, with a series of sharp rallies and brutal selloffs, the biggest of which sent the market down seventeen per cent in a couple of weeks. Even on a daily basis, stocks were startlingly volatile: the Dow Jones Industrial Average moved more than a hundred points on forty per cent of trading days, and there were more than sixty days on which the S. & P. index moved about two per cent or more (which in 2005, for example, it didn’t do once). Ordinary investors, who have watched the value of their 401(k)s yo-yo seemingly at random, have been left feeling understandably dazed and confused as they head into the new year.

Traders and professional money managers don’t seem to have any real clue about what’s going to happen, either. You might think that volatility would allow people with superior information and market sense to get ahead. But last year money managers did a very poor job of playing the market. According to estimates made by Goldman Sachs, as of the last week in December seventy-two per cent of core large-cap mutual funds had underperformed their market indexes. The average stock-market mutual fund was down almost three per cent for the year. And hedge-fund managers, who are supposed to thrive on volatility, did even worse, with hedge funds that focus on stocks falling more than seven per cent. Strikingly, some of the biggest flops came from superstars: Bruce Berkowitz, whom Morningstar named one of the money managers of the past decade, saw his flagship fund fall more than thirty per cent; the hedge-fund manager John Paulson, whose bet against mortgage-backed securities a few years ago has been called “the greatest trade ever,” saw one of his funds drop nearly fifty per cent.

Surowiecki then mentions that ordinary investors “chase performance” and suggests:

The sensible solution would be for investors to put their money into low-cost index funds and just keep it there. But that’s hard to do when the market is extremely volatile. Most of us find it difficult enough in normal times to take a long-term approach. So when prices are rising and falling two per cent a day, and when it seems like getting in or out of the market could be worth ten per cent of our portfolio’s value, the temptation to try to time the market is hard to resist.

Here’s where I don’t agree with Surowiecki. What’s so hard about choosing to allocate a certain percentage (or a set sum of your savings/salary) per year to index funds (regardless of market volatility)? You can’t time the market, so you might as well invest in an index (or a fund) that tracks the S&P 500 and let your cash sit there for as long as possible.

I had a positive return on my portfolio in 2011, the majority of which consists of index funds. The key is diversification and a “buy and hold” strategy.

You Can’t Explain the Market

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Chao Deng, in his piece “Memoirs of a Market Reporter,” gets it (mostly) right about analysts/reporters trying to explain the short-term movements in the market:

[The] drudgery of writing the market-close story—stocks up on this; stocks down on that—began to make me wonder whether chasing the inevitable day-to-day ups and downs of markets was worth anyone’s time. Some critics say markets reporters must suffer from A.D.D., because short-term fluctuations in stock indices really don’t matter much in the long run. They say it’s absurd to pin a single narrative on spot news involving countless individual decisions, many of them made by robots. Too often, coverage favors one slant if stocks are up and another if stocks are down when, in fact, nobody really knows.

The depressing part is that markets beg for an explanation, and the public desires one. As if an explanation can assuage our fears:

[A] volatile turn in the markets simply begged for an explanation, sending thousands of extra readers my way.

Here’s the kicker: there is no good explanation for why the markets are down today(a must-read piece by Felix Salmon):

As a general rule, if you see “fears” or “pessimism” in a market-report headline, that’s code for “the market fell and we don’t know why”, or alternatively “the market is volatile and yet we feel the need to impose some spurious causality onto it”.

This kind of thing matters — because when news organizations run enormous headlines about intraday movements in the stock market, that’s likely to panic the population as a whole. They think that they should care about such things because if it wasn’t important, the media wouldn’t be shouting about it so loudly. And they internalize other fallacious bits of journalistic laziness as well: like the idea that the direction of the stock market is a good proxy for the future health of the economy, or the idea that rising stocks are always a good thing and falling stocks are always a bad thing.

Trying to put a reason behind short-term fluctuations is ultimately useless. Remember: you can’t time the market. And don’t believe anyone that tells you they can.