February 1, 2008

Market Volatility

Taking a look at the chart published by BusinessWeek indicate to me that market volatility is returning to normal rather than being abnormal. Volatility have been reduced in the previous 5 years but the market was no stranger to it and you should not react and base your investment decision on it.
Financial crises like this one seems to be occurring at a more frequent pace than before. And they will continue to do so until investor, regulation and institutions catch up to the financial innovation that occurred in the past 20 years. The frequency in credit and liquidity crises are mainly as a result of financial derivatives. Now I am not knocking derivatives like Warren Buffet as they think they are useful as risk management tools. However, any tool created can be abused by lack of regulations and fraud and this is what is happening in the market today. Markets are left on its own to police itself on the use of derivatives and lack of oversight encouraged fraud.

However, I think that human and society ability to adjust and deal with issues like this will overcome these challenges. In the meantime as an investor I will keep looking for good buys not deterred by the "sky is falling crowd".

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