Thursday, 5 August 2010

Manny Pacquiao’s boxing and the stock market

Written by John Mangun
Outside the Box
Business Mirror

It is becoming more obvious each month that the long-awaited boxing match between Manny Pacquiao and Floyd Mayweather is never going to happen. I never thought that it would, and I will be surprised if it ever does go off.

There have been many comments and excuses from both sides. First, there were the disputes about who should receive how much for their participation. Then, the Mayweather allegations that Pacquiao was on performance-enhancing drugs. Pacquiao countered that Mayweather was simply afraid. Contracts almost signed with negotiations suddenly failing at the end. Each fighter saying that he was anxious to fight and that it was the other person’s fault. Both fighters found other opponents easily, leading the commentators to say that each was just raising the excitement for a bigger payday.

The fact is that both men understand one of the basics of the fact of war and investing.

Many decisions we make in life—from the seemingly insignificant to the serious—are based on incomplete thinking and analysis. Because people do not think things through thoroughly enough and with enough looking at the big picture, we tend to base too many of our decisions on how much we assume our chances are for success.

Driving down the highway, we decide to speed up and overtake the car in front of us based on whether we think we can make it without causing an accident.

We look at the probability of success or failure, the odds of winning or losing. But there is another consideration that we need to factor in to our decision-making.

Both Pacquiao and Mayweather believe they can win. But both also know that there is a possibility of losing. A confusing unseen punch or a slip of the foot, and it’s all over. So, we and the fighters, in fact, know that on any given day, either one could come out the victor. The next and perhaps more important consideration than winning or losing comes into play. What do you win? What can you lose?

Driving down the road, you see you’re off ramp just ahead and you know you have to cut the other car off to make your exit. Maybe you can do it safely or not. Therefore, you quickly think about the reward of getting off where you want to go, or driving to the next turnoff and having to spend five minuets coming back. Are those five minutes worth the possibility of a car accident that could ruin the rest of your day?

If Mayweather wins, he will be the man who stopped Pacquiao and retired undefeated. But if he loses, the only thing he will be remembered for after his long-undefeated career is losing to Pacquiao. “Floyd Mayweather? He is the guy Pacquiao beat.”

If Pacquiao wins, everyone would say, “See. That proves he was the best pound-for-pound boxer in the world.” But everyone is saying that right now, so what more can he gain?

But if Pacquiao loses, then he ends as a loser, regardless of a magnificent career that led to being the best pound-for-pound boxer in the world.

Further, no matter who might win, no one, including the boxers, would be satisfied without a rematch. Therefore, a single fight really means nothing in the big picture. And the loser of two fights would be disgraced.

In this case, no matter what the odds of success or failure might be, each has too little to gain and too much to lose by fighting the other.

People buy lotto tickets “knowing” they are going to lose. But the loss is so small in comparison with the amount of potential gain, that it makes the wager, the investment, sensible.

The first risk/reward concern is the probability of winning or losing. The second factor is how much you lose against how much you can win.

In order to be a successful stock-market player, the second consideration is critical.

For over a year, the market has been trending up. That puts the odds of success in your favor. While there have been issues that have doubled and tripled in price, there have been some big losers. GMA 7 is down 30 percent since reaching its high. Paxys is still down 90 percent from its high in 2007. Others went up and are now going down.

Assume then that it is 50/50 that your stock will go up or down. If it goes up, what is the potential gain? If it goes down, what is the possible loss? Charting and technical analysis can help with your decision-making by looking at supports and resistances.

Support is the price that investors consider is cheap and theoretically where everyone comes in to buy. Resistance is the price that is too high and most people want to sell. Therefore, you want to buy near support and sell near resistance. And further, you want to buy near support when resistance is a long way up to maximize your potential gain.

One issue on the PSE is 9 percent above support and more than 35 percent below its resistance. The trend is neutral. It is a 50/50 proposition. The risk is 10 percent since if it goes lower than that, the stock will fall considerably farther. But the upside potential is large.

If and when you find opportunities like this, it becomes much more sensible to trade without sleepless nights. You know where the downside stop loss point is and you know the high price objective that you are hoping to reach.

The stock market is not about winning and losing. It is about losing small and winning big and support and resistance levels can make that easier.

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