While I was traveling last week on vacation, I read Michael Batnick’s latest book Big Mistakes: The Best Investors and Their Worst Investments. So often, when we think of great investors, athletes and leaders, we tend to define them by how successful they are. Many remember Michael Jordan’s game-winning shot to win the 1998 NBA Finals, but you don’t often hear that he lost to the Detroit Pistons 3 years in a row before winning his first NBA championship. Batnick’s book does a great job of highlighting the fact that not even the most intelligent and wealthiest investors come away with a perfect record. Often, when clients call to ask about the securities in their portfolios, they ask about the ones that are down (this is loss aversion at its finest). I try to focus on the fact that not every stock we buy is going to go up and
As many of you know, I am fascinated as to why people make the choices and decisions they make. Many people who work in our industry are focused on valuation ratios, dividends, profitability ratios, balance sheets and charts. With data becoming so easily and readily available these days, I think the extra “edge” these data points produce is becoming smaller and smaller. I believe one area of investing that remains important and useful is sentiment. Digging a little deeper, one can find some interesting cross-currents between expected returns and investor sentiment.
What exactly is investor sentiment? In the most basic sense, investor sentiment is how investors feel about the overall direction of the markets or a particular stock.
One way in which investor sentiment is measured is through the AAII Sentiment Survey. This is a widely cited survey and AAII stands for the American Association of Individual Investors. This association is made up of roughly 150,000 investors, with the average member being in their mid-60s with a median portfolio over $1M. Every week, the AAII surveys about 300 members asking them if they feel bullish, neutral or bearish about the direction of the stock market for the next 6 months.
Those of you who know me or have read some of my previous blog entries know I am a fan of behavioral finance and psychology. A couple of months ago I read Richard Thaler’s book Misbehaving, which chronicles his findings that would forever change the way we think about economic decisions. One of the basic premises of economic theory is that human beings always make rational decisions for their best interests. Thaler, along with the works of Israeli psychologists Danny Kahneman and Amos Tversky, found that while people said they would act rational, their actions proved otherwise. Their studies showed that humans are much more prone to error in their decisions and judgments than we think.
After Thaler won the Nobel Prize for economic sciences in October of last year, he said “We’re more like Homer Simpson, than we are like Spock. In myriad ways, we do things because we’re human. We do things that are predictably different from what economists expect us to do which can help inform better economic models and better monetary policy.” Some of the most interesting highlights from Misbehaving include the following...
Today is International Women’s Day and it made me think of a very interesting article I came across from Bloomberg Gadfly titled “The Next Warren Buffett Will Be a Woman”. Some of the arguments include:
A 2010 study by Vanguard showed that men were more likely to panic and sell stocks in a financial crisis
A University of California study showed that men are more overconfident than women which leads to more trading activity and worse performance compared to women
A Boston Consulting Group study noted that “women are more intent on understanding the risk-return profiles of investments…” and “…are less likely to be distracted by short-term performance”
A 2017 research study found that higher testosterone levels reduced the ability to make cognitive decisions and were more likely to act on impulses
You can do a quick search on Google and find the definition of risk as “a situation involving exposure to danger.” With the recent volatility in the stock markets, we hear and read headlines that would make you think the world is coming to an end. I think the reason we see so much of this is because it plays on our primal fears as human beings, it gets the eyes and ears perked up.
If you thought this was going to be another stuffy blog post about an economic or stock market forecast, you are mistaken. While we spend numerous hours researching, debating and discussing how we should position client portfolios for the coming year and beyond, I have grown further skeptical of “market outlooks” that are published annually in December. Instead of boring you with a bunch of market commentary or resolutions, I will make ten observations and recommendations for 2018, not all of which are investment related.
I was recently reading a blog about predictions and how often people are wrong in their predictions, whether it be about a particular stock, sports team or political event. Every baseball analyst on ESPN predicted that the Cleveland Indians would beat the New York Yankees in the ALDS this year and we all know how that played out. As a behavioral economics "junkie" and an avid reader, learning and participating in both the financial markets and sports, I often find myself trying to figure out ways in which I can increase my odds of being right about a particular event or stock. Notice that I am staying away from the word “prediction” because often people make predictions and don’t admit when they are wrong, or they are right but because they were lucky. Too often, we judge based on outcomes and not on process.
Topics: Stock picking
As someone who studied economics in college, I have always been fascinated by human decision making, not just in business but in life. I recently was listening to a Bloomberg podcast interview with Daniel Kahneman that was recorded last year. Kahneman is a professor emeritus of psychology at Princeton University, the author of the best-selling book Thinking, Fast and Slow and one of the world’s most renowned behavioral economists. Behavioral economics is the study of the psychological, emotional and social factors that impact the economic decisions we make. Below are some interesting points and examples Kahneman discussed:
Checking in at the quarter mile mark
With about 1/4th of the year almost over, I thought it would be good to check in on what market sectors are performing the best and worst thus far in 2017. Below is a table that shows the S&P 500 return YTD and each sector of the S&P 500. It is interesting to note that the sector that most Wall Street strategists recommended buying at the start of this year (financials) is underperforming the overall market. Also, other so-called “Trump Trade” sectors such as industrials and energy are underperforming so far. On the other side of the coin, consumer staples and utilities were universally unloved by this same group, yet they are outperforming the S&P 500. We don’t want to draw too much from this but it is nonetheless something to note, especially considering how often we hear about narratives in regards to price action on Wall Street. See the previous 2017 Stock Market Contest Blog