Posted in Behavioral Finance, Global Investing, Markets, tagged earthquake, economy, exchange rate, GDP, Japan, Japanes stock market, Nikkei, Nikkei 225 index, tsunami, Yen, Yen exchange rate on May 30, 2013 | Leave a Comment »
One of the most interesting market stories in the last week is the big drop in the Japanese stock market. Japan is the third-largest economy in the world, ranked by GDP. The values of the Japanese stock market, as measured by the Nikkei 225 index, dropped by 7.3% on May 23rd, and then suffered another fairly dramatic one-day decline of 3.2% on May 27th.
Over the last five sessions, the iShares MSCI Index ETF, EWJ, has dropped by almost 10% (see chart below). (more…)
Posted in Behavioral Finance, Financial Advisors, Long-term investing, Regular Investing, tagged bull market, consistent investing, index fund, investor returns, lost decade, market timing, Morningstar, recovery, retirement planning, return data, under-performance, wealth accumulation on May 22, 2013 | Leave a Comment »
As the market rally persists, many investors will no doubt be kicking themselves and wishing that they had bought in earlier. Some will convince themselves that they better get on board or risk missing out on this bull market. There are many good reasons to invest money, but choosing to get in because of the potential gains that you could have made is not one of them. In the same way that people capitulate and sell out near market bottoms, there is also a big behavioral driver that seems to make people capitulate and join the herd towards the end of big bull markets. I am not saying that we are poised for decline (I am not a good market timer), but simply noting that buy or sell decisions made on the basis of what you wished you had done last month or last year is often truly dangerous. (more…)
Posted in Behavioral Finance, Investors, Mutual Funds, Stock Investing, tagged hedge funds, ideologies, investing strategy, price-to-earnings, value stocks on May 6, 2013 | Leave a Comment »
Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.
Value has persistently outperformed over the long-term. Why is that?
In the most general terms, growth stocks are those with growing positive attributes – like price, sales, earnings, profits, and return on equity. Value stocks, on the other hand, are stocks that are underpriced when compared to some measure of their relative value – like price to earnings, price to book, and dividend yield. Thus growth stocks trade at higher prices relative to various fundamental measures of their value because (at least in theory) the market is pricing in the potential for future earnings growth. Over relatively long periods of time, each of these investing classes can and do outperform the other. For example, growth investing dominated the 1990s while value investing has outperformed since. But value wins over the long haul. (more…)
Posted in Behavioral Finance, Investors, Market Timing, tagged behavioral bias, bias blind spot, cognitive bias, motivated reasoning, scientific method on January 22, 2013 | 2 Comments »
Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.
Pretty much since the day I wrote it, my Investors’ 10 Most Common Behavioral Biases has been the most popular post on this blog. It still gets a surprising number of hits all these months later. Due to the pioneering work of Daniel Kahneman and others, nearly everyone in the financial world acknowledges the reality of cognitive and behavioral biases and their impact on people, the markets and life in general. It’s a very popular subject. (more…)
Posted in Behavioral Finance, Bonds, Dividends, Risk, Stock Investing, tagged Apple, Behavioral Finance, IPO, market price, risk capital, shareholders on January 16, 2013 | 2 Comments »
The price of a share of Apple (AAPL) is almost 30% below the high that it set back in September 2012—about five months ago. Even before its peak, the price of Apple shares had already made it the most valuable company in history. In those heady times, Apple shares reached $702. Today, they are at $503. Even today, however, Apple remains the largest single holding in the S&P 500 at about 3.6% of the total index. It is mind boggling to consider that the market value of the most valuable public firm in history could decline by 30% in five months, without some sort of catastrophic event. But this is the situation and there are some lessons to be drawn. (more…)
Posted in Behavioral Finance, Investors, Risk, Stock Investing, tagged Apple, behavioral bias, Facebook, First Solar, game theory, Goldman Sachs, Groupon, Herd Behavior, solar energy, Warren Buffett on November 15, 2012 | Leave a Comment »
In the first four parts of this article, I have discussed a number of well-known behavioral biases that cause investors to make decisions that are, to put it kindly, less than optimal. In this final installment, I summarize how best to avoid these costly traps.
As these blog posts have been published over the past couple of weeks, the issues are much in evidence. Apple (AAPL), long the darling of the market, has lost favor and Groupon (GRPN) seems to be following a relentless downward spiral. Surely many investors in Groupon must be asking themselves how they could possibly have seen the company as a good bet. Apple stock, which was trading at $700 in mid-September, is currently at $544, a decline of 22% in two months. The news that has come out on Apple does not seem sufficient to justify such a broad shift in the market’s consensus as to the long-term value of Apple as a company. And, of course, we have the poster child of behavioral bias: Facebook (FB). How is it possible that the market’s consensus view of the share value of such a widely held company could be almost 50% below its first day closing price of $38? As Warren Buffett is quoted as saying, in the short-term the market is a voting machine and in the long-term the market is a weighing machine. When voting overwhelms weighing, investor psychology is dominating.
Posted in Behavioral Finance, Investors, Retirement, retirement planning, Stock Investing, tagged behavioral bias, delayed gratification, EBAY, Herd Behavior, self-attribution bias on November 7, 2012 | Leave a Comment »
In earlier installments of this article, I have discussed some behavioral biases that tend to influence people to make bad investing decisions. In this post, I explore several more of these biases. The focus of this piece is on how we perceive ourselves and our ability to make independent decisions. One of the key ideas within rational markets is that people gather public information and make informed decisions. Without rational market participants, it is unlikely that markets themselves will converge to appropriate prices for traded assets (stocks, bonds, real estate, etc.). (more…)
Posted in Behavioral Finance, Inflation, Investors, Long-term investing, Stock Investing, tagged Amazon, behavioral anomalies, bond investors, Chipotle, glamour stocks, Groupon, investment fads, IPOs, LinkedIn, lotteries, lottery, marketing, Panera, Starbucks, valuation, Zynga on November 2, 2012 | 1 Comment »
In this post, I continue the discussion of behavioral finance with examples of some of the key behavioral biases and where they can be seen in recent market behavior. The specific focus of this post is those biases that drive investment fads and bubbles.
It is almost invariably the risk that we ignore that really hurts us. The market today is, for the most part, discounting inflation risk. Historically, inflation has been a major threat, especially to bond investors. Today, with yields at historic lows, the implied inflation expectations are exceedingly low. The process by which the market comes up with rationales as to why a risk, that has historically done major damage, no longer matters is at the heart of every bubble. We have had the housing bubble (in which investors became convinced that houses were an infinite source of capital appreciation), the Tech bubble (in which investors decided that valuations based on earnings were irrelevant) and now the government debt bubble (in which investors are implicitly assuming that inflation risk is no concern). The bubbles get out of control largely because people assume that what has worked recently will continue to work. (more…)
Posted in Behavioral Finance, Investors, Market Timing, Markets, Stock Investing, Wealth, tagged Behavioral Finance, clean energy, Gambling, game theory, gaming, green tech, odds, software compaines on October 26, 2012 | 4 Comments »
Watching the market this year has been like observing an exercise in game theory and behavioral finance, and the two fields are closely related. Game theory is the study of how a rational person makes decisions in uncertain situations. As the name suggests, game theory was developed with the intent of developing optimal strategies in games in which chance or the decisions of an opponent play a role in your outcome. Game theory focuses on how rational players can make the best decisions to maximize their satisfaction. Behavioral finance adds the nuance that, in real life, people do not necessarily have all available information and, even if they do, they often make decisions that are inconsistent with those made by a perfectly-rational and fully-informed decision maker. (more…)
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