Jason Zweig at the Wall Street Journal published a disturbing article that deserves more attention. The basic story is this. A number of banks sold a complex financial product to retail investors who have subsequently lost quite a bit of money. Here is the basic pitch that was apparently made to individual investors in 2012. You are going to buy an investment product that is currently invested in bonds and is producing 8% in income per year. The performance of this product is tied to the stock price of Apple, however. In exchange for the high income, you take on the risk of a decline in Apple’s stock price. These products were sold when Apple stock was soaring, so a fair number of people apparently saw this as a favorable bet. With the stock down more than 30% from its peak, many of these investors have lost a considerable amount of money. Read Zweig’s piece for more details. These products have a number of variations and he discusses one specific structure. Here is another. The title of Zweig’s article, How Apple Bit Bondholders, Too, gives the impression that bonds were responsible for these losses. This is not the case, but the title serves to illustrate the subtlety of the problem. Continue reading
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. Continue reading
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.
We put that question recently to David Neubert.
A man of wide experience, Neubert spent ten years at Morgan Stanley in a number of trading roles including head of Global Portfolio and Program Trading. Then he moved on to Lehman Brothers where he was Head of Equity Trading Strategy and Technology for a couple of years. He knows how the big institutions on the Street trade. After retiring (early!) in 2005, he spent a few years working on investor education initiatives. Continue reading