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…)
Posts Tagged ‘Behavioral Finance’
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…)
Posted in Commodities, financial planning, Inflation, Market Outlook, Uncategorized, Wealth, tagged beef, Behavioral Finance, Commodities, cookout, corn, food cost, Inflation, july 4th, steak on July 3, 2012 | Leave a Comment »
Many Americans will be feeling the effects of higher commodity prices this 4th of July.
If you have been to the grocery store lately, you’ve probably done a double-take at the register as your outdoor grilling essentials are being scanned. Steak and ground beef prices are up almost 6% over the last 12 months and a persistent drought in the mid-West is driving corn prices up dramatically. USDA recently reported that the average price that Americans pay for food will be up between 2.5% and 3.5% vs. what we paid in 2011.
However, before you ration the hot dogs and burgers and put a hold on serving steaks at your BBQ this year, lets take a look at the long-term history of food prices in the U.S.
Don’t Blame Inflation This Time
The good news is that (more…)
Posted in Active Investing, Behavioral Finance, financial planning, Investors, Long-term investing, Market Outlook, Market Timing, Markets, Stock Investing, Uncategorized, tagged Behavioral Finance, gains, investment risk, losses, safety, Safety Not Guaranteed, stock investing on June 22, 2012 | 2 Comments »
Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.
I haven’t seen it yet, but I love the conceit behind the indie film Safety Not Guaranteed, which has opened to excellent reviews. The words of the title are found in a mysterious classified ad in a local paper seeking a partner for time travel. The ad also states that applicants will need their own weapons and, ominously, “safety not guaranteed.”
That’s a pretty good metaphor for investing and for life in general. (more…)
Posted in 401(k), Active Investing, Asset Allocation, Behavioral Finance, Books, Diversification, ETFs, Financial Advisors, financial planning, Income Investing, Investors, Long-term investing, Markets, Mutual Funds, Personalization, retirement income, Risk, Uncategorized, tagged asset allocation, Behavioral Finance, Daniel Kahneman, David Swensen, Fees, investing, management fees, mutual funds, rebalancing, retirement planning, volatility on January 5, 2012 | 3 Comments »
Guest blog by Daniel Solin, Mint.com.
The evidence showing that most individual investors significantly underperform the market is compelling. A study done by Dalbar, a leading financial services market research firm, found that, during the 20 years from 1991 through 2010, the average stock fund investor earned returns of only 3.83% per year, while the S&P 500 returned 9.14%.
The ramifications of this study are startling. It’s very easy to capture the returns of the market. All you have to do is purchase index funds that track the returns you are seeking to replicate. You will pay low transaction fees, but your returns should be pretty much in line with the indexes.
There is overwhelming support for buying (more…)
Posted in Active Investing, Investors, Long-term investing, Market Outlook, Market Timing, Markets, Personalization, Rebalancing, Regular Investing, retirement income, retirement planning, Risk, Stock Investing, Uncategorized, tagged asset allocation, Behavioral Finance, diversification, MoneyBall, recency bias on December 21, 2011 | 1 Comment »
Guest Blog by Robert P. Seawright, CIO, Madison Avenue Securities.
On account of the success of Moneyball (both the book and the movie, nicely satirized here), baseball management is often compared to investment management, and with good reason. Moneyball focused on the 2002 season of the Oakland Athletics, a team with one of the smallest budgets in baseball. At the time, the A’s had lost three of their star players to free agency because they could not afford to keep them. A’s General Manager Billy Beane, armed with reams of performance and other statistical data, his interpretation of which was rejected by “traditional baseball men” (and also armed with three terrific young starting pitchers), assembled a team of seemingly undesirable players on the cheap that proceeded to win 103 games and the division title.
Unfortunately, much of the analysis of Moneyball from an investment perspective is focused upon the idea of looking for cheap assets and outwitting the opposition in trading for those assets. (more…)
Posted in Active Investing, Asset Allocation, Diversification, Financial Advisors, financial planning, Investors, Long-term investing, Low Cost Investing, Market Outlook, Market Timing, Markets, Portfolio Investing 101, Rebalancing, Regular Investing, Retirement, Risk, Stock Investing, Uncategorized, Volatility, Wealth, tagged Behavioral Finance, behaviorgap.com, Carl Richards, diversification, economy, market volatility, recession, stock market predictions, stock market rebound, Wall Street Journal on September 27, 2011 | 1 Comment »
Carl Richards’ is a favorite contributor here at the Portfolioist. We’ve interviewed him in the past (see, “How to Pick an Investment Advisor (Part 3): Carl Richards’ 3 Key Questions” by Nanette Byrnes) and remain a fan of his website, behaviorgap.com.
Using a Sharpie and a piece of card stock, Richards captures complex financial ideas in simple, easy-to-understand sketches.
Here’s his latest sketch and commentary on the recent market volatility. Enjoy–we certainly did. (more…)
Posted in Active Investing, Asset Allocation, Behavioral Finance, Bonds, Diversification, Income Investing, Investors, Leverage, Long-term investing, Low Cost Investing, Market Outlook, Market Timing, Markets, Mutual Funds, Rebalancing, Stock Investing, Uncategorized, Volatility, Wealth, tagged Antti Petajisto, Behavioral Finance, costs, hidden cost, index investing, market timing, S&P 500 Index on July 27, 2011 | 4 Comments »
While it is widely understood that index funds represent a low-cost way for investors to achieve broad diversification, a recently published research study sheds light on a “hidden cost” associated with investing in index funds.
Antti Petajisto, a professor at NYU’s Stern School of Business, conducted the original research for “The Index Premium and its Hidden Cost for Index Funds,” as part of his Ph.D. thesis at Yale in 2003.
The study examines the ways that stock prices change between the time that it is announced that a company will be added or removed from a stock index (such as the S&P500) and when the company’s stock is actually added. The research suggests that canny institutional investors can make a profit in this period that results in a drag on performance for index fund investors.
Posted in Active Investing, Asset Allocation, Behavioral Finance, body mass index, Books, Diversification, ETFs, Income Investing, Investors, Long-term investing, Low Cost Investing, Market Outlook, Market Timing, Markets, Personalization, Rebalancing, Regular Investing, Retirement, Stock Investing, Uncategorized, Volatility, tagged asset allocation, Behavioral Finance, BMI, Body Mass Index, bonds, book review, books, Charles Farrell, diversification, ETFs, financial planning, mortgages, volatility, Your Money Ratios: 8 Simple Tools for Financial Security on July 22, 2011 | 1 Comment »
I’m always on the lookout for great books on financial planning and investing. There are literally thousands of books on these two topics and that makes it hard for many people to figure out where to start.
I recently read Your Money Ratios: 8 Simple Tools for Financial Security by Charles Farrell and think that this is one of the best books on financial planning that I’ve ever read. If you don’t feel confident in how much you should be saving, can afford to spend on housing and other financial planning decisions, start by reading this book. (more…)
Posted in Active Investing, Asset Allocation, Behavioral Finance, Diversification, Investors, Leverage, Long-term investing, Market Outlook, Market Timing, Markets, Regular Investing, Risk, Scams, Stock Investing, Uncategorized, Volatility, tagged Behavioral Finance, David Swensen, diversification, hedge fund investors, hedge funds, long term investing, marketwatch, Risk, stock investing, stocks, Yale on July 1, 2011 | 1 Comment »
Brett Arends recently wrote a piece for MarketWatch in which he expressed the opinion that hedge funds are a sucker’s bet. He bases his argument on a fascinating study called Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn that was published in 2009. The authors of the study, professors from Emory University and Harvard, came to the conclusion that hedge fund investors would have (on average) been better off buying an S&P500 Index fund. So, if hedge funds have performed as badly as this academic study suggests, why have assets invested in hedge funds skyrocketed over the past 20 years? (more…)