Applied behavioral finance


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  • Most market participants are victims of how markets actually workYou wouldn’t do brain surgery without understanding the brainThe market is not an intuitive system
  • Ask:Are great traders born or made?Effective rules and principals can be taught
  • Ask: how do we value assets?Ask: how do we value commodities?Ask: how do we value equities?Ask: how do we value bonds?
  • Markets are made of people and algorithms (programed by people)Market, just like people, operates on classic emotional cycles
  • Time to tear down everything you’ve previously learned
  • What is a house worth?We just went through a massive housing bubble Who decides how we should value things?
  • Value of an asset is whatever you can sell it for todayValue is set by supply and demand for an assetWe have historical norms called multiples and valuation methods to help guide usP/E rationDCF analysis
  • Efficient market theory worst blunder in economics historyEconomists attempt to fit complex things into simple systemsIf markets were efficient, we wouldn’t have marketsDifferent participants have different levels and types of informationDifferent participants have different motives
  • Does this look like an efficient marketWhy did price change so rapidly here?“Markets can deal with good news, deal with bad news…..”
  • Markets are made of peoplePeople are inherently irrationalAny number of factors causes people to be irrational
  • Can’t assume markets will act in rational waysMarkets have phobias and biasesGo through example of earnings beat and stock drop
  • Buy and hold is a horrible promise sold to you by mutual fundsYou don’t have 100 years to grow your assets
  • Markets do not move in straight linesThere are draw downsGet caught in a draw down and it can take long time to break evenWhat happens if you’re about to retire like baby boomers in ‘07
  • Did buy and hold work here?
  • Modern portfolio theory has been proven wrongCross asset correlation is higher than everThere is no free lunch from diversification
  • Markets are more volatile than ever increasing correlations
  • Based on evolution, your brain is wired to do certain thingsEffective market operation goes against many of these thingsWe need to rewire your brain to follow a different set of rules
  • Controlling fear is the most important skill to master“fear and greed”, no just FEARControl fear by having a system
  • Fear produces replicable patters in all markets on all timeframesUnderstanding where a market is in this cycle is important
  • How do we know where we are in the pattern?Use technical analysis to decode the market like a rosetta stoneTechnical analysis teaches us patternsPriceVolumeDerivatives of those twoThese patterns don’t change
  • Not trying to predict the futureUse technical analysis and pattern recognition to put odds in favorWe don’t care about being right or predicting the futureCare about understanding the system
  • DON’T LOSE MONEY!#1 job in the market, protect your assets
  • It’s all just numbers and symbolsShouldn’t be buying assets for an ownership stakeGoal is to extract value from the marketMany different strategies to extract value
  • Markets don’t changeFear still guides all humansSame patterns in human emotionHigh frequency trading does not change thisHumans program computers and can unplug them
  • Economy is not the marketEconomy is just 1 factor in the marketStop worrying about the economy and focus price
  • You are not smarter than the marketEverything else lies besides price, it never liesTell story of early short sellers
  • What story do you see here?
  • best overpast 12 months have better chance of performing well over next 12
  • Momentum helps us to narrow down which assets to look atMomentum cuts both ways, long and short side
  • Buying begets buying, selling begets sellingBuy strength, sell weaknessMove with the market, not against it
  • Not looking to buy bottomsBuy the assets that everyone wants, not the ones they don’t
  • Institutions drive the marketInstitutions accumulate and distribute stock in predictable patternsThey look for earnings and revenue accelerations, is the company growing?Narrow down your list to only these stocks
  • Support and resistance is supply and demandWhen the trend ends, get off!There will always be another trend to catchDon’t need to catch the whole trend
  • Don’t touch broken chartsBroken charts give clues about broken companiesUnderdogs are good in Hollywood, not hereOwn the winners, short the losers
  • Cash is a positionMarket does not give equal opportunity at all timesPlay the odds when they are in your favor
  • Just like learning a sport or skillTakes time to rebuild neural connections just like building muscle memoryHave a set of rules and stick to themUnderstand your own emotions, be self aware
  • Questions
  • Applied behavioral finance

    1. Applied behavioral finance<br />How to Think About Markets Like a Hedge Fund Manager<br />
    2. Who Am I and Why Are You Here<br />
    3. Who Are You and Why Am I Here<br />
    4. Who Are You and Why Am I Here<br />
    5. What We Want to Change Today<br />
    6. What We Want to Change Today<br />
    7. What is an Asset Worth?<br />
    8. What Does the Chart Say to You?<br />
    9. What Does the Chart Say to You?<br />
    10. What Does the Chart Say to You?<br />
    11. What Does the Chart Say to You?<br />
    12. What Does the Chart Say to You?<br />
    13. What Does the Chart Say to You?<br />
    14. What Does the Chart Say to You?<br />
    15. What Does the Chart Say to You?<br />
    16. The Cycle of Life<br />
    17. Tear It Down<br />
    18. The 5 Market Myths<br /> Assets have inherent value<br /> Markets are efficient <br /> Markets are rational<br /> You can’t time the market so buy & hold<br /> Diversify your investments<br />
    19. Assets Have NO Inherent Value<br />
    20. Assets Have NO Inherent Value<br />
    21. Markets are NOT Efficient<br />
    22. Markets are NOT Efficient<br />
    23. Markets are NOT Rational<br />
    24. Markets are NOT Rational<br />
    25. Buy and Hold Does NOT Work<br />
    26. Buy and Hold Does NOT Work<br />
    27. Buy and Hold Does NOT Work<br />
    28. Diversification Works?<br />
    29. Diversification Does NOT Work<br />
    30. Rewire Your Brain<br />
    31. Fear Drives the Market<br />
    32. Patterns in the Chaos<br />
    33. Technical Analysis: What Is the Market Telling You?<br />
    34. Odds NOT Crystal Balls<br />
    35. Your New Mantras<br /> Don’t lose money<br />It’s all just numbers and symbols<br />Markets don’t change<br />The economy is not the market<br />Don’t fight the market<br />
    36. Don’t Lose money!<br />
    37. It’s All Just Numbers and Symbols<br />
    38. Markets Don’t Change<br />
    39. The Economy is NOT the Market<br />
    40. Don’t Fight the Market<br />
    41. Strategy: Momentum Wins<br />
    42. Strategy: Momentum Wins<br />
    43. Strategy: Momentum Wins<br />
    44. Strategy: Momentum Wins<br />
    45. Strategy: Momentum Wins<br />
    46. Buying Begets Buying, Selling Begets Selling<br />
    47. Buy High, Sell Higher<br />
    48. Earnings and Revenue Acceleration<br />
    49. Use Your Big Red Crayon!<br />
    50. Don’t Touch Broken Charts!<br />
    51. Cash is a Position<br />
    52. Exercise Your Mind to Rewire Your Brain<br />
    53. Thoughts On Apple?<br />
    54. Exercise Your Mind to Rewire Your Brain<br />
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