ABM Investment Seminar                 Investing – Navigating the                 Choppy Waters                   Septembe...
Agenda                 1         2                3      Embrace        ‘Short-Termism’   Fear, Greed &    Uncertainty –  ...
Predictions      “If I were a gambler, I’d take even money that             England will not exist in the year 2000”      ...
We all make predictions, sometimesinadvertently...!                        “I n e v e r                          m ake    ...
We all make predictions    Crossing the road; Saving for     retirement     Based on huge amounts of data    Weather - ...
Why are Predictions Useless?         For want of a nail, the shoe was lost... Small things, can magnify quickly &   unpre...
Newtonian Principles Don’t Apply3  laws to explain 99% of economic   phenomena We             are not electrons and neut...
The Problem with Predictions    Usually based on extrapolating recent     trends     Driving a car with no hands    Rev...
Extrapolations – Lessons from The King                      In 1960 there were 216 Elvis                             imper...
Objective Evidence   Denrell & Fang, June 2010     Wall Street Journals Survey of Economic      Forecasts 2002-2005   “...
Objective Evidence   Philip Tetlock – fifteen year study     28,000 forecasts from 300 experts from      1988 to 2003.  ...
Why do we want to know the future?     Desire to feel we are in control     Uncomfortable to think the ‘experts’ don’t k...
Why do we want to know the future?September 2012                  13
Investment Implication of This? Breeds   overconfidence Lesson’s  from   Blaise PascalSeptember 2012                    14
Pascal’s WagerSeptember 2012   15
Investment Implication of This?   Go all in or embrace the uncertainty?      Diversification!   Chance/randomness   Do...
Agenda                        2                 ‘Short-Termism ‘                 - not in your long                    ter...
Who Said This?“As long as the music is playing you’ve   got to get up and dance. We’re still                dancing”.   Ch...
Failing Conventionally    Prince understood the ‘party’ would     eventually end    It is difficult to maintain a long t...
Short Term Performance                         20 September 2012
Short Term Performance                         21 September 2012
Timing                 22September 2012
“We have met the enemy and he is us.” Pogo September 2012                        23
Average Holding Period for StocksSeptember 2012                      24
How Do We Avoid This?   Turn off CNBC   Think of risk differently than price variation     Transfer of purchasing power...
Agenda                      3                 Fear, Greed &                  TemptationSeptember 2012                   26
Fear, Greed, Temptation    Fear lies at the heart of the psychology of bear     markets .    Emotion has primacy over co...
Would you accept this bet?  Imagine            being offered the following     bet:  Bet            €1 on a flip of a co...
Psychology of Bear markets September 2012              29
Implications for Investors When taking    risk is rewarded over LT,    players who can’t feel fear perform better Fear d...
Greed & Temptation...September 2012                           31
Greed & Temptation...September 2012                           32
Greed & Temptation...September 2012                           33
Greed & Temptation...September 2012                           34
Greed & Temptation...September 2012          35
Investing & Emotions   Investment should be influenced by       Current situation, i.e. degree of value on offer       ...
Summary   There is no easy fix, guarantee, or certainly no    holy grail,     Investing is difficult – requires high EQ,...
www.icubed.ie                 www.valueinstitute.org                 Disclosure                 iCubed is an investment tr...
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2012 Sep 28 - Gary Connolly - Investing, Navigating the Choppy Waters

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2012 Sep 28 - Gary Connolly - Investing, Navigating the Choppy Waters

  1. 1. ABM Investment Seminar Investing – Navigating the Choppy Waters September 2012September 2012 1
  2. 2. Agenda 1 2 3 Embrace ‘Short-Termism’ Fear, Greed & Uncertainty – - not in your Temptation Financial Market long term Predictions are Interest UselessSeptember 2012 2
  3. 3. Predictions “If I were a gambler, I’d take even money that England will not exist in the year 2000” Paul Ehrlich, The End of Affluence “Road signs of the 1990’s will read: NO WHEELED VEHICLES ON THIS HIGHWAY” Arthur C. Clarke, Profiles of the future, predicting hovercraft would replace cars and ships!"We dont like their sound, and guitar music is on the way out.“ Decca Recording Co. rejecting the Beatles, 1962September 2012 3
  4. 4. We all make predictions, sometimesinadvertently...! “I n e v e r m ake p re d ic tio n s and I never w ill”September 2012 4
  5. 5. We all make predictions Crossing the road; Saving for retirement  Based on huge amounts of data Weather - useful modelSeptember 2012 5
  6. 6. Why are Predictions Useless? For want of a nail, the shoe was lost... Small things, can magnify quickly & unpredictably...Chaos Theory ButterflySeptember 2012 6
  7. 7. Newtonian Principles Don’t Apply3 laws to explain 99% of economic phenomena We are not electrons and neutrons! Physics Envy!September 2012 7
  8. 8. The Problem with Predictions Usually based on extrapolating recent trends  Driving a car with no hands Reversion to the mean Sinister side to extrapolating the past...September 2012 8
  9. 9. Extrapolations – Lessons from The King In 1960 there were 216 Elvis impersonators In 1970, there were 2,400 By 1980, there were an estimated 6,300 By 1992, there were 24,000 By the year 2020, ONE in FOUR people will be Elvis impersonators, bringing the total to 1.7 billion worldwideSeptember 2012 9
  10. 10. Objective Evidence Denrell & Fang, June 2010  Wall Street Journals Survey of Economic Forecasts 2002-2005 “Rather than being an indication of good judgment, accurately forecasting a rare event, may in fact be an indication of poor judgment”September 2012 10
  11. 11. Objective Evidence Philip Tetlock – fifteen year study  28,000 forecasts from 300 experts from 1988 to 2003. “We reach the point of diminishing marginal predictive returns for knowledge disconcertingly quickly”September 2012 11
  12. 12. Why do we want to know the future? Desire to feel we are in control Uncomfortable to think the ‘experts’ don’t know any better than us “He’s often wrong, but he’s never in doubt” Norman LamontSeptember 2012 12
  13. 13. Why do we want to know the future?September 2012 13
  14. 14. Investment Implication of This? Breeds overconfidence Lesson’s from Blaise PascalSeptember 2012 14
  15. 15. Pascal’s WagerSeptember 2012 15
  16. 16. Investment Implication of This? Go all in or embrace the uncertainty?  Diversification! Chance/randomness Does not render people unable to make decisions, makes them more cautiousSeptember 2012 16
  17. 17. Agenda 2 ‘Short-Termism ‘ - not in your long term InterestSeptember 2012 17
  18. 18. Who Said This?“As long as the music is playing you’ve got to get up and dance. We’re still dancing”. Chuck Prince, CEO Citigroup, Interview with FT July 2007September 2012 18
  19. 19. Failing Conventionally Prince understood the ‘party’ would eventually end It is difficult to maintain a long term view, with penalties in short term  Unemployment line! He chose to keep dancing and failed conventionally 19September 2012
  20. 20. Short Term Performance 20 September 2012
  21. 21. Short Term Performance 21 September 2012
  22. 22. Timing 22September 2012
  23. 23. “We have met the enemy and he is us.” Pogo September 2012 23
  24. 24. Average Holding Period for StocksSeptember 2012 24
  25. 25. How Do We Avoid This? Turn off CNBC Think of risk differently than price variation  Transfer of purchasing power Try not to obsess over short term results 25September 2012
  26. 26. Agenda 3 Fear, Greed & TemptationSeptember 2012 26
  27. 27. Fear, Greed, Temptation  Fear lies at the heart of the psychology of bear markets .  Emotion has primacy over cognitive functions.September 2012 27
  28. 28. Would you accept this bet?  Imagine being offered the following bet:  Bet €1 on a flip of a coin with payouts:  Plus €2.50 for win (€1.50 profit)  Minus €1 for loss  Would you invest? September 2012 28
  29. 29. Psychology of Bear markets September 2012 29
  30. 30. Implications for Investors When taking risk is rewarded over LT, players who can’t feel fear perform better Fear drives people to ignore bargains if they have experienced previous lossSeptember 2012 30
  31. 31. Greed & Temptation...September 2012 31
  32. 32. Greed & Temptation...September 2012 32
  33. 33. Greed & Temptation...September 2012 33
  34. 34. Greed & Temptation...September 2012 34
  35. 35. Greed & Temptation...September 2012 35
  36. 36. Investing & Emotions Investment should be influenced by  Current situation, i.e. degree of value on offer  Not governed by our prior experiences Blank slate - hard mentally Barriers to sensible investment decision making in a bear marketSeptember 2012 36
  37. 37. Summary There is no easy fix, guarantee, or certainly no holy grail,  Investing is difficult – requires high EQ, not (necessarily) IQ Drowning in information, but starved of knowledge  Information is a commodity. Cut through the ‘noise’. Will always be more ‘Art’ than science  ABM will always be in demand! If you find yourself being influenced by the 37 predictions of a financial soothsayer...September 2012
  38. 38. www.icubed.ie www.valueinstitute.org Disclosure iCubed is an investment training, research and consulting company for financial advisers. This document is intended for professional investors and should not be distributed to retail investors. iCubed has based this document on information obtained from sources it believes are reliable but which have not been independently verified. The opinions contained in this document are based upon publicly available information at the time of publication and are subject to change without notice.September 2012 38

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