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2012 emotional investing presentation
- 4. 1300 1100 900 All returns are total returns in CAD 700 500 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Source: Bloomberg Sep 12 TSX S&P 500 EAFE
- 5. 1. Which would you prefer?
- 8. o o
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- 13. o o
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- 19. o o o
- 22. o o o o o o o o
Editor's Notes
- “I can calculate the motion of the heavenly bodies, but not the madness of people”-Sir Isaac Newton, in response to the 1720 collapse of the South Sea BubbleBritish company that at the time had a monopoly with trade in South America. However at that time, Spain controlled South America, Britian was engaged in the War of Spanish Succession with Spain, so their was no realistic prospect trade would ever take place.After insider trading and some policical bribery the company imploded and many people were ruined financially. Can you say Enron?
- What we know is that investors tend to be influenced more by the prospect of loss rather than by opportunity for gain. This is evidenced by most people’s response to questions 1 and 2.Usually, people respond “A” in question 1 and “B” in question 2. In other words, they are motivated by fear of loss than by possible gain. People normally take chances to avoid pain.
- Financial goals are best met by combining proper portfolio construction with the proper investor behaviour .
- Our journey today.First discuss why awareness of behavioral finance is important, in order to set the stage.Then we’ll discuss how investors’ returns are influenced by their emotions, the urge to time the markets, and the media.Finally, we’ll discuss the steps you can take with your investment professional, such as myself, to review or implement your personal financial plan.What we know is that investors tend to be influenced more by the prospect of loss rather than by opportunity for gain.
- Industry Developments past few decades:Diversification through Asset allocationModern Portfolio Theory, Portfolio Design and the Efficient FrontierMutual FundsIndex funds and ETFsSo that’s the science, but whats the reality?
- It provides a framework to understand “non-rational” investor and market behavioursBecause in reality:Investors are not totally rational, often act on imperfect information, and consistently make “non-rational decisions in predictable waysHarvard found that humans are not “wired to make rational decisions:Human beings are simply not good at accurately calculating oddsLeft to our own regards, we would make the same mistakes over and over again.
- When you invest, you accept whatever return the markets are paying investors in general.When you speculate, you attempt to beat that return - to do better than other investors are doing - through clever timing, forecasting, or selection. The implicit assumption is that you have knowledge or talents other investors lack.Ask yourself if you’ve ever said “I’m going to wait for the stock to come back to X dollars a share”
- Reason people say no, is that they
- ImplicationsTime “in the market” is critical.100 months in the market (like 100 flips of the coin) creates a quasi-aggregation effect
- People with unrealistic expectations may be tempted to try to time the market, thinking they can achieve better returns. This can lead to market timing behaviour, which can negatively impact the long-term performance of your investments.We all know that market timing may be challenging and risky. We often think about missing the “worst” days as a success, but what about missing the market’s “best” days because of emotions? This slide demonstrates the effects of missing the market’s “best” days. Investors trying to time the market often miss the “best” days, by letting their emotions determine when to get out.
- Missing just a few days of good performance can significantly reduce your overall return.Missing the best 40 days out of a decade
- News:A report of recent eventsPreviously unknown informationSomething having a specified influence or effect
- Results Investors being emotional. Being greedy and buying high and being fearful and selling low Returns are more dependent on investor behaviour than fund performance Buy-and-hold investors typically earn higher returns over time than those who time the market
- Another quote. Are you sensing a theme?
- Contraction / Recession, Trough, Expansion, PeakBull and Bear Markets in the TSX since September of 2012Average gain: =122% over 47 monthsAverage loss: -28% over 9 months
- How can you be successful?
- Thank you for your time.I’d like to open the floor to any questions that you may have about today’s presentation, ATB or any other business/ideas/comments you would like to discuss.Thanks again for your time and attention.