» Posted by Martin Weil on February 19, 2010

Jonah Lehrer, author of How We Decide, updates and explains the classic Kahneman & Tversky loss aversion experiment that is at the foundation of behavioral economics in his blog post. A short read and a very accessible explanation of how our emotions distort the human decision-making process, and why the economics theory that man is a rational actor is not based in reality. One excerpt that investors should note:

Loss aversion also explains one of the most common investing mistakes: investors evaluating their stock portfolio are most likely to sell stocks that have increased in value. Unfortunately, this means that they end up holding on to their depreciating stocks. Over the long term, this strategy is exceedingly foolish, since it ultimately leads to a portfolio composed entirely of shares that are losing money.

» Posted by Martin Weil on January 10, 2010

Bob Farrell, chief market strategist at Merrill Lynch until 1992, penned this particular list. Pretty much a summary of the collective wisdom on markets that every investor should understand.

1. Markets tend to return to the mean over time.
2. Excesses in one direction will lead to an opposite excess in the other direction.
3. There are no new eras - excesses are never permanent.
4. Exponential rising and falling markets usually go further than you think.
5. The public buys the most at the top and the least at the bottom.
6. Fear and greed are stronger than long-term resolve.
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chips.
8. Bear markets have three stages.
9. When all the experts and forecasts agree - something else is going to happen.
10. Bull markets are more fun than bear markets.

Reprinted from The Big Picture

» Posted by Martin Weil on December 17, 2009

Apparently the new reform legislation pushed by Barney Frank contains the following language "Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities."

This is not in any way in the consumer interest, as noted in Fox Business' Sweeping Financial Reforms Don't Clean House.

"...one of the dirty little secrets in the financial advice world, namely that some people you trust for advice may not have your best interests at heart. Brokers -- in fact any type of intermediary whose primary job is selling products -- live by the standard of "suitability," meaning that the investments they select and sell to clients must be suitable for the buyer. ... By comparison, investment advisers who make money giving advice rather than selling products must live by a "fiduciary standard," meaning they have a responsibility to put your best interests ahead of their own. If it's not in your best interests -- even if it's suitable and appropriate -- they shouldn't sell it."

Given the choice between someone who offered you investment choices that they thought suitable and appropriate for you and someone who offered you choices they believed were in your best interests, which one would you choose?

» Posted by Martin Weil on December 02, 2009

Good while it lasts but these things usually end in tears. Chart from the WSJ.

» Posted by Martin Weil on November 28, 2009

"Property developers tend to be highly geared and very procyclical in their revenue flows and access to the capital markets. During construction slumps they drop like flies. Because the property sector is risky (ask Donald Trump), its creditors tend to get better interest rates... If you earn a risk premium during good times, you should not moan when the borrower defaults from time to time when the going gets tough...
Property companies don't fall into the systemically important category. Their collapse is painful for their shareholders, creditors and, if the local labour markets are weak, their employees. They are not, however, systemically important. Their collapse will not threaten the delicate fabric of financial intermediation. They are fit to fail. Creditors beware."

William Buiter, writing of Dubai in the FT, lays out a basic lesson for real estate investors everywhere.

» Posted by Martin Weil on October 09, 2009

In spite of the strength of the recent market rally, looking at this chart of inflation-adjusted market returns from dshort, one realizes that Goldilocks has definitely left the building.

» Posted by Martin Weil on September 23, 2009

Economist James Grant, not known for his rosy forecasting, turns roaring bull in this unlikely piece in the WSJ (subscription required).

Grant, pointing to the extraordinary stimulus provided by the US Federal Reserve, claims that the risks to growth are to the upside, and he expects the current recovery to be a "barn-burner." At a time when most investors and professionals as well, from Warren Buffett to Bill Gross, are expecting sub-par growth and a potential for the economy to fall back into recession, Grant, ever the maverick, takes a startlingly contrarian point of view.

» Posted by Martin Weil on August 24, 2009

However, US households have lost their love for borrow-and-spend for good. American household demand won't pick up when the temporary growth factors run out of steam. By the middle of the second quarter next year, most of the world will have entered the second dip. But, by then, financial markets will have collapsed.

So writes Andy Xie, former Morgan Stanley analyst, writing from China as reprinted by The Big Picture.

» Posted by Martin Weil on July 16, 2009

there are always the courts as a venue to redress the wrongs perpetrated on the investing public.

From Bloomberg "The California Public Employees' Retirement System, the largest U.S. public pension fund, sued the three major bond-rating companies for $1 billion in losses it said were caused by "wildly inaccurate" risk assessments.

Standard & Poor's, Moody's Investors Service and Fitch Ratings used methods to analyze medium-term notes and commercial paper that were "seriously flawed in conception and incompetently applied," Calpers said in a lawsuit filed July 9 in state court in San Francisco."

I suspect this is not leading simply to a financial penalty so much as a remaking of the damaged ratings business model. Hooray.

And hooray for our system of multiple checks and balances that in the end may bring some measure of justice to an industry at the very heart of this credit disaster.

» Posted by Martin Weil on June 02, 2009

Speaking at the Morningstar investment conference, John Bogle [founder of Vanguard and indexing champion] says the best investing advice he ever got was when, as a young man working as a "runner" in a brokerage firm, a fellow runner--"who was probably the same age I am now"--told him the secret:

Nobody knows anything.