Posts Tagged ‘behavioral finance’
Planet Money gets its groove back with this terrific podcast on the parking dilemmas in urban America and one man’s failed effort to improve the status quo. The podcast has everything a classic PM podcast should have: a core economic theory explained via a real world problem and a human interest story at the same time. Welcome back to the big leagues PM.
Investors had something more to cheer about this week as the NASDAQ Composite Index finally surpassed its prior high of 5048 set during the Dot Com bubble in March 2000. It has been a long journey since then as the tech-heavy index sunk as low as 1100 in 2002.
With this week’s landmark, a $1,000 investment into the NASDAQ at that March 2000 peak is now once again worth the original $1000 invested. Or is it? After inflation, or in “real” terms, that $1,000 today is worth the equivalent of just $715 in March 2000 dollars. So NASDAQ investors of March 2000, you are not back to par just yet. Breakeven for you, after inflation, would require the index to be at 7,000 today, not 5000.
On the flip side of this trying tale, an investor who fought off the overwhelming urge to flee risk in early 2009 and invested into the NASDAQ at the depths of the financial crisis would be sitting pretty, with $4,000 today for every $1,000 invested then. Timing is everything I guess.
But how to judge timing? There is no proven way I know to get the timing anywhere close to spot on in advance. But valuations are a useful, if highly imperfect, tool. Valuations were almost as compelling in early 2009 as they were terrifying in early 2000. However, investing in stocks in early 2009 essentially meant “running into a burning building,” while getting out of the market during the Dot Com bubble risked looking like a fool. In the context of a market flowing irresistibly either higher, or lower, investing with a valuation discipline often means running counter to conventional wisdom. This can be very very difficult, and it can be costly in the short-term, even for professional investors.
Anecdotal signs are starting to accumulate that this bull market cycle may be nearing at least a pause. More than one client has contacted me of late wondering why they can’t make more money in the seemingly unstoppable rise of the US market. I need to have the chart above laminated and hung next to my desk.
Crowd-sourcing (think Yelp, TripAdvisor etc.) comes to economic forecasting! The Good Judgment Project is a bold attempt to harness the “wisdom of crowds” as a more reliable predictor of future economic and geo-political events than expert forecasters. I am really excited by this development. University of Pennsylvania’s Philip Tetlock who brilliantly took on the failings of “expert” political judgement with his book of the same name, is behind the project.
Investors want to believe in someone. Forecasters want to earn a living. One of those groups is going to be disappointed. I think you know which.
Morgan Housel (Motley Fool)
That is the title of an OpEd on MarketWatch this AM. A variation on the old “this time is different,” which of course it never is.
Buying stocks is an act of optimism. Holding through a sell-off is a function of conviction.
From a post at Yahoo Finance
… as people age, they become more focused on maximizing positive emotions and social interactions—and more determined to block out negative experiences. This process, which experts call socioemotional selectivity, leads older people—including the affluent—to pay more attention to those who make them feel content and comfortable. At the same time, they are more likely to neglect warning signs that might have been obvious at a younger age.
From the always thoughtful Jason Zweig in the WSJ on new research into older adults and finances.
As I wrote in my July letter, it has been some three years since the stock market last had a normal correction, a decline of more than 10%. These can be nasty experiences for those who may have accustomed themselves once again to steady market gains. This seems a dirty trick but it is just the way of the market.
A recent study, explored in Jason Zweig’s Intelligent Investor column in the WSJ, finds that individuals become risk-averse very quickly when exposed to the sorts of stresses provoked by sudden market declines. After such rapid sell-offs, markets typically recover gradually, but investors remain fearful of further losses and unwilling to take that risk for the prospect of seemingly small gains.
Exposure to stress makes people more loss-averse and diminishes their overall sensitivity to reward. and if a reward is of low magnitude, [people under stress] often don’t care about it very much.
Mauricio Delgado, a neuroscientist in the psychology department at Rutgers University in Newark, N.J.
There is no way to know whether the next market correction will come next week, next month or next year. But if there is anything that is certain, it is that there is one in our future. Which is why I am stressing that investors “fasten their seat belts,” by which I mean making sure that their portfolios are positioned so that the investor can psychologically (and financially) endure a 15% or greater stock market sell-off without panicking into selling.
The efficient markets hypothesis must apply to economists too – all the really good ideas have already been discovered.
Ed Leamer, Professor of Management, Economics and Statistics, Director of UCLA Anderson Forecast
Definitely an “inside baseball” sort of joke. But hysterical if you happen to be an economics junkie. Ed, a former professor of mine, and I were emailing about the seemingly irreconcilable differences between Eugene Fama and Robert Shiller, the recent co-recipients of the Nobel Prize in Economics