Contagious: Why Things Catch On by Jonah Berger
Source: The Big Picture
Tag Archives: Psychology/sentiment
12 Cognitive Biases That Endanger Investors
Before Todd Harrison created Minyanville, he was an options trader at Morgan Stanley, eventually becoming President of Cramer Berkowitz, where he toiled as head trader at Jim Cramer’s hedge fund.
Todd has an excellent analysis of the various biases that endanger investors.
Here is the full list:
1. Confirmation Bias
2. In-Group Bias
3. Gambler’s Fallacy
4. Post-Purchase Rationalization
5. Neglecting Probability
6. Observational Selection Bias
7. Status-Quo Bias
8. Negativity Bias
9. Bandwagon Effect
10. Projection Bias
11. The Current Moment Bias
12. Anchoring Effect
Check out his explanation and descriptions here.
Source: The Big Picture
Investors Should Ignore Economics & Politics
Voters should pay attention to politics. Investors should ignore it.
By Barry Ritholtz
Washington Post, March 8 2013
Source: The Big Picture
Why Time Frames Matter to You
What is your time frame?
That question came up recently after a media appearance where the host asked about a specific stock (which we did not own). The way this investor asked the question was “You mentioned this stock could do THIS — how does that square with your long term view of THAT?”
Consider for a moment what your time frame is and you will figure out what your answer should be. Indeed, much investor confusion (and many investor errors) involve making the mistake of investing for one time frame and behaving in another.
Perhaps a few examples might help to illustrate this.
The classic rule “Never turn as trade into an investment or an investment into a trade” illustrates shifting of time frames for the wrong reasons. If your time frame is that of a trader — you are seeking to take advantage of volatility of daily price fluctuations — then you stick to your expected holding period. Extending this into a longer frame because the trade goes against you is an error. Especially if you have not done the requisite research and planning for a long term hold.
Investors make a similar mistake. They own something with an expected multi-year holding period, only to bounce on some very short term news — a critical review of a product, a negative research report, a 5% price drop. I doubt any of these investors has in their plan “I will sell XYA if an analyst downgrades the stock.”
Good investors must learn to contextualize (i.e., mostly ignore) the Daily Background Noise. That is my phrase for the never ending proliferation of economic releases, media broadcasts, technical updates that are more or less meaningless time fillers. Television and radio have 24 hours per day to fill — do you believe that all of that content is meaningful? Newspapers and magazines have a specific number of pages that requires ink be spilled on them — are they all worth your time to read? The modern internet has an infinite number of pages to fill (guess how many are truly valuable).
Consider these various time frames, and what they mean to your investing or trading approach:
Minute-to-minute: Constant flow of prices, rumors, and chatter about stocks
Hourly: Similar to minute flow, only with opening and closing behavior (“strong open in XYZ” or “I hate the way the ABC closed”)
Daily: Very noisy. Filled with random gains and losses, driven mostly by the overall market (my guess 35%) or the equity’s sector (~30%).
Weekly: Begins to smooth out the noise factor. Informative charts, overall trend beginning to develop. Still contains lots of noisy economic chatter.
Monthly: Provides a window into secular cycles. Most traders ignore the monthly charts — too slow they say — but these can give you some insight into real (versus false) reversals.
Quarterly: Valuation data comes into focus via earnings. Longer term view allows potential mean reversion to be taken advantage of (via re-balancing).
Annual: For retirement planning, and life events. Yearly data puts the rest of the noise into perspective. Most of the daily or even weekly up and down movements get smoothed out. Ultimately, where long term investors should be focused.
Decades: The market historian’s friend.
Source: The Big Picture
Why Investors Should Ignore Politics & Economics
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My Sunday Washington Post column this week looks at two of the major topics of financial news – Politics & Economics.
The column draws the counter-intuitive conclusion that these aspects of daily life are mostly meaningless to investors much of the time.
Under the headline Voters should pay attention to politics. Investors should ignore it, it looks at a few historical events that have been much more emotionally resonant than impactful to investments. These include wars, tumultuous presidential events, oh, and silly little non-events like the debt-ceiling debate of 2011 and the sequester of 2013.
Here’s an excerpt from the column:
“Most of the time, economic data is fairly benign. I don’t wish to imply it is meaningless, but it is not a driver of stock markets. Indeed, the correlation between economic noise and how equity markets perform has been wildly overemphasized. To quote Warren Buffett: “If you knew what was going to happen in the economy, you still wouldn’t necessarily know what was going to happen in the stock market.”
The economic cycle sees a constant stream of news. Various data are released on a recurring weekly, monthly and quarterly cycle. Sometimes they improve; sometimes they degrade. These are minor and noisy fluctuations, often reflecting flaws in how the data are collected or seasonally adjusted.
There are many reasons why economic data are so noisy, none of which matter to the primary driver of your investments, namely corporate profits and equity valuations.”
While investors pay too much attention to Politics and Economics, they don’t pay enough attention to valuation and the development of bubbles.
Source: The Big Picture
Are You A Perma-Bear? Take The Zero Hedge Test
Take The Zero-Hedge Test
Being permanently bearish on equities definitely pays.
Just ask Zero-Hedge. Unfortunately, for wool-dyed pessimists and the other overly-skeptical black sheep of the thundering herd, it pays apocalyptic newsletter writers’ paychecks, and Zero-Hedge/Tyler Durden’s Manhattan bar tabs rather than those who permanently position against market priapism. And it’s worse than zero-sum because those who are optimistically-challenged often pay for the bad advice – whether directly in subscriptions, inflated margins on retail bullion products, or indirectly via page-views and click-throughs AND then they get hosed by the market.
The first step to improving behaviour toxic to one’s own self interest is admit one has a problem. As an aid to help those who have difficulty in distinguishing “a bearish trade” from “the lead boots of anger and pessimism”, I’ve devised a little something I call the Zero-Hedge Test to determine more precisely whether readers objective realities are sufficiently paranoid, pessimistic, anti-social and rantingly angry to warrant more serious help.
Instructions: Circle the letter that best describes the adjacent image:
a. a glass of water
b. glass of water, half-empty
c. glass of water, half-full
d. glass of errrr ummm , Grey Goose vodka? (NB: ed. choice)
e. The US Government must have stolen half of a glass of water.
Source: The Big Picture
Investors Should Ignore Politics
Politics matters little to your investment outcomes.
This has been a theme of mine for nearly forever. I discuss this in presentations all the time. It was — literally — my first column for the Washington Post.
And yet the financial press simply cannot get enough of this stuff. They love a good narrative. While these story lines make for good copy, they also make for terrible investing advice.
Consider the market impact of the past Fiscal Cliff (none) and the Sequester (rally mode). Both of these events are relatively minor compared to past historical events of far greater import that also have had negligible impact on markets.
What has the overall effects been on investments of past historical events? Consider the attack on Pearl Harbor, which led the US to entering WW2; the Soviet Union’s launching of Sputnik into space, and starting the cold war arms race. (I can’t forget the Cuban Missile Crisis or the Iraq and Afghanistan Wars). There have been momentous events with U.S. presidents — the assassination of President John F. Kennedy, the resignation of President Nixon, the impeachment of President Clinton — none of which really impacted investment values much.
In none of the above, did the markets react unusually. At most they wobbled a bit, before resuming their prior trend. Even the horrific attacks of 9/11, which saw markets closed for almost a week, had a big selloff, followed by an even bigger snapback rally — followed by markets returning to the prior trend, which was the post-2000 popped tech bubble down slide.
The lesson investors should learn is while these events may transfix us emotionally, they have almost zero impact on corporate revenues, profits and valuations earnings. That is what drives most of your investment results, not what is on C-Span . . .
Source: The Big Picture
What Do Investors Lie To Themselves About?
Pinocchio traders with fantastic returns are lying to themselves
Barry Ritholtz,
Washington Post, February 23
Source: The Big Picture
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