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Archive for the ‘Investor Behaviour’ Category

Myopia in the stock market

We all know that private investors are typically scarred and scared out of owning equities by their aversion to incurring losses. Yet the scale of that aversion is staggering, according to some research recently reported by the Franklin Templeton fund management group.  Its annual survey of investor sentiment allows it to ask investors what they think has happened to the stock market each year, and then compare that perception to the reality.

So for example the proportion of the 1000-investor sample which thought stocks had fallen in 2009 was 66%. Yet the S&P 500 index in that year was actually up 26%. The comparable figures for 2010 were 48% (who thought the market had fallen) and 15% (the actual market rise). More than half the survey also thought stocks had fallen in 2011, when the market in practice was flat.

The fund manager’s theory is that these figures are testament to the behavioural bias which prompts humans to give undue importance to one bad experience – the 2008 crisis, which sent the S&P index down 40% – and ignore more favourable outcomes. Whatever the explanation, the data certainly helps to explain why so much money has flowed out of equity funds into bond funds since the crisis broke, in apparent contradicton to common sense and historical experience.

Written by Jonathan Davis

October 17, 2012 at 3:59 PM

The truth about future economic growth

Rob Arnott, the chairman of Research Affiliates, is one of the most articulate and interesting market analysts in the States, and someone whose ideas and research I have followed for a number of years. In my latest 30-minute podcast, I discuss with him the outlook for investment returns – and how they will be dramatically influenced by what he calls the three Ds now hanging over the world – debt, deficits and demographics. All three are conspiring to drag down likely future rates of economic growth in the developed world. Investors need not despair however, Rob argues: better returns are available if investors switch their focus from conventional benchmarks to a multi-asset strategy based on broad economic, rather than purely financial, criteria. Before listening in, click the link below to download a copy of the slides he used to develop his arguments at a recent presentation to a London Stock Exchange seminar. The podcast can be downloaded from here. Recommended.

Arnott LSE Presentation July 2012

Written by Jonathan Davis

July 29, 2012 at 5:30 PM

What investors really want

Meir Statman, one of the pioneers of research into behavourial finance,  has written an interesting book on the subject of what motivates investors and was talking about it today in Edinburgh. His argument, in essence, is that most investors are not rational, as efficient markets theory insists, but they are normal, with a range of expressive and emotional needs – eg for status – that go beyond the simple dynamics of risk and return. That makes them unpredictable to those who don’t start from the same premise. I liked his concluding analogy between the investment industry and going to the movies. At the cinema you knowingly and enjoyably watch fiction on the screen, only to return to reality when they put the lights back on and you find yourself  surrounded once again, not by Superman but by normal human beings. In investment, by contrast, “we are willing to pay good money for the movie [the promise of superior returns], but they never turn on the lights”.

Written by Jonathan Davis

May 10, 2011 at 1:06 PM