Behavioral Finance

Market Pundits in 2016 – A Reality Check

Most successful pundits are selected for being opinionated, because it’s interesting, and the penalties for incorrect predictions are negligible. You can make predictions, and a year later people won’t remember them. Daniel Kahneman (Nobel Prize winner in Economics for Behavioral Finance theory) It’s time for a reality check. The scary market narrative right now goes something like this: slower global growth – led by China – unleashed deflationary forces that exposed malinvestment and excessive leverage in commodity and industrial companies that will lead to widespread corporate bankruptcies, sovereign debt defaults and another banking crisis. Central banks are out of monetary …

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Why Don’t Value Investors Always Buy the Dips?

In the short run, the market is a voting machine; in the long run, it’s a weighing machine. For fun, let’s assume you’re a value investor looking at GM in late 2015.  Like all good value investors, you want to make decisions based on “intrinsic value” – that is, what a company is worth, not where the stock trades today.  Taped on your wall is Benjamin Graham’s quote, “In the short run, the market is a voting machine; in the long run, it’s a weighing machine.”  You think like a business owner, not a trader. You trawl through the financial …

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Market Psychology and the Investor Narrative

History doesn’t repeat itself, but it often rhymes. So said Mark Twain, or possibly someone else, depending on whom you believe. You might say the same thing about market drawdowns.  While next year’s crisis won’t look quite like last year’s, they’ll share some common traits.  Hence the rhyming. Let’s start with the average investor’s “narrative.”  In order to make sense of a world that is mind-numbingly complex, we make simplifying assumptions.  There are simply too many variables to process at one time.  A technology stock analyst, for instance, is unlikely to be an expert in commodities, macroeconomic trends, central bank …

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