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Tag Archives: behaviorial
I don’t blame you. Interest rates are next to nothing. Stocks are experiencing frequent bouts of high volatility. Pop went the real estate bubble. Gold has increased in value on a yearly basis for the last 10 years. I’m all … Continue reading
The objective of these viewpoints is to question commonly accepted pillars of financial advice. So I took notice when Consuelo Mack interviewed Lubos Pastor, Professor of Finance at the University of Chicago. Pastor recently completed research stating that stocks become more risky over longer investment horizons. His research takes the investor point of view (i.e. forward looking and accounting for uncertainty) rather than a historical (i.e. backward looking) point of view. Furthermore, he suggests that the 7% annualized real return stocks experienced during the last century–based on Jeremy Siegel’s analysis–is uncommonly high with several lucky events bolstering that figure. Pastor’s final pearl of wisdom suggests that human capital should play a significant role in portfolio construction. Continue reading
Our ability to find real patterns is a mark of our intelligence, but our intelligence often backfires, as when we identify illusory patterns as real. Imagine that we are facing machines with two levers marked S and B. The machines dispense nothing if we pull the worng lever but they dispense $10 if we pull the right one. We’ll get to pull levers many times. A pattern is programmed into the machine but we do not know what it is… How would we go about the task if we want to get the most money out of the machines? Continue reading
Market predictions can be made for several reasons: industry fundamentals, technical analysis, etc. However, the most influential factor in market predictions is past performance. The psychological mindset of the investor dominates the assessment of the future. This is obviously an unintended and unwanted circumstance. Successful long-term investing requires the elimination, or significant reduction, of this behavioral risk. Predictions are not inherently bad. But it is less about the prediction itself and more about the hypothesis that created it. Continue reading
What I am about to suggest could very well revolutionize portfolio management. In the current market environment—an environment in which one needs to prepare for both the journey and the destination—portfolio strategy and structuring needs to be addressed from a different perspective. The essence of portfolio strategy, for the time being, is this: allow yourself room for error while outperforming absolute and relative benchmarks. Continue reading
While both fundamental and technical analysis have their place at 85 Broad St, equity markets have structurally changed. No longer is the environment fit for the retail investor. Retail investors, and most asset allocators, are at distinct disadvantages.
Behavioral risk dominates most investment decisions. The investments that generate the largest returns over the next decade are likely to have some of the most volatile price swings. Do you have the tolerance for this volatility? I think not. Therefore, long term investments are not appropriate for you. But it is questionable if you have to capacity to make objective and accurate decisions on a shorter time frame. Whatever your goals are for your investments (e.g. college, retirement, etc), you must invest for both the journey and the destination.