Investor Behavior Shows Delayed Reaction to News

A new study by Columbia Business School economists shows that the influence of news on financial markets is “often greater a year after the report than a month,” according to a recent article in Barron’s. The study analyzed how stock markets in 51 countries reacted to “millions of news items written by Reuters over a 19-year period ended in 2015.” The researchers conclude that the delayed reaction to news occurs because “of the time it can take for investors to fully appreciate the ramifications of what they read about.” Charles Calmoiris, one of the authors, concludes: “There is an undercurrent […]

Investor Returns Hurt by Attempts to Time the Market

The average investor has lagged behind the average fund for the past 10 years, writes Russel Kinnel, Director of Mutual Fund Research at Morningstar. The reason, he says, is that “in aggregate, investors’ timing is not very good.” Kinnel cites data showing that, for the ten years ending 2016, the average investor saw mutual fund returns of 3.96% even though the average return for those funds was actually 4.33%. Kinnel points out that there are many different factors at play–for example, he says, two funds “doing the same thing might have different investor returns just because they are in different […]

Stock Picks for the Level-Headed Investor

When buying stocks, it is essential for investors to value process over outcome, says guru James O’Shaughnessy during a recent speaking engagement. This according to a recent Nasdaq article by Validea CEO John Reese. O’Shaughnessy shares a cautionary tale of a client who would knee-jerk when the market rose or dipped, often buying or selling based on emotion rather than on fundamentals. He stresses, writes Reese, how this practice will “get you into trouble, since by the time you want to buy in most of the easy gains have been made and, conversely, once you decide to sell most of […]

Greenblatt Blends Active and Passive Strategies in New Fund

Joel Greenblatt, managing partner of Gotham Asset Management, may have figured out a way to make active strategies appeal to passive investors, according to a recent article in Forbes. The legendary investor and author of The Little Book that Beats the Market (2010) has started a new fund called the Gotham Index Plus Fund that seeks to bend passive an active management strategies by tracking the S&P 500 and using it, the article says, as an “overlay strategy to build a long/short exposure based on Gotham’s value models.” The article outlines a recent interview with Greenblatt. Here are some highlights: […]

The Realities of Pretend Investing

At the end of November, The New York Times ran an article by columnist and CFA Carl Richards that addresses how the tendency to invest based on emotion rather than reality can be dangerous to the investor. Richards contrasts “pretend” versus “real” investors as follows: “Pretend” Investors “Real” Investors Are drawn in by what they see and hear on television. Would never make an investment decision based on television news. Think it makes sense to change investments based on events such as presidential election, Fed moves, etc. Change investments solely on what happens in their own lives, such as shifting […]

Adding Momentum to Your Portfolio

The tendency of recent market performance to persist, an effect known as momentum, has been pervasive even though it is a “blatant violation” of what you would expect in an efficient market. This according to Alex Bryan, director of passive strategies research for Morningstar, in a recent interview. Bryan explains that extensive research has uncovered three theories behind this: Behavioral biases. Investors may underreact to new information because they “anchor” their investment strategies to old information. This can cause market prices to react more slowly than they should. Investors are reluctant to sell stocks that have decreased in value. Instead, […]

How to Win in the Market: Look Up

It may sound like a mother’s mantra to her tech-obsessed teenager, but turning off your computer and putting away your smartphone might be the ticket to triumph in the market. This according to Mark Hulbert, founder of The Hulbert Financial Digest, in a recent MarketWatch column. Hulbert cites study results published this month by the National Bureau of Economic Research that found performance by those traders who pay the closest attention to the stock market’s “short-term gyrations” to be significantly lower than those who pay infrequent attention. The study’s authors explain that the traders most focused on short-term market movements […]

Are you a Solider or a Scout When it Comes to Investing?

It’s no mystery that much of investor behavior (and, consequently, stock market movement) is fueled by emotion and reaction as opposed to hard data or statistics. A recent Ted Talk entitled “Why you think you’re right—even if you’re wrong” sheds some light on the subject of what drives rational thought. Speaker Julia Galef, president and co-founder of the Center for Applied Rationality, describes some of the machinations behind decision-making. You don’t have to look far to find countless studies on the subject of investor behavior and the factors that affect it. Many of the guru strategies we employ are founded […]

New York Times Columnist Says Sit Tight After Brexit

As an investor, it’s not unusual to bristle when the stock market takes a dive then fight the impulse to cut and run. In the wake of Brexit, The New York Times “Your Money” columnist Ron Lieber offers the following words of wisdom: Your portfolio is probably made up of a diverse group of assets, so all of your eggs are not in the stock market basket. If you have been investing in a global stock portfolio in the last seven years, you have most likely made gains. When you invested in stocks, you knew there were risks and whatever […]

A Watched Pot Never Boils — A Lesson in Market Returns

When meeting with clients, Steven Podnos (principal at Florida-based Wealth Care LLC) shared with the Wall Street Journal how he explains the negative impact of emotional decision-making on an investment portfolio. “Over a short period of time,” says Podnos, “you’re almost as likely to have an up market as you are to have a down market. If you can wait five years, then about 90% of the time you’re up in every five-year period. You’re going to be pretty happy.” Podnos shows clients the following chart to illustrate how buying and holding can eventually pay off: While he knows that […]

The “Hurry Up And Kiss Me” Market

The following is an excerpt from the June 3rd, 2016 Validea Hot List newsletter.  Summary:  The financial crisis and Great Recession were incredibly painful events for investors, the financial equivalent of going in for a good night kiss and having your date slap you in the face Because of that, many investors have spent the last several years sitting on the sidelines, not wanting to get hurt again. Seven years of rising stocks and a steadily improving economy haven’t been enough to make them field safe enough dive back into the market. In this week’s newsletter, we talk about how […]

Emotions and Biases Play Huge Role in Bad Investment Decisions

In a recent New York Times article, columnist Gary Belsky observes that “the majority of cognitive biases and shortcuts that influence everyday judgement and choice have analogues in investment behavior.” In other words, insights from behavioral economics and finance explain why people don’t often behave rationally when investing. For example, amateur investors believe they can outperform the professionals, largely because of cognitive biases. The article highlights several, such as overconfidence and optimism biases, as described below. Overconfidence bias is the tendency to overrate one’s abilities, knowledge, and skill. Mirtha Kastrapeli of State Street described overconfidence found in a 2014 study: […]

Volatility and Investor Behavior in Today’s Uncertain Market

The PBS Newshour reports on recent market volatility, noting a series of contributing events. Liz Ann Sonders of Charles Schwab said, “a lot of [the current volatility] really is unfisnished business from 2015, it’s just conspired to occur in a condensed period of time, unfortunately at the beginning of the year, which I think adds to the angst of investors.” She also noted, “we do not think this is the beginning of a big nasty bear market, but it could get worse before it gets better.” Further, she opined that the financial crisis, coming within a decade of the prior […]