In a High Market, Investors Should Prepare for a Downturn

A recent article by Jeff Sommer of The New York Times poses the question: “Is this the top of the market? Is it time to sell?” “Simply put,” writes Sommer, “my answer is this: If you’re a stock investor, be prepared for a major decline, not because one is necessarily coming soon but because no one can predict where the markets are heading.” The article points out that the current economic expansion is the third longest since 1854, and that the low volatility has been “almost supernatural.” Regarding the risk of a decline, Sommer offers comments by Vanguard principal Fran […]

Morgan Housel: Discomfort the Key to Investing Success

 A key component of becoming a successful investor, writes Morgan Housel of the Collaborative Fund, is the “ability to be comfortable being uncomfortable.” Investors, he says, “have a fascination with no-brainers, obvious decisions, and easy money. The phrases should be chapter titles in a book on the ease of deluding yourself.” He argues that finding well-performing investments requires above-average intelligence but also the willingness to “endure more discomfort and uncertainty than others.” Housel cites a comment by former Benchmark partner Andy Rachleff: “What most people don’t realize is that you don’t make money if you’re right in consensus. The only way […]

Zweig Talks Color and Investor Behavior

New research shows that color can have a significant influence on investor behavior, writes Jason Zweig in a recent Wall Street Journal article. According to Zweig, researchers have found that “seeing red has a drastic effect on how people view investments.” One part of the research, says Zweig, shows that when investors looked at charts of stocks in the S&P 500 index with falling prices and predicted how the shares would perform in the subsequent six months, “those who saw charts in red, rather than black, projected significantly lower returns.” The findings, says Zweig, supports economist Richard Thaler’s theory that […]

Morgan Housel Explains the Lure of Pessimism

“Every past market crash looks like an opportunity, but every future market crash looks like a risk,” writes Morgan Housel in a recent blog for Collaborative Fund. Housel offers insights as to why investors tend to attach more to negative thoughts than to positive ones, why pessimism is more “seductive” than optimism. Pessimism, he writes, “can be hard to distinguish from critical thinking and is often taken more seriously than optimism, which can be hard to distinguish from salesmanship and aloofness.” According to Daniel Kahneman, 2002 Nobel Laureate for his work in the field of behavioral economics: “Organisms that treat […]

Study Shows Retirees Become More Pessimistic About the Market as They Age

A new study shows that as people age, they become more pessimistic about the stock market and the economy as a whole, and actually spend less “just as many can start enjoying their life’s savings,” according to a recent Wall Street Journal article. Study author Matt Fellowes, former chief executive of Morningstar subsidiary HelloWallet, says that as we age “our ability to reliably anticipate the future weakens,” and even people who have saved carefully end up not enjoying retirement as they should. Fellowes argues that this isn’t necessarily a revelation. “We have known for a long time that people become […]

Sentiment Measures Are Not Reliable Investment Cues

The topic of market sentiment and how it manifests in stock price shifts and investor behavior is addressed in this week’s Enterprising Investor. In today’s post-election market, the article points out that sentiment measures have increased. “A recent Investors Intelligence Sentiment Report registered 65% bulls—not an extreme reading, but above the roughly 45% average.” The author warns, however, that such measures alone are not reliable. “Investors should not base their decisions on psychology alone,” it says, “but they should always be assembling and updating their worldview. Paying attention to excessive sentiment is a good way to avoid overpaying.” Long-term investors, […]

Steve Cohen’s Head Performance Coach Talks Portfolio Manager Mindset

As the PGA tour winds down and the Olympic Games approach, it seems only fitting to share some perspective on the investment world from a famous sports psychologist. Dr. Gio Valiente has worked with many of the top PGA Tour players to help them improve their mental game. A Yahoo Finance article from earlier this month describes what Valiente (who recently joined Steve Cohen’s $11 billion Point72 Asset Management as head performance coach) views as the similarities between coaching athletes and portfolio managers. “Once you think you have all the answers,” Valiente says, “markets will punish you.” He says that […]

Think Twice before Listening to the Pessimists

During these post-Brexit days when hanging crepe seems to be the favorite pastime, one has to wonder why so many folks default to gloom-and-doom scenarios. Morgan Housel of The Motley Fool explains it this way: “Pessimism isn’t just more common than optimism, it also sounds smarter.” When it comes to investing, Housel differentiates between perceptions of those that are bullish and those that are bearish. He argues that a bull sounds like a “reckless cheerleader” while a bearish investor sounds like a “sharp mind who has dug past the headlines, despite the record of the S&P rising 18,000-fold over the […]

When the Going Gets Tough, the Rich Take a Hike

A new study has found that folks in the top 0.1% tax bracket run for the exits fastest on the days when market volatility spikes (according to government data collected in 2008 and 2009). According to Bloomberg News, the idea behind the study was that different people react with varying degrees of urgency amidst signs of trouble, which can in turn feed market meltdowns. So why do the rich bail more quickly? According to one author of the report, there are a few possibilities: Wealthy people have more at stake per person and are more sensitive to shocks; The rich believe they are better market timers; Investors who earn less are reluctant to sell […]

Avoiding the Negative Return Gap

Writing in the Wall Street Journal, former Morningstar analyst John Coumarianos highlights “investors’ self-defeating behavior” and suggests ways to correct it. He notes that Morningstar data shows a “negative ‘return gap’” of 1.8% over the past decade, and 1.6% over the past 15 years, “because of bad trading.” The return gap is the difference between a fund’s total return (which accurately measures a manager’s performance) and an “investor return” (also called “a dollar-weighted return”), which “evaluates how much of the fund’s return the average dollar invested in the fund has extracted” and thus “how well or poorly investors trade their […]

How Market Surprises can Impact your Thinking

Jason Zweig of the Wall Street Journal highlights the effects of surprises on investor psychology, drawing on neuroscience and historical events back to the 18th century. Robert Shiller of Yale says, “Metaphors and stories are important in investors’ thinking, and they can become a self-fulfilling prophecy,” noting that such stories are adjusted partly “by the almost instinctive urge to look at others’ emotions.” The journal notes that “all investors have a narrative in their head . . . the simpler that story is, the more likely you are to feel in control and the more confident you will be that […]