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Investments with people problems

Metis Life Investment Seminar

Gary Connolly, MD iCubed

September 2014

2

Is this you?

The great back-handed compliment

September 2014

3

“We have met the enemy and he is us.” Pogo

September 2014

4

Investments With People Problems

September 2014

5

Performance Chasing

September 2014

Agenda

September 2014 6

1

Investment With People

Problems

3

Metis Approach

2

Emotional Risks:

Fear, Greed &

Temptation

7

Investments with people problems

“Here’s your ideal portfolio; it’s mathematically optimal for your level of long-term risk tolerance and financially efficient. Now it’s your problem!” Places huge emotional burden on investors.

Ignore the problem…Financial Services Industry has a lot to answer for.

We don’t live in the future. Following the optimal prescription for long-term

performance tremendously difficult from an emotional perspective.

September 2014

8

Investments with people problems

How much are you willing to pay to sleep at night?

No room in classical finance theory for such sentimentality. Traditional finance says “zero”.

A moderate-risk investor missing out on c 4–5% per year.

September 2014

9

Investments with people problems

It’s not rational to aim for an “optimal” solution but also not rational to not participate at all for reasons of emotional comfort.

Clients need to: Be coached about short term v long term. Returns and return patterns - expectations matter. The value in committing to a plan. Advice!!

September 2014

Casual commitments invite casual reversals

Agenda

September 2014 10

2

Emotional Risks:

Fear, Greed &

Temptation

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Fear, Greed, Temptation

Fear lies at the heart of the psychology of bear markets .

Emotion has primacy over cognitive functions.

September 2014

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Would you accept this bet?

Imagine being offered the following bet:

Bet €1 on a flip of a coin with payouts: €2.50 for win (€1 stake + €1.50 profit) Lose the €1 otherwise.

Would you invest?

September 2014

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Psychology of Bear markets

September 2014

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Implications for Investors

When taking risk is rewarded over LT, players who can’t feel fear perform better

Fear drives people to ignore bargains if they have experienced previous loss

September 2014

15September 2014

Greed...

16September 2014

Greed...

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Greed...

18September 2014

Greed...

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Greed...

September 2014

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Temptation...

Engagement Ring

16 Bagger

Bought Shares

September 2014

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Investing & Emotions

Investment should be influenced by Current situation, i.e. degree of value on offer

Not governed by our prior experiences

Blank slate – mentally very difficult.

Plan…

September 2014

Agenda

September 2014 22

3

Metis Approach

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A Sound Framework

September 2014

“A sound intellectual framework for making (investment) decisions, and the ability to keep

emotions from corroding that framework”

Buffett c. 1998

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Should I go to the gym more often?

Non-members No-strings fee of $10 per visit.

People preferred $70 per month for unlimited access.

BUT members only attended 4.3 times a month on average $17 per visit!

The authors concluded “clear evidence of overconfidence about future self control.”

September 2014

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Casual commitments invite casual reversals

September 2014

Need a proper investment plan.

Successful investment not about IQ, connections, or social status.

Psychological restraint/ self control.

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Short Termisim

“You can’t produce a baby in one month by getting nine women pregnant”

Multiple Choice Question…Who Said The Following:

September 2014

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Short Termism

September 2014

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Investing should be

Like watching paint dry...

It’s serious and should not be driven by excitement When treated that way invariably ends badly.

September 2014

29

Average Holding Period for Stocks

September 2014

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Monitoring Performance…

Compel clients to read (& sign) a document called Monitoring Portfolio Performance

September 2014

Casual commitments invite casual reversals

Monitoring Frequency

Percentage of time seeing 5 Year Time Horizon One Month Time Horizon Gains 90% 38% Losses 10% 62%

31

Return Expectations

September 2014

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Summary

No easy answers, but some simple concepts. Regularly rebalance. Don’t over-monitor your portfolio; focus on the

big, long-term picture, not on the details. Make fewer changes to your portfolio than you

are tempted to. Plan – know where you are going.

You need someone unemotionally connected. Karl & Carl!

September 2014

33September 2014

Disclosure

iCubed is an investment training, research and consulting company for financial advisers. This document is intended for professional investors and should not be distributed to retail investors. iCubed has based this document on information obtained from sources it believes are reliable but which have not been independently verified. The opinions contained in this document are based upon publicly available information at the time of publication and are subject to change without notice.

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