This is your brain · This is Your Brain. This is Your Brain on Drugs 1987 PSA. This is your Brain...
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Presentation by Barry Ritholtz Agora Financial Investment Symposium Thursday, July 28 4:40PM-5:20PM British Columbia Ballroom Fairmont Hotel, Vancouver, CA This is your brain This is your brain on Equities. Any questions?
Transcript of This is your brain · This is Your Brain. This is Your Brain on Drugs 1987 PSA. This is your Brain...
Presentation by Barry Ritholtz Agora Financial Investment Symposium Thursday, July 28 4:40PM-5:20PM
British Columbia Ballroom Fairmont Hotel, Vancouver, CA
This is your brain This is your brain on Equities.
Any questions?
This is Your Brain. This is Your Brain on Drugs
1987 PSA
This is your Brain . . . This is your Brain on Stocks
This is Your Brain. This is Your Brain on Equities
1. Emotions change the way you perceive events
2. Over Confidence: Overly Optimistic Assumptions 7 Billion Errors Per Day
3. Articulate Incompetents: Ignorant Certainty vs Ambiguous Reality
4. Recency Effect
5. Selective Perception: Looks closer if you like it
6. Self: Understanding your own desires
7. Selective Retention: Gee, I had all these winning trades why am I down this month – ?
8. Herding, Groupthink
9. Underestimating Risk: Reward ALWAYS relative Low Probability Catastrophes
10. MPT: Why stock selection matters much less than you think
11. You invest like a girl (that’s good)
“Expert” Forecasting versus Ambiguous Uncertainty
Source: Ritholtz.com,
Bennett Goodspeed, The Tao Jones: “The articulate incompetents”
1. The more confident an expert sounds, the more likely he is to be believed by TV viewers
2. Experts who acknowledge that the future is unknowable, that they have no idea what the outcome of an election, or where the Dow will be in a year are perceived with uncertainty.
3. Expert forecasters do about as well as the average public
4. The more self-confident an expert is, the worse their track record.
5. Forecasters who get a big outlier correct are more likely to underperform
Herding & Groupthink
Source: Ritholtz.com, Bloomberg
Lose the News: Beware the Recency Effect
Source: Ritholtz.com, WSJ
WSJ: 2007 WSJ: 2010
Source: Ritholtz.com, Bloomberg
Buy Buy Buy!
1. Only 5% of Wall Street Recommendations Are “SELLS” -NYT, May 15, 2008
2. Why Analysts Keep Telling Investors to Buy -NYT, February 8, 2009
3. Equity Analysts Too Bullish and Bearish at the Exact Wrong Times -McKinsey, June 2nd, 2010
Analysts (Still) Think Alike
Source: Ritholtz.com, McKinsey
“Analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year, compared with actual earnings growth of 6 percent… On average, analysts’ forecasts have been almost 100 percent too high”
-McKinsey study
It is better for one's reputation to fail conventionally than to succeed unconventionally. -John Maynard Kyenes
Analysts Coverage: US Steel
Your Brain Is Easily Fooled
Source: Ritholtz.com, The Star-Ledger
You Invest like a girl!
Source: Ritholtz.com, Hedge Fund Research
Invest like a girl!
Women:
Greater desire for financial discipline
Less Financially Literate
Trade less, return more
Men:
Tend to be overconfident
More aggressive risk-takers
Buy and sell often (churn to lower returns)
Only 3% hedge fund managers are women, on average they delivered nearly double the return on investment vs male counterparts, according to Hedge Fund Research, 2009
Source: Ritholtz.com BigCharts.com
These are poorly designed tax cuts - Stay Out of Markets!
2003: Politics and Asset Management Don’t Mix
2003: Politics and Asset Management Don’t Mix
Source: Ritholtz.com, BigCharts.com
2003 Tax Cuts > $1 Trillion
How did that political trade – up over 90% over 4 years – work out for you . . . ?
2009: Political Investing
Source: Ritholtz.com, BigCharts.com
Obama is a Socialist! Stay Out of Markets!
2009: Politics and Asset Management Don’t Mix
Source: Ritholtz.com, BigCharts.com
FASB 157, ZIRP, QE +VERY Oversold Markets
How did this political trade – up over 78% over 11 months – work out for you . . . ?
Source: Ritholtz.com,
What Drives Prices Higher?
Ask random people what drives stock prices, and you will receive a list of factors:
Economy Interest rates Taxes Psychology Inflation Analyst Ratings Government policies Consumer Spending Employment (NFP) Industry News
Blah blah blah ! Company Revenues Management teams CEO New Products War R&D Business Cycles Profits Services Wall Street Banks
Source: Ritholtz.com
Magnetic Attraction vs. Money over Time
QUANTITATIVE
QUA LI T ATI VE
Psychology Media Coverage Celebrity CEO Hot Product Momentum BUZZ
Revenue Cash Flow Earnings Dividends
ANALYTCIAL
EMOTIONAL
HOT
COOL
The exciting stock of the moment
Steady, boring firms that grow revenues, earnings, dividends
PRICE
GAINS
BUSINESS PERFORMANCE
Has Human Nature changed much between these two images?
Answer: Zero
Barry L. Ritholtz
CEO, Director of Equity Research
Fusion IQ 535 Fi@h Avenue
New York, NY 10017 212-‐661-‐2022 516-‐669-‐0369
The Big Picture hQp://www.ritholtz.com/blog
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