Take your foot off the throttle
Friday 29 February 2008
An interesting article by Matthew Vincent the FT on February 22. He introduces the concept of behavioral finance and the problem of over confidence. “Do you consider yourself an above-average driver? Do you feel more comfortable driving rather than flying? Do you judge your speed on the motorway by the other cars around you?
Calm down, dear – unlike that bumptious film director in the TV adverts, I’m not trying to sell you car insurance. But I am trying to sell you an investment strategy based on cognitive biases. Because if you answered yes to any of those three questions, you’re demonstrating the same behavioural mistakes that are driving the markets today – mistakes that fund managers believe can be exploited for profit."
It is the over-emphasis of recent news which makes investors ignore longer-term data that offers opportunities for fund managers. But is it? It sounds great to know when there is an over reaction, that someone with a cool mind, driving sensibly (using a driving analogy…and clearly not with ones foot on the throttle..well not too much anyway!), can take advantage of the situation. But if it was simple to do, all the fund managers would be doing it and actually generating returns for their investors that boosted their returns above average. You have guessed, they are not all doing it because it’s not easy to do.
Yet the world of behavioural finance does offer significant value to investors' understanding of how they invest and their expectations. We are all human, we read newspapers, watch TV, listen to colleagues, friends and family, all of which impacts on our judgement and how we see things. We are not computers making logical decisions….and being aware of its importance in the decision making process is vital to every investor.
Categories: Behavioural Finance, Analogies
posted by Murray Round Wealth Management @ 23:05,
Private investors are finally to be allowed access to hedge funds
Tuesday 26 February 2008
Private investors are finally to be allowed access to hedge funds through UK retail products, under changes to the regulatory regime proposed by the Treasury and the Financial Services Authority says Matthew Vincent the FT on February 22.
Advisers now expect retail fund management groups, such as Jupiter, Artemis, and New Star, to launch funds of hedge funds and other alternative investments, from next year.
I have no doubt that investors will buy these investments. Why? As the FT says "Private investors' appetite for hedge funds has grown rapidly in recent years.” The appetite is driven by a perception of profit, otherwise known as greed. Yet hedge funds are very opaque, the charging structure is excessive, and now the FSA want to let retail investors buy into these products.
Without doubt that is great news for the fund management groups. They will use their retail marketing experience to collect funds under management.
Investors’ expectations will be for high profits. Whether these funds will consistently outperform and are worth the fees investors will pay, I very much doubt it. Of course there will be success stories, but knowing which ones to invest in before they hit the big-time may require more than a touch of good fortune.
When I get in the post the direct marketing promoting these new funds, I will diligently file them away in file 13.
Categories: Hedge Funds, Retail Funds
posted by Murray Round Wealth Management @ 09:51,
Don’t just stand there, do something
Tuesday 19 February 2008
Well this is my first blog entry this year…I think I have a lot of catching up to do. Too many ideas ready and waiting…where do I start? Hmmm the stock market.
Property and equities have been heading south. Whilst the stock market is pretty transparent and is a scoreboard for the markets, property is less so. In a few months or so the state of the property market may be more revealing. Property is opaque and anyone trading in the property market is keen to be optimistic but the sad truth is that property is not moving at the moment…perhaps it has already moved south already with equities.
Now for the stock market. Don’t just stand there, do something comes from an article in the FT called Why sitting tight is sometimes right February 16th 2008
At times like this when markets are falling, rather than doing nothing, the world of behavioural finance provides a more profound reason for doing something. Humans suffer from an activity bias. Inactivity embarrasses us. When there are problems, our instinct is not just to stand there but to do something.
There is a lovely example from James Montier of Societe General in the article about the goalkeeper…” When a goalkeeper tries to save a penalty, he almost invariably dives either to the right or the left. He will stay in the centre only 6.3 per cent of the time. However, the penalty taker is just as likely (28.7 per cent of the time) to blast the ball straight in front of him as to hit it to the right or left. Thus goalkeepers, to play the percentages, should stay where they are about a third of the time. They would make more saves. Why don't they? Because it is more embarrassing to stand there and watch the ball hit the back of the net than to do something (such as dive to the right) and watch the ball hit the back of the net. The results are the same but those who tried to be active feel happier.”
But what about the world of investment… “traders are trading out of boredom - they feel they have to do something. Like goalkeepers and hitters at the plate, they feel they have to do something. Moreover, the activity bias is most acute after bad results. If your portfolio is down, you feel an even greater need to thrash around”
Thrash around…thrash around, well I think such activity should be relegated to the football field and not played with investors’ money!
Behavioural finance is vastly important in the world of investment. As humans we all interpret things differently…and the combination of logic and emotions make it difficult to predict the future. In truth, investors need to remain focused on the long term and do not get too caught up in short term volatility. Perhaps remembering to play the ball down the middle and looking a fool increase the chance of winning. Investment is not a game, its about winning however boring that may be.
Categories: Behavioural Finance
posted by Murray Round Wealth Management @ 21:37,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
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Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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