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.
Kirsty
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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