Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Support MFO
Donate through PayPal
Is Loss Aversion Causing Investors To Shun Equities ?
Good article Ted. I liked the part about frequency of checking portfolio (which I do daily) most interesting:
In a financial context, myopic loss aversion is represented by the frequent evaluation of a portfolio’s performance, which can lead to shifts in an investor’s long-term asset allocation mix. Checking a portfolio’s performance more frequently increases the likelihood of seeing a loss, which produces more mental agony than comparable gains satisfy. This, in turn, can cause investors to tolerate less exposure to more volatile assets.
I have have been reading some blogs and articles on this subject. Loss aversion at the fund level is translating to seeking alpha at the expense of beta. In a trending up market, returns attributable to alpha lags returns attributable to beta and much of these managers have lagged severely. Hedge funds are included in this mix even though they can lever up and amplify the alpha but loss aversion and uncertainty of alpha probably prevented most from doing so to a large extend.
Reply to @Charles: Excellent observation, that applies to a couple of MFO members that remind us on a frequent bases how their portfolio's are doing. Investing is a marathon not a sprint. Regards, Ted
"If you have a diversified, quality equity portfolio you only lose if you sell." - - -
Couple additional "Ifs" - (1) If you're young enough not to need the $$ anytime soon, and (2) you have nerves of steel to allow you to Ignore the flood of negative news and dire prophecies that always accompany protracted bear markets.
Best opportunities occur when things appear bleakest. Gold at $270 in '99. NASDAQ under 1200 in '02. Dow near 6,500 in '09. Housing at multi-year lows in 2011 (& with banks practically giving away $$). That's not to say this ain't a good time to own equities. Just some perspective.
Reply to @Ted: Thanks Ted. Excellent observation. "Return" means nothing over a year or so. Foremost is figuring out risk tolerance based on age, temperament, etc. Second comes wise fund selection. Rest will take care of its self. Advertising "return" is like the fella who never scored a touchdown before - gotta dance for the crowd. Oh - and thanks for all the great links. Anyone who doubts that need only call-up your contributions by clicking on your MFO name - an awesome array. (I'm sure that's why David puts up with ya:-)
Well that's a nice tale but I'm not buying it as the sole answer. Why? Frankly I think a lot of people are afraid of the stock market. Loss aversion to be sure but many simply don't trust the stock market anymore and/or they don't understand it. I think it has a lot to do with possibly the losses they may have incurred relative to the tech bomb of 2000 and the slump of 2008. It also has a lot to do with their fear of not having a good paying job with a pension or retirement that they can rely on like those investors who came before them. It seems as though many of those safety nets of yore now come with big, big holes in them.
Boomers who do have investment money or market exposure are worried that another crash may wipe them out or at the very least send them back out into the work force ergo - they want the 'safety' of bonds. Today's workers worry about what little they may be able to invest, if any, and want the perceived safety of bonds as well because they don't know if their jobs will be there tomorrow. Many, many others think the market is just a scam manipulated by the well to do and insiders. Flash crashes and computer glitches don't leave them feeling warm and fuzzy. Bottom line people want to see what little they have sitting there when they need it or look for it. It's their rock and they are sick and tired of the Goldman Sachs', rating agencies and numerous others out there taking it from them correctly or incorrectly.
Finally think also about your own investments. How many of you skim off profits from your winning positions as a rule or on a regular basis. I'm guessing the percentage is low because many believe that these investments will just keep going up. Likewise, when many experience a losing position they will hang on to it for dear life on the belief that it will revert eventually. I don't think that's a good plan. I believe that one needs to have a sell discipline in addition to a buying regimen or plan and that both should be firmly in place before you begin investing. Far too many just take whats handed to them.
Many, many others think the market is just a scam manipulated by the well to do and insiders. Flash crashes and computer glitches don't leave them feeling warm and fuzzy. Bottom line people want to see what little they have sitting there when they need it or look for it. It's their rock and they are sick and tired of the Goldman Sachs', rating agencies and numerous others out there taking it from them correctly or incorrectly.
Good point Mark. I have witnessed the mistrust you speak of in some good friends the past few years. Once long time investors in the market, now, not even short-term bonds. Simple savings accounts in banks is all they feel comfortable with...at near zero percent growth.
I have yet to read Dark Pools, which Scott recommended, but something tells me it's gonna re-enforce your point.
It's a drier read than "The Quants" by the same author, but is still certainly worth reading and gives one a sense of the force that technology has become in the market.
I agree with the idea that people's confidence in the market has been shaken and they believe the tables have been turned even further in the favor of large participants (like Goldman, who recommended to sell Heinz right before it was bought by Buffett - bad call or another Goldman "do as I say, not as I do?".) I think a lot of people buy into what's hot now and exciting rather than looking at what has done well over time - putting money into the Groupons, Zyngas and Facebooks because they are familiar/like the companies but are not taking into account/understanding valuation. I say this not to upset anyone who likes Apple, I think Apple makes great products and over the long term it may do very well, but when the analysts were all talking Apple going to a thousand dollars a share was the time to sell (at least in the short-to-mid term). How many retail investors bought on those calls - while how many big funds started to sell into those analyst calls?
" I'm guessing the percentage is low because many believe that these investments will just keep going up"
I don't think what single names I have will keep going up forever ("Trees don't grow to the sky"), but I think nearly all of them provide nice yield (which, when possible, is reinvested - and hopefully the dividend will grow some over time for many of the names) and fall into what I believe are mid-to-long term themes. Some are enjoyably boring, such as Reckitt Benckiser.
Many play into what I believe are longer-term themes. Some may be sold at some point soon or a long time from now, but I think it becomes a matter of reasoning, valuation or a number of other factors. I have a lot of companies I like, but I can't own everything I like by any means. If something changes, I will certainly consider selling a position, but I've grown tired of short-term trading and attempts at market timing. I'm not saying people can't and I give credit to those who can.
I've become a lot longer-term in nature with my investments, but am occasionally shorter-term - I bought Anderson's (ANDE) in the mid-30's and sell if it got to the mid-40's, given the fact that it topped before last year's bad growing season at a tiny bit over $50. It also topped at about $50 the Spring of the year before that. If it tops at $50 this Spring, I'll look for it to bottom again next Fall. I think Andersons offers some terrific, unique assets, but is too volatile (and seasonal) and doesn't offer enough of a dividend to consider as a long-term holding.
I think there are a lot of concerns that have kept people out of the markets, and I don't see those concerns really being solved because the fundamental issues aren't being addressed.
The inflows that have been seen in the last month or so are already subsiding.
"Citi analyst Markus Rosgen also notes something interesting: "In the week ended 2/13/2013, inflows into equity funds slowed to $1.8 billion while bonds had an inflow of $2.6 billion, ending equities’ nine-week winning streak versus bonds. The major laggards in equity funds were US funds which recorded $3.7 billion of outflow."
Reply to @scott: "I've become a lot longer-term in nature with my investments..." Precisely!!! Consider the market investment road you traveled to reach that point and how long it took you to reach that end. I'm assuming that it's a radical departure from the vista you perceived when you began your investing travels. It certainly is for me.
When I first started investing/saving it was simply a matter of me thinking that the stock market provided the best bang for my buck. Raised by depression era parents with a "make do with what you've got lifestyle" I knew we struggled but we were fed, housed and healthy. What there was allocated to saving was in the form of US Savings Bonds, shoe boxes full of them. As I and my 6 siblings left the house I could see my dad begin to tinker with buying stocks while my mother kept filling the shoe boxes. I began with short-term CD's simply because I didn't want my savings tied up for the longer terms dictated for holding savings bonds. Eventually I moved into mutual funds and witnessed half of my retirement savings wiped out by Black Monday. The move to individual equities coincided with the tech craze and we all know how that turned out. Point being - I had a momentum 'buy' plan but no 'sell' plan whatsoever. As far as I was concerned I was just a stock market genius right up to the point where I had my head handed to me. Thus began the evolution to an investment plan with goals other than making a killing and a more disciplined diversified approach which probably mirrors yours in many respects although our holdings are likely radically different. The key is the "plan."
I will indeed read Dark Pools. Just so many things to do now that I'm retired! Don't understand how I ever found the time to work.
How do you spell Volatility? ANDE
Reminds me of the view from a favorite camping spot near Mammoth Lakes called East Fork:
OK, when you feel like telling us again, I'd like to hear more...
I think there are a lot of concerns that have kept people out of the markets, and I don't see those concerns really being solved because the fundamental issues aren't being addressed.
Here's an example of a lesson learned. I invested - probably about a year and a half more or less, in a London closed end fund (it's on the US pink sheets) called Dolphin Capital Investors. It is invested heavily in Greek (and surrounding area) resort property. It had been ob-lit-er-ated, going from about $3 and change to about 30 cents. The property owned is gorgeous - just beautiful. The book value, if one were to believe book value, was a couple of bucks. The investment was rather tiny - a lottery ticket bet.
A while later, the situation in Europe got worse and it hadn't done anything (was likely already at the point where anyone who'd wanted to sell had GTFO). Again, the position was small enough that it didn't matter, but it wasn't doing anything and I just gave up on it. Had I waited not that much longer, Third Point took a stake in it in the Fall and it just about doubled. The situation in Europe was getting worse, but the story hadn't changed - the land was still impossibly beautiful, still traded at a fraction of book - and I didn't need to sell. It wasn't doing anything and I got bored and wanted to move on to something else. Had I waited a little longer, the idea would have started to play out as I'd hoped it would. Who knows - it still trades at a fraction of book value (at about 26% of book value, according to Yahoo Finance), but the idea being that I learned a lesson from being too short-term on an idea.
The Andersons is an unfortunate instance in terms of volatility. There are not too many plays (in terms of publicly traded companies) on what I call "agricultural infrastructure" at all in the world, and fewer as they get bought up (Viterra, which was bought by Glencore, which I own) or are in the process of maybe getting bought up (Graincorp, which I owned and then sold when Archer Daniels Midland made an offer).
The Andersons is a very Americana company - Ohio company with grain elevators around the Midwest, a railcar operation, Fertilizer operation, ethanol operation and a small retail operation - there's even a division that makes things out of corn cobs, such as pet bedding. Family operation that started as a single grain elevator and still remains family-run. A couple of the smaller aspects I could do without, but a lot of great, productive assets. Still, it's a very small float and it's almost absurdly volatile. The seasonality of it, if it plays out again, makes for a great trade, but it's too bad as I'd love to own the assets over a longer-term. If the Archer Daniels Midland/Graincorp tie-up does not happen, I'd own Graincorp again in a second, as while that isn't low-key either, it has a terrific dividend policy.
Instead, I own Glencore, which is highly volatile, but offers a global collection of productive assets (including hundreds of thousands of acres of owned or leased farmland), is well-managed and rather infamous. ("The Biggest Company You Never Heard Of": http://www.reuters.com/article/2011/02/25/us-glencore-idUSTRE71O1DC20110225 - "Bigger than Nestle, Novartis and UBS in terms of revenues, Glencore's network of 2,000 traders, lawyers, accountants and other staff in 40 countries gives it real-time market and political intelligence on everything from oil markets in Central Asia to what sugar's doing in southeast Asia." "Their knowledge of the flow of commodities around the world is truly frightening." )
It also is another instance of a story playing out as it absorbs Viterra and Xstrata (and possibly more over the next couple of years), becoming both a large-scale commodity company and the largest commodity trading company on the planet.
However, despite issues, I remain a long-term holder, as I think Glencore remains a value and unique in terms of what it offers. Additionally, I think it's evolving as it becomes a much larger entity.
Mark said: " Consider the market investment road you traveled to reach that point and how long it took you to reach that end. I'm assuming that it's a radical departure from the vista you perceived when you began your investing travels. It certainly is for me."
I think the market has an incredibly short-term mentality in modern day and I think people are effected by the rapid money flows one way or another - as I've noted before, the average holding period for a stock has gone from several years to several days. However, I think there's real downsides to attempting to keep up with what's working now aside from the fact that I think it quickly becomes exhausting and not enjoyable. Personally, for me, it becomes a matter of having a selection of duller, consistent, low beta names and a selection of bets on various themes and/or assets that are - to varying degrees - more aggressive. If the story changes, I'l definitely reconsider, but I don't see selling anything I own for quite a while, and will continue to reinvest dividends when possible.
________________________________________________
As for fundamental problems that keep people out of the markets, I think:
1. If you are an investor in this country, it's likely that you taught yourself to some degree, because there is nothing at the high school level regarding personal finance. I think that's terribly unfortunate. I think to some degree it's the desire of financial companies not to have the populace (as a whole) highly educated in terms of investing. Still, if everyone was educated in personal finance at the high school level, you wouldn't have situations like the Facebook IPO, but I think you would have less volatile markets and a population that would likely see greater benefits from financial markets. People are still going to chase hot stocks, there's still going to be issues, but if people go out of high school with basic knowledge about personal finance and investing, I really don't see a downside.
2. I think people remain insecure and concerned about the big picture (as noted above) and do not want to commit to anything not believed to be safe. However, I'm a little concerned that a lot of average people do not understand the workings of the fixed income market and will be disappointed if bonds really turn after believing that they are safe.
3. Trust is broken and that will take time to repair. People don't trust the markets and I think to some degree I don't blame them. The media doesn't explore the reasons why people are staying out of markets, nor does it try to assist people - you instead get stories in Smart Money and the like that essentially scream, "YOU'RE MISSING IT! WHAT'S WRONG WITH YOU?" It doesn't help anything or anyone.
Comments
Agreed ... Learn form your mistakes.
Skeeter
Regards,
Ted
"If you have a diversified, quality equity portfolio you only lose if you sell." - - -
Couple additional "Ifs" - (1) If you're young enough not to need the $$ anytime soon, and (2) you have nerves of steel to allow you to Ignore the flood of negative news and dire prophecies that always accompany protracted bear markets.
Best opportunities occur when things appear bleakest. Gold at $270 in '99. NASDAQ under 1200 in '02. Dow near 6,500 in '09. Housing at multi-year lows in 2011 (& with banks practically giving away $$). That's not to say this ain't a good time to own equities. Just some perspective.
Boomers who do have investment money or market exposure are worried that another crash may wipe them out or at the very least send them back out into the work force ergo - they want the 'safety' of bonds. Today's workers worry about what little they may be able to invest, if any, and want the perceived safety of bonds as well because they don't know if their jobs will be there tomorrow. Many, many others think the market is just a scam manipulated by the well to do and insiders. Flash crashes and computer glitches don't leave them feeling warm and fuzzy. Bottom line people want to see what little they have sitting there when they need it or look for it. It's their rock and they are sick and tired of the Goldman Sachs', rating agencies and numerous others out there taking it from them correctly or incorrectly.
Finally think also about your own investments. How many of you skim off profits from your winning positions as a rule or on a regular basis. I'm guessing the percentage is low because many believe that these investments will just keep going up. Likewise, when many experience a losing position they will hang on to it for dear life on the belief that it will revert eventually. I don't think that's a good plan. I believe that one needs to have a sell discipline in addition to a buying regimen or plan and that both should be firmly in place before you begin investing. Far too many just take whats handed to them.
I have yet to read Dark Pools, which Scott recommended, but something tells me it's gonna re-enforce your point.
It's a drier read than "The Quants" by the same author, but is still certainly worth reading and gives one a sense of the force that technology has become in the market.
I agree with the idea that people's confidence in the market has been shaken and they believe the tables have been turned even further in the favor of large participants (like Goldman, who recommended to sell Heinz right before it was bought by Buffett - bad call or another Goldman "do as I say, not as I do?".) I think a lot of people buy into what's hot now and exciting rather than looking at what has done well over time - putting money into the Groupons, Zyngas and Facebooks because they are familiar/like the companies but are not taking into account/understanding valuation. I say this not to upset anyone who likes Apple, I think Apple makes great products and over the long term it may do very well, but when the analysts were all talking Apple going to a thousand dollars a share was the time to sell (at least in the short-to-mid term). How many retail investors bought on those calls - while how many big funds started to sell into those analyst calls?
" I'm guessing the percentage is low because many believe that these investments will just keep going up"
I don't think what single names I have will keep going up forever ("Trees don't grow to the sky"), but I think nearly all of them provide nice yield (which, when possible, is reinvested - and hopefully the dividend will grow some over time for many of the names) and fall into what I believe are mid-to-long term themes. Some are enjoyably boring, such as Reckitt Benckiser.
Many play into what I believe are longer-term themes. Some may be sold at some point soon or a long time from now, but I think it becomes a matter of reasoning, valuation or a number of other factors. I have a lot of companies I like, but I can't own everything I like by any means. If something changes, I will certainly consider selling a position, but I've grown tired of short-term trading and attempts at market timing. I'm not saying people can't and I give credit to those who can.
I've become a lot longer-term in nature with my investments, but am occasionally shorter-term - I bought Anderson's (ANDE) in the mid-30's and sell if it got to the mid-40's, given the fact that it topped before last year's bad growing season at a tiny bit over $50. It also topped at about $50 the Spring of the year before that. If it tops at $50 this Spring, I'll look for it to bottom again next Fall. I think Andersons offers some terrific, unique assets, but is too volatile (and seasonal) and doesn't offer enough of a dividend to consider as a long-term holding.
I think there are a lot of concerns that have kept people out of the markets, and I don't see those concerns really being solved because the fundamental issues aren't being addressed.
The inflows that have been seen in the last month or so are already subsiding.
"Citi analyst Markus Rosgen also notes something interesting: "In the week ended 2/13/2013, inflows into equity funds slowed to $1.8 billion while bonds had an inflow of $2.6 billion, ending equities’ nine-week winning streak versus bonds. The major laggards in equity funds were US funds which recorded $3.7 billion of outflow."
http://www.businessinsider.com/weekly-fund-flow-data-february-15-2013-2
When I first started investing/saving it was simply a matter of me thinking that the stock market provided the best bang for my buck. Raised by depression era parents with a "make do with what you've got lifestyle" I knew we struggled but we were fed, housed and healthy. What there was allocated to saving was in the form of US Savings Bonds, shoe boxes full of them. As I and my 6 siblings left the house I could see my dad begin to tinker with buying stocks while my mother kept filling the shoe boxes. I began with short-term CD's simply because I didn't want my savings tied up for the longer terms dictated for holding savings bonds. Eventually I moved into mutual funds and witnessed half of my retirement savings wiped out by Black Monday. The move to individual equities coincided with the tech craze and we all know how that turned out. Point being - I had a momentum 'buy' plan but no 'sell' plan whatsoever. As far as I was concerned I was just a stock market genius right up to the point where I had my head handed to me. Thus began the evolution to an investment plan with goals other than making a killing and a more disciplined diversified approach which probably mirrors yours in many respects although our holdings are likely radically different. The key is the "plan."
I will indeed read Dark Pools. Just so many things to do now that I'm retired! Don't understand how I ever found the time to work
How do you spell Volatility? ANDE
Reminds me of the view from a favorite camping spot near Mammoth Lakes called East Fork:
OK, when you feel like telling us again, I'd like to hear more...
Here's an example of a lesson learned. I invested - probably about a year and a half more or less, in a London closed end fund (it's on the US pink sheets) called Dolphin Capital Investors. It is invested heavily in Greek (and surrounding area) resort property. It had been ob-lit-er-ated, going from about $3 and change to about 30 cents. The property owned is gorgeous - just beautiful. The book value, if one were to believe book value, was a couple of bucks. The investment was rather tiny - a lottery ticket bet.
A while later, the situation in Europe got worse and it hadn't done anything (was likely already at the point where anyone who'd wanted to sell had GTFO). Again, the position was small enough that it didn't matter, but it wasn't doing anything and I just gave up on it. Had I waited not that much longer, Third Point took a stake in it in the Fall and it just about doubled. The situation in Europe was getting worse, but the story hadn't changed - the land was still impossibly beautiful, still traded at a fraction of book - and I didn't need to sell. It wasn't doing anything and I got bored and wanted to move on to something else. Had I waited a little longer, the idea would have started to play out as I'd hoped it would. Who knows - it still trades at a fraction of book value (at about 26% of book value, according to Yahoo Finance), but the idea being that I learned a lesson from being too short-term on an idea.
The Andersons is an unfortunate instance in terms of volatility. There are not too many plays (in terms of publicly traded companies) on what I call "agricultural infrastructure" at all in the world, and fewer as they get bought up (Viterra, which was bought by Glencore, which I own) or are in the process of maybe getting bought up (Graincorp, which I owned and then sold when Archer Daniels Midland made an offer).
The Andersons is a very Americana company - Ohio company with grain elevators around the Midwest, a railcar operation, Fertilizer operation, ethanol operation and a small retail operation - there's even a division that makes things out of corn cobs, such as pet bedding. Family operation that started as a single grain elevator and still remains family-run. A couple of the smaller aspects I could do without, but a lot of great, productive assets. Still, it's a very small float and it's almost absurdly volatile. The seasonality of it, if it plays out again, makes for a great trade, but it's too bad as I'd love to own the assets over a longer-term. If the Archer Daniels Midland/Graincorp tie-up does not happen, I'd own Graincorp again in a second, as while that isn't low-key either, it has a terrific dividend policy.
Instead, I own Glencore, which is highly volatile, but offers a global collection of productive assets (including hundreds of thousands of acres of owned or leased farmland), is well-managed and rather infamous. ("The Biggest Company You Never Heard Of": http://www.reuters.com/article/2011/02/25/us-glencore-idUSTRE71O1DC20110225 - "Bigger than Nestle, Novartis and UBS in terms of revenues, Glencore's network of 2,000 traders, lawyers, accountants and other staff in 40 countries gives it real-time market and political intelligence on everything from oil markets in Central Asia to what sugar's doing in southeast Asia." "Their knowledge of the flow of commodities around the world is truly frightening." )
It also is another instance of a story playing out as it absorbs Viterra and Xstrata (and possibly more over the next couple of years), becoming both a large-scale commodity company and the largest commodity trading company on the planet.
Glencore has not done as well as I'd hoped and it's been a long, strange trip with the Xstrata merger that involved sovereign wealth funds and mediation by former Prime Minister Tony Blair in the middle of the night. (http://www.dailymail.co.uk/news/article-2200655/The-million-dollar-man-How-Tony-Blair-wafted-Claridges-secure-massive-pay-day-just-hours-work.html) "Tony Blair made $1 million in less than three hours by brokering late night talks between billionaire businessmen trying to save a £50billion mining deal."
However, despite issues, I remain a long-term holder, as I think Glencore remains a value and unique in terms of what it offers. Additionally, I think it's evolving as it becomes a much larger entity.
Mark said: " Consider the market investment road you traveled to reach that point and how long it took you to reach that end. I'm assuming that it's a radical departure from the vista you perceived when you began your investing travels. It certainly is for me."
I think the market has an incredibly short-term mentality in modern day and I think people are effected by the rapid money flows one way or another - as I've noted before, the average holding period for a stock has gone from several years to several days. However, I think there's real downsides to attempting to keep up with what's working now aside from the fact that I think it quickly becomes exhausting and not enjoyable. Personally, for me, it becomes a matter of having a selection of duller, consistent, low beta names and a selection of bets on various themes and/or assets that are - to varying degrees - more aggressive. If the story changes, I'l definitely reconsider, but I don't see selling anything I own for quite a while, and will continue to reinvest dividends when possible.
________________________________________________
As for fundamental problems that keep people out of the markets, I think:
1. If you are an investor in this country, it's likely that you taught yourself to some degree, because there is nothing at the high school level regarding personal finance. I think that's terribly unfortunate. I think to some degree it's the desire of financial companies not to have the populace (as a whole) highly educated in terms of investing. Still, if everyone was educated in personal finance at the high school level, you wouldn't have situations like the Facebook IPO, but I think you would have less volatile markets and a population that would likely see greater benefits from financial markets. People are still going to chase hot stocks, there's still going to be issues, but if people go out of high school with basic knowledge about personal finance and investing, I really don't see a downside.
2. I think people remain insecure and concerned about the big picture (as noted above) and do not want to commit to anything not believed to be safe. However, I'm a little concerned that a lot of average people do not understand the workings of the fixed income market and will be disappointed if bonds really turn after believing that they are safe.
3. Trust is broken and that will take time to repair. People don't trust the markets and I think to some degree I don't blame them. The media doesn't explore the reasons why people are staying out of markets, nor does it try to assist people - you instead get stories in Smart Money and the like that essentially scream, "YOU'RE MISSING IT! WHAT'S WRONG WITH YOU?" It doesn't help anything or anyone.
1. You are amazing.
2. What a truly sad situation if your comment is true (beyond obviously exploitative shops like Edward Jones):
Very high regards- OJ