Upload
others
View
6
Download
0
Embed Size (px)
Citation preview
CFA Society New Mexico
Bob SchmidtManager, Brandes Institute
1
Are A & B Different Shades of Gray?
Source: Edward H. Adelson, 1995.
2
Are A & B Different Shades of Gray?
Source: Edward H. Adelson, 1995.
6
Prospect Theory & Framing
System 1 (fast thinking, taking short cuts)
• “operates automatically”
• “little or no effort”
• “no sense of voluntary control”
7
Prospect Theory & Framing
System 2 (slow thinking)
• “effortful mental activities”
• “agency, choice and concentration”
Kahneman, Daniel. Thinking Fast and Slow. New York: Farrar, Straus and Giroux. 2013.
8
Prospect Theory
Mental Value
Losses Gains
Fear = 2xGreed
Kahneman, Daniel. Thinking Fast and Slow. New York: Farrar, Straus and Giroux. 2013.
9
• Grows consistently for 20 years
• Low standard deviation
The Bumble Corp. The State of Bliss
A Hypothetical Portfolio
10
• Paper Gains =
1 positive emotional unit
• Paper Losses =
2 negative emotional units
How often do you look?
Chance of seeing a “Paper Gain”
Once a year 93%
Every quarter 77%
Every month 67%
Every day 54%
Every hour 51.3%
Every minute 50.17%
Every second 50.02%
Benefits of a Long-Term Focus
Source: Taleb, Nassim Nicholas. Fooled by Randomness: The Hidden Role of Chance in Life and the Markets. 2nd Ed. New York: Thomson,
2004. pages 64-68. This hypothetical example is intended for illustrative purposes only. It does not reflect the performance of any specific
investment vehicle. Actual results will vary.
11
Wheel of Investor Emotion
Source: Taleb, Nassim Nicholas. Fooled by Randomness: The Hidden Role of
Chance in Life and the Markets. 2nd Ed. New York: Thomson, 2004. pages 64-68.
This hypothetical example is intended for illustrative purposes only. It does not
reflect the performance of any specific investment vehicle. Actual results will vary.
12
More News = More Information?
Get Rich.com
– Time,
September 27, 1999
“Bubble Fears as U.S.
Stocks Break Records”
– Financial Times,
November 20, 2013
“Bailout Fails; Stocks Plunge.”
– The New York Times,
September 29, 2008
“The Death of Equities”
– Business Week, August 13, 1979
“The Rebirth of Equities.”
– Business Week,
March 9, 1983
“Bear Trap: Will Tech Stocks Sink the
Rest of the Market and the Economy?”
– U.S. News & World Report,
March 26, 2001
13
In 1977, at the time of Elvis Presley’s death, there were 170
Elvis impersonators worldwide.
In 2000, there were 85,000 Elvis impersonators.
At this rate of growth, statisticians predicted that by 2019,
Elvis impersonators would make up 1/3 of the world’s population.
Extrapolation
Source: http://www.murderousmaths.co.uk/elvis.htm; Freemovement.org, November 13, 2007
14
Framing
15
Attention Response & FramingS&P 500 Annual Returns (1928-2015)
Source: Prof. Robert Shiller data. http://www.econ.yale.edu/~shiller/data.htm. Past performance is not a guarantee of future results. One cannot invest
directly in an index.
11.4%
Average
Annual
Return
16
Attention Response & Framing
Source: Prof. Robert Shiller data. http://www.econ.yale.edu/~shiller/data.htm. Past performance is not a guarantee of future results. You may not invest
directly in an index. Does not represent all market declines of 10% or more.
-25%
-44%
-35% -11%-13%
-10%
-14%-26%
-12%-22%
-37%
10
100
1000
10000
100000
1000000
% R
etu
rn
S&P 500 Index (1928-2015) Calendar Years With Declines in Excess of 10%
17
Meet Dr. Eben Otuteye and Mohammad Siddiquee
“Volatility is not a surprise.
Volatility is neutral;
it is just part of what the asset is.
“Redefining Risk and Return”
Volatility ≠ Risk
But you can turn it into risk if you mishandle it.”
Source: Otuteye, Eben and Mohammad Siddiquee. “Redefining Risk and Return in Common Stock Investment from a Value Perspective.”
https://www.brandes.com//docs/default-source/brandes-institute/2015/redefining-risk-and-return
18
Source: Inspired by Marks, Howard. The Most Important Thing: Uncommon Sense for the Thoughtful Investor. New York: Columbia
University Press. 2011. Hypothetical illustration does not represent any particular investment. Actual results will vary.
Risk Perceptions
More Risk Doesn’t Necessarily Mean More Return
-100
-50
0
50
100
150
200
Low Low to Medium Medium Medium to High High
Po
ten
tia
l R
etu
rn %
Risk Level
19
Risk Tends to Diminish Over Time…
Source: S&P Dow Jones Indices, as of 12/31/15. U.S. stocks represented by the S&P 500 Index. Rolling periods represent a series of overlapping, smaller
time periods within a single, longer-term time period. For example, over a 20-year period, there is one 20-year rolling period, eleven 10-year rolling periods,
sixteen 5-year rolling periods, and so forth. Past performance is not a guarantee of future results. One cannot invest directly in an index.
-60%
-40%
-20%
0%
20%
40%
60%
2 Yr 5 Yr 10 Yr 20 Yr 30 Yr
Ra
ng
e o
f T
ota
l R
etu
rns (
An
n.)
%
Range of Total Returns for U.S. Stocks Over Various Rolling Periods (1926-2015)
20
Risk and Return: Ask Your Clients a Simple Question
“What do you expect returns to be next year for the stock
market? Give me a range of outcomes.”
• Do they include a negative number in their range?
• If not, have a conversation about expectations and short-term returns.
Source: Jay Mooreland, www.theemotionalinvestor.org
21
Source: Carl Richards at www.behaviorgap.com
Avoid This Behavioral Pattern!
22
Investment Process: The Essentials
Source: CFA Institute report, “Manager Selection” by Scott D. Stewart, CFA. Dec. 2013.
IPS Features and Implications
1. Client description (asset size, cash flow profile, liabilities)
2. Duties (asset class selection, manager selection, fee negotiation,
monitoring)
3. Objectives (total vs. relative, real vs. nominal, risk objectives,
fees/expenses)
4. Constraints (liquidity, horizon, taxes, legal, restrictions)
5. Asset allocation targets (asset class selection, acceptable styles,
number of classes)
6. Rebalancing guidelines (frequency and rules)
7. Schedule for reviews (frequency and access)
Investment Policy Statement
Source: Jim Ware, CFA and Brian Singer, CFA. “Decision Making: A Process Check for Investment Firms.”
Decision Rights
How Do We Make Decisions?
25
Evaluating “Success”
Source: Russo, J. Edward and Paul J. H. Schoemaker. Winning Decisions: Getting It Right The First Time. 1st ed. New York: Random House. 2002.
26
Investor Stress Management Plan (ISMAP)
1. Positive activities they control
2. Investment plan
3. Sign it
Source: MarketPsych and Brandes Investment Partners
Hiring or firing managers
Adopting strategies/approaches that have
had recent success—or abandoning
strategies that have fared poorly recently
Confusing skill with luck when evaluating
managers
Looking at high returns without
considering risks
Recognizing Potential Biasesin Decision-Making
Source: Bob Maynard. “Behavioral Finance: Pitfalls and Prevention for Plan Sponsors.” Brandes Institute. 2004.
Evaluating the products without
evaluating the firm
Avoiding “high-risk” investments
because of perceived volatility
Relying on skill in selecting a
“better-than-average” manager
Decisions where leverage is involved
Source: Bob Maynard. “Behavioral Finance: Pitfalls and Prevention for Plan Sponsors.” Brandes Institute. 2004.
Recognizing Potential Biasesin Decision-Making
Explanations in simple language
Appoint a devil’s advocate
Establish and perpetuate a culture
of debate
Use quantitative evidence—wisely
Source: Bob Maynard. “Behavioral Finance: Pitfalls and Prevention for Plan Sponsors.” Brandes Institute. 2004.
Preventing Bias From Affecting Decisions
Create and follow a comprehensive
investment policy
Focus on the long term
“Pre mortem”
Document successes and failures
Source: Bob Maynard. “Behavioral Finance: Pitfalls and Prevention for Plan Sponsors.” Brandes Institute. 2004.
Preventing Bias From Affecting Decisions
Review staff capabilities
Set clear objectives and short-term risk tolerances
Provide “stabilizing, rational consistency”
Maintain stable committee with terms of 5 to 6 years, renewable once
Achieve average manager tenure of 10 years or more
In What Areas Should Investment Committees Focus?
Source: CFA Institute report, “Manager Selection” by Scott D. Stewart, CFA. Dec. 2013.
CFA Institute Recommendations
Understand how we make decisions―and which system we use
Be aware of specific biases and use tools/tactics to help counter them
Think long term
Seek additional resources if needed
In Closing…
33
VALUE SPECIALISTS SINCE 1974
CALL BRANDES NOW 800.237.7119
BRANDES.COM
11988 El Camino Real │ Suite 600 │ P.O. Box 919048 │ San Diego, CA 92191-9048
34
Disclosures
Robert Maynard is a member of the Brandes Institute Advisory Board.
The S&P 500 Index with gross dividends measures equity performance of 500 leading companies in industries of the U.S. economy.
The information provided in this material should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any
security transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be
profitable or will equal the investment performance discussed herein. Portfolio holdings and allocations are subject to change at any time and should not be
considered a recommendation to buy or sell particular securities. Strategies discussed herein are subject to change at any time by the investment manager in its
discretion due to market conditions or opportunities. International and emerging markets investing is subject to certain risks such as currency fluctuation and social
and political changes; such risks may result in greater share price volatility. Unlike bonds issued or guaranteed by the U.S. government or its agencies, stocks and
other bonds are not backed by the full faith and credit of the United States. Stock and bond prices will experience market fluctuations. Please note that the value of
government securities and bonds in general have an inverse relationship to interest rates. Indices are unmanaged and are not available for direct investment.
The foregoing reflects the thoughts and opinions of Brandes Investment Partners® exclusively and is subject to change without notice. Brandes Investment
Partners® is a registered trademark of Brandes Investment Partners, L.P. in the United States and Canada.
Rolling periods represent a series of overlapping, smaller time periods within a single, longer-term time period. For example, over a 20-year period, there is one 20-
year rolling period, eleven 10-year rolling periods, sixteen 5-year rolling periods, and so forth.
The recommended reading has been prepared by independent sources which are not affiliated with Brandes Investment Partners. Any securities mentioned reflect
independent analysts’ opinions and are not recommendations of Brandes Investment Partners. These materials are recommended for information purposes only and
should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Past performance is not a guarantee of
future results. No investment strategy can assure a profit or protect against loss.
Brandes Investment Partners does not guarantee that the information supplied is accurate, complete or timely, or make any warranties with regard to the results
obtained from its use. Brandes Investment Partners does not guarantee the suitability or potential value of any particular investment or information source.
No investment strategy can assure a profit or protect against loss.
35
VALUE SPECIALISTS SINCE 1974
CALL BRANDES NOW 800.237.7119
BRANDES.COM
11988 El Camino Real │ Suite 600 │ P.O. Box 919048 │ San Diego, CA 92191-9048
36
The Stroop Effect: Testing our Brain
Source: University of Washington. https://faculty.washington.edu/chudler/java/timesc.html
37
The Stroop Effect: Testing our Brain
Source: University of Washington. https://faculty.washington.edu/chudler/java/timesc.html