Just Stay Out of the Water
Top 5 of the Week of May 22
In our Top 5 this week, Provost Professor of Finance at the University of Colorado Sanjai Bhagat argues for the Harvard Business Review that we should change board directors incentives. Meir Statman, author of Finance for Normal People: How Investors and Markets Behave and writing for Wealthfront, discusses our rational versus irrational behavior. And The Financial Samurai, Sam Dogen, advises us to say no to angel investing.
Dr. John Hussman of Hussman Funds explains how the market is not really different this time. And Shlomo Benartzi and Hal E. Hershfield warn us of the dangers of financial apps on our retirement for Market Watch…
Provide the Right Incentives
- Following scandals at top companies—Wells Fargo, Lehman, Enron, and Qwest—the way boards of directors are focused has undergone some scrutiny
- If we change how directors are incentivized, currently in cash retainers and stock options, similar crimes could be avoided
- By compensating only with restricted equity—they’d be unable to sell shares for at least one or two years after their last board meeting—we could focus their attention on the long-term success of the company rather than their own gain
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The Smart Move
- Behavioral finance can teach us much as investors if we see beyond just the utilitarian benefits of financial products
- By increasing our understanding of the full range of investor’s wants—the driving forces behind our decisions fueled by utilitarian, expressive, and emotional factors—we can better avoid being “irrational”
- Learn the lessons behavioral finance has to offer and improve the ratio of smart to foolish decisions you make
Just Stay Out of the Water
- Angel investing has become increasingly popular since 2009, but individual angels are entering dangerous waters when trying to compete with venture capital (VC) firms
- VC firms invest other people’s money in order to make returns—as a solo investor, you have zero edge and you’re the sole bearer of all associated risk
- Also, as a minority investor you have zero liquidity and no say in the management decisions or funding rounds; all for dismal returns—safer just to avoid swimming at all costs!
“This Time Is Always Different”
- Because history does not repeat itself in exactly the same manner time and again, we fail to learn from it; believing that “this time” is entirely different—every time
- Yet, we cannot ignore what history can teach us by being so wrapped up in the singularity of events that we disregard known principles
- In financial markets, each “new era” we face should be carefully quantified and analyzed so that we do not neglect the central principles of investing by being so short-sighted
Financial Apps Should Come with a Warning Label
- Studies show that despite connecting us better with our retirement accounts, financial apps are engendering mistaken beliefs about the value of our retirement investments
- They are desensitizing us to large sums of money by presenting our retirement information in large lump sums—giving us the ‘illusion of wealth’
- They fail to help us correspond these large amounts to what will realistically become our monthly income and expenditures—and we run the risk of being ill-prepared for our futures
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form—and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Become a Better Investor Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.