Behavioral Economics: How Things Have Changed
Top 5 of the Week of March 5
Kicking off our Top 5 this week, Daniel Rasmussen on Institutional Investor takes a closer look at Michael Porter’s value investing ideas. In Michael Kitces’ own Nerd’s Eye View, he reveals new research in the well-known area of loss aversion. And Barry Ritholtz, Chairman & CIO of Ritholtz Wealth Management, shares the best methods for avoiding investment disaster—timeless advice indeed!
Real Investment Advice’s Jesse Colombo spots trouble ahead in U.S. corporate bonds. And for Newfound Research, Vice President Nathan Faber asks if dollar-cost averaging is the right move to make…
Michael Porter’s Competitive Strategy: Gospel or Fiction?
- The latest in value investing is Harvard Business School professor Michael Porter’s Competitive Strategy about power leading to profits
- Instead of following the Benjamin Graham school of value investing, who advocated buying undervalued stocks, Porter’s theory is about looking for a competitive advantage
- But while the first has been empirically proven over and over again, the latter is founded on no empirical evidence
Behavioral Economics: How Things Have Changed
- One of the most notorious concepts in behavioral economics is that of loss aversion—that losing money is more painful than any positive feelings associated with gaining it
- It’s considered the drive behind many other notions such as “the endowment effect, status quo bias, the disposition effect, and even the equity risk premium”
- However, new studies have demonstrated that loss aversion may only apply in very specific circumstances and that the concept is much more nuanced than previously supposed
Dodge Investing Disasters
- “Avoid new products”: Wait for a full market/economic cycle before investing in anything new
- “Too many investors never learn from history”: Don’t get complacent, volatility always returns
- “Never buy anything you don’t understand”: There is always a high risk when investing in something unknown
- “Beware of institutional products repackaged for retail”: Don’t buy into any complex products as an individual
- “Greater returns always come with greater risk”: Remember; there’s no such thing as a free lunch
Are any pieces of advice missing from this list? Share your comments in the section below
Bubble Trouble for Corporate Bonds
- The most oft-overlooked bubble influence of today is the record low-interest rates we’re experiencing
- In response to the artificially low rates, there has been a mania of “yield-chasing” with liquidity moving into riskier assets in order to yield any return
- U.S. corporate bonds have been on the positive receiving end of this chase, but the tightening Fed policy will no doubt burst this bubble before long with a repeat performance of 2008
High drama and Fraught Emotions
- When it comes to dollar-cost averaging (DCA)—set amounts at set periods—or lump-sum investing (LSI)—exactly what it suggests—the decision makes for a situation loaded with stress
- There is both historical and theoretical proof to argue that DCA doesn’t actually return better results than LSI, and few risk measures show the benefits of choosing the first option too
- Instead, what matters most is to compile a risk-appropriate portfolio, stick with it long-term, and calmly handle any behavioral problems
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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