20. June 2010 by Dan Walkow, CFA, CMT.

We have seen the enemy and it is us….

When it comes to successful investing in this era the laws of human nature have not changed. Humans are social creatures and for the most part feel good when they are part of the crowd. In  this era of instant communication by “live business TV” and the constrant real time feed of the internet information flows real-time and on a global basis “emotional risk intensifies.”

Investing is not a local thing anymore and when the ” crowd” gets excited pushing investment values to and fro on an acclerated basis. This leads to sharper and more volitle moves in security prices.

The danger for most investors is that they get their information through the popular news flow and form their opinions accordingly. This is human nature but in the world of investing it is a dangerous and often costly exercise.

The emotional pull to be part of the crowd more often than not leads to buying investments at rich prices already bid up and therefore postioned for disappointment.

The most signifigant impediment to making successful investments is our own emotions and desire to be part of the crowd.

Now more than ever, when it comes to investing, the old saw applies; believe nothing of what you hear and half of what you see.

Great piece at the Wall Street Journal on a recent study on the reasons why investors get caught up in the crowd mentality. Read it here.

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13. October 2009 by Dan Walkow, CFA, CMT.

According to Mark Hurbert “the data from TrimTabs Investment Research shows that the net outflow for the month of September from domestic equity open-end mutual funds was $11 billion — the biggest monthly outflow since March, the month in which the bear market hit bottom. This trend continued for the first five trading sessions of October (through this last Wednesday, in other words), over which time an additional $4.1 billion was pulled out.

By the way, the other trend I mentioned in my mid-September column appears to be alive and well and, if anything, getting stronger: I am referring to mutual fund investors’ love affair with bonds. According to TrimTabs, open-end bond mutual funds in September had their strongest month of the year in terms of net new cash invested in them. And, if we extrapolate on the data for the first five trading sessions of October, October might be a month of even bigger net inflows.” Read full story here.

This rally continues to climb a wall of worry. Could the masses be wrong again with bond prices at nose-bleed levels while stocks continue to recover but only benefiting the courageous few?

Bubble bubble me thinks its the bond market!

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24. August 2009 by Dan Walkow, CFA, CMT.

 While we know that we made investment mistakes, and vow not to repeat them, most people have only the vaguest sense of what those mistakes were, or, more important, why they made them. Why did we think and feel and behave as we did? Why did we act in a way that today, in hindsight, seems so obviously stupid? Only by understanding the answer to these questions can we begin to improve our financial future.This is where behavioral finance comes in. Most investors are intelligent people, neither irrational nor insane. But behavioral finance tells us we are also normal, with brains that are often full and emotions that are often overflowing. And that means we are normal smart at times, and normal stupid at others. Read more here.

More on how pros take advantage advantage of the “sheeple”. The area of behavioral science is well understood and available to most investors. However, even if you understand “emotional triggers” most individual investors cannot capitalize on them. Each investor is their own worst enemy and it is your emotions vs you or as they say “I have seen enemy and IT IS ME!”

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19. August 2009 by Dan Walkow, CFA, CMT.

Not that long ago I posted a blog here entitled “They Can See You Coming”. They are sharp minded wall street players who use behavioural science along with super fast computer programs to exploit human weaknesses.

Paul Farrel over at CBS Marketwatch penned a piece which I think every investors should read which follows on the point of my last blog that most investors face a system that is stacked against them. To beat the pros you have to think like one as it truly is a “battle for investment survival.”

He calls the great unwashed nudgees. Here are 25 habits of predictably irrational ‘nudgees’

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26. July 2009 by Dan Walkow, CFA, CMT.

When stressed, studies show men tend to take on more risky bets and gamble whereas women, when stressed tend to pull back and control risk.

Generally speaking I think this to be true, as I reflect back over 30 years of working with investors. My own sense is that women could be a little more aggressive and men should temper the tendency to hit a home run on speculative stocks.

Most investors focus on the “investment return” side of the equation losing sight of the fact that investing is a two-sided coin where risk and return are joined at the hip.

Risk management is a crucial part of sucessful investing over the longer term, do you have a risk management framework?

For more on risk management and using a concept called “risk bucketing” sign up for our email newsletter . It’s free! Check the study out here.

——–Stressed out, dude? Don’t go to Vegas.

New research, to be published July 1 in the journal PLoS One, shows that men under stress may be more likely to take risks, correlating to such real-life behavior as gambling, smoking, unsafe sex and illegal drug use.

In contrast, stressed women moderate their behavior and may be less likely to make risky choices, the study found.

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23. July 2009 by Dan Walkow, CFA, CMT.

Far be it from to to critique Jim Cramer but I have seen enough of this kind of marketing over the years to agree with Henry Blodget over at Clusterstock.

As he notes on Cramer’s marketing spin:

It’s a personal note from “Jim Cramer.”  And it uses the oldest sleazy investment marketing tactic in the book.

What’s that?

Cherry-picking.

In an attempt to get you drooling about how much money you’ll make if you pony up and buy a subscription, the letter describes a few amazing calls Jim has made in recent months.  Goldman Sachs!  Nike!  GE!  What the letter doesn’t do, of course, is describe all of Jim’s terrible calls.

This is what many newsletters (and investment managers) do: Tout their good calls and igore their bad ones.  And they do it because it works.  But for anyone who takes their advice and clients seriously–as Cramer purports to–it’s misleading and sleazy. 

Cramer is not alone here. Without trying to get into the same boat of selfless self- promotion , if you don’t know who the pooch is at the poker table, hire a pro such as Seabank Capital or some other reputable fee-based investment manager who does not have any incentive or bias to promote a product or service….

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21. July 2009 by Dan Walkow, CFA, CMT.

If history is any guide when investor sentiment is bearish, as it is now, markets tend to mark higher climbing a wall of worry.

According to a recent survey by Merrill Lynch here are a few take-aways:

•   The latest readings from last weeks AAII survey show that small investors remain overly bearish.
• In terms of asset allocation, investors remain fairly risk averse.  Bonds and cash are still heavily favored while requities remain an underweight.  This likely represents a scenario where investors remain under invested in stocks and over invested in risk averse assets.
• Alternative assets are more of a mixed bag.  Commodities overall remain in no mans land.
• Gold and oil both remain neutral holdings for most fund managers.
• There is no conviction; investors finding lots of excuses to do nothing.  Everyone expecting a further modest equity correction; surprise for investors would be summer rally or a real summer crack in markets.
• Meanwhile, individual investors remain fairly bearish.  The latest AAII bullish poll came in at 28% which is a level that has generally favored the long equity trade.

As alwaus, it rarely pays to be in the majority when it comes to investing. This market has a ways to go yet.

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8. July 2009 by Dan Walkow, CFA, CMT.

One of the great ironies in the hedge fund industry is the propensity for many investors to favor relative returns over absolute returns.  This is particularly true among retail investors who, by and large, would prefer to lose money along with everyone else than to make less than everyone else.  What else could explain the complacency with which investors accept -40% market returns while crying foul at the hedge funds that “under perform” in a bull market.

Investors are supposed to be “rational” when it comes to accessing risk and making investment choices. At least that is what they teach finance students when they study the CAPITAL ASSET PRICING MODEL. Nothing could be further from the truth!

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20. June 2009 by Dan Walkow, CFA, CMT.

Paul Tudor Jones - Failure Speech June 2009

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