Financial Theory vs Flawed Humans

[mickeyd]

http://www.bankrate.com/brm/news/investing/20060724a1.asp?caret=1

What happens when financial theory intersects with flawed human beings who are motivated not by pure rationality, but by personal and brand-name loyalties and the twin engines of fear and greed?

Behavioral finance experts have studied the problem and have found that, far from being rational, investors in the real world are often wracked by extreme emotional disturbances. Most mental maladies fall into two broad categories: narcissistic delusions and loss-avoidance disorders. These conditions afflict investors just like us. But we can do things to inoculate ourselves against them.

Being a big Bogle/Vanguard fan, I wonder if I have not fallen into this abyss and may be somehow emotionally linked to VG too damn much? Is this a forest/trees situation that I find myself in without realizing it?

 

[Spanky]

The cure is to buy a Vanguard target xxxx retirement fund and to ignore all financial news or better yet -- do not watch the news, watch newspaper, visit financial web site, participate in financial forum, etc. Play golf (or whatever you enjoy) and enjoy life.

 

[MasterBlaster]

Ah Ha !

Now their is definitive proof that some who post on this board (not me though) have extreme emotional disturbances and narcissistic delusions !

I suspected as much but now I know it to be true.

 

[ESRBob]

Being a big Bogle/Vanguard fan, I wonder if I have not fallen into this abyss and may be somehow emotionally linked to VG too damn much? Is this a forest/trees situation that I find myself in without realizing it?

mickeyd,
I think the "vanguard approach" -- (you could certainly do this other places than vanguard) of long-term, buy-and-hold, low-fee, diversified index investing is the solution to the investing maladies the article mentions. Keeps you sitting on your hands instead of fiddling with things that should be left alone, and it enforces a 'match-the-market' instead of 'beat-the-market' type of approach.

So, I'd say you're on firm ground -- don't worry, be happy!

 

[unclemick]

75% Target Retirement, 82% counting Roth(I switched from Lifestrategy) - ala Bogle: 'Hurry up, just stand there.

15% individual stocks - irrational - whadda mean - after forty years(1966 - 2006) of putzing - any day now, any day.

heh heh heh heh heh heh heh heh heh - 102 in the sun and I did mow the rest of the lawn early. psst Budweiser. No - perhaps iced tea while I'm questing for 'the' Holy Grail stock.

 

[cute fuzzy bunny]

Funny how many 'systems' and 'newsletters' waltz right by the irrational human aspect of investing.

Reminds me of the traffic engineers trying to model traffic flows, and they never resembled the real thing. Until they factored in drivers doing completely irrational stuff, like driving too slow, changing lanes and braking for no reason, etc. Then the models started to fit perfectly.

 

[brewer12345]

I also find that the markets can be pretty slow to react to information that is in the public domain. Stuff that is sent out via newswire, makes it onto the financial cable channels, is covered by the WSJ, etc. is reacted to and efficiently priced in immediately. Stuff that is out there and simply takes careful attention to monitor and keep track of is often ignored until it makes its way into the media. I have to wonder if this is the sort of thing that sell-side analysts used to do.

 

[Spanky]

I also find that the markets can be pretty slow to react to information that is in the public domain.

This may not be true in the penny stock market. Any news trigger strong reactions (positive or negative).

 

[Gone4Good]

This may not be true in the penny stock market. Any news trigger strong reactions (positive or negative).

This may be true for "news" but I think brewer is refering to information that is available before it makes headlines. I've seen it a number of times. An important regulatory or legal filing sits there on the web completely unnoticed by the market at large. Nobody seems to care until some "news" organization runs a headline and then the market reacts.

 

[d]

irrational? moi? how does one act rationally in the face of irrationality?

 

[2B]

Funny how many 'systems' and 'newsletters' waltz right by the irrational human aspect of investing.

Reminds me of the traffic engineers trying to model traffic flows, and they never resembled the real thing.  Until they factored in drivers doing completely irrational stuff, like driving too slow, changing lanes and braking for no reason, etc.  Then the models started to fit perfectly.

This post raises my suspicion that you may be a civil engineer. If so, confess now and the flames will purify your soul.

 

[unclemick]

'slip out the back jack', don't play, pick up your marbles and go home, etc, etc.

Orrrrrrr - use only mad money and be wildly irrational - in your own rational way of course.

heh heh heh heh - recognize it as incurable and try to manage the disease - er ah hormones. 15% here - no more - unless I hit the big one - then I'll quit - I promise, I promise!!!! Cross my heart.

 

[ladelfina]

I know I'm not 'supposed' to be checking my investments too often, but I couldn't help but notice 3M "losing" 20% of its "value" in the last month or two.



I have a little bit of cash in my Roth (which already has some 3M) and am tempted! Up to 70 now, but was 67 a couple days ago, down from 88. (Seee? now why don't I ACT on my hunches... grrrrrr )

Even with stocks that are heavily analysed, I don't see such a great correlation between reality and the market 'wisdom.' This is all supposedly over some bad news about video screens? Am I missing something? [Possibly, because I didn't even know 3M had anything to do with video screens!!  ]

Quick, because I'm logging on to Schwab soon! 

 

[brewer12345]

This may be true for "news" but I think brewer is refering to information that is available before it makes headlines.  I've seen it a number of times.  An important regulatory or legal filing sits there on the web completely unnoticed by the market at large.  Nobody seems to care until some "news" organization runs a headline and then the market reacts. 

This is exactly what I am talking about. Also things like:

- Rates earned by dry bulk shipping companies have shot up in the last 6 months and continue to rise. This information is available to anyone via numerous free websites. The stocks of the companies in this business (DRYS, DSX, EGLE, etc.) have all bounced off their lows, but they are still way down. Everything I see says that these companies will see tremendous earnings growth in the next 6 months to a year at current carter rates. But I can pretty much guarantee that the stocks will go nowhere until either they report vastly higher earnings, or a sell-side analyst trumpets higher charter rates as a reason to get excited.

Can't complain. It would be tough to make excess returns if markets didn't behave this way. I notice that this seems to be much more prevalent with small companies rather than large ones, which are more widely/obsessively followed.

 

[ESRBob]

Brewer,
Could those rate increases just be the result of additional fuel costs? Or do you think they will really translate to profits? I remember hearing a lot about this statistic 3 or so years ago, and a big focus on shipping industry profits that were to follow. The stats were being discussed in stories about China and all the trade going on there, pressure on shipping rates elsewhere etc.

I admire your sense of confidence and optimism, spotting things that are overlooked by others. I agree that sell-side analysts used to do much of this spadework. I still deeply suspect that there are armies of bright, talented, clear-thinking people backed by tons of money (hedge funds, mostly, but also mutual funds, institutional investors and tons of individual intelligent people who love markets) who are sifting through all this info and turning it into market positions. You are presumably one of them, too.

My own feeling is that while I might outwit that force once or twice in a row, I won't be able to do it consistently for decades to come. I might be smart enough to know when to buy this time, will I also be smart enough to know when to sell? And again next time? Give me my index funds and value funds any old day. Then I can have the time to hang out here 8) (then again, you have the time to hang out here, too, and make money and buy your wife nice jewelry, so maybe you've figured something out!)

 

[brewer12345]

Brewer,
Could those rate increases just be the result of additional fuel costs?  Or do you think they will really translate to profits?  I remember hearing a lot about this statistic 3 or so years ago, and a big focus on shipping industry profits that were to follow.  The stats were being discussed in stories about China and all the trade going on there, pressure on shipping rates elsewhere etc.

Nope, its not fuel costs.  In time charters, the charterer (renter of the ships) pays the fuel and port charges.  In cases where the owner of the ship pays these charges, it gets built into the rate charged, and everyone tends to express things in "time charter equivalent" (i.e. with fuel and port charges backed out).  It appears to be a case of not enough ships to go around.  I read yesterday that the Yangtse River has surpassed the Mississippi for the most cargo volume handled on any river.

If you are interested:

- EGLE owns a high quality fleet, has modest debt levels, and fixes all its ships on medium to long term charters.  I think it is high quality and low risk.
- DSX has no debt and owns a high quality fleet with significant exposure to short term charter rate fluctuations.  I think they are well run and a reasonable way to get some of the benefit of an upswell of rates without taking too much risk.
- DRYS has a large fleet of newish and somewhat older ships, lots of exposurre to short term rates, and a lot of debt.  These guys run full tilt and have the knob turned all the way to 11 and ripped out.  It won't be pretty when the wheels fall off (and they will), but if charter rates continue screaming upwards the stock could easily double in 6 months.  I think this is a speculative stock suitable only for play money or call options exposure.
- GSTL owns a fleet of somewhat older ships, most/all of which are fixed on medium term charters.  The company has some debt, but a sane level of leverage.  It is run by a guy who did very well in the oil tanker industry.  I think the company is well run, but the age of the fleet icreases operational risk modestly and the stock appears expensive.

All of the above pay extremely fat dividends.

Please do your own due diligence.

 

[cute fuzzy bunny]

This post raises my suspicion that you may be a civil engineer. If so, confess now and the flames will purify your soul.

Nah, I just read stuff and remember the interesting bits. Well, most of them.

 

[Nords]

But I can pretty much guarantee that the stocks will go nowhere until either they report vastly higher earnings, or a sell-side analyst trumpets higher charter rates as a reason to get excited.
Can't complain. It would be tough to make excess returns if markets didn't behave this way. I notice that this seems to be much more prevalent with small companies rather than large ones, which are more widely/obsessively followed.

Ssssshhhh. I'm still re-investing dividends...

Could those rate increases just be the result of additional fuel costs? Or do you think they will really translate to profits? I remember hearing a lot about this statistic 3 or so years ago, and a big focus on shipping industry profits that were to follow. The stats were being discussed in stories about China and all the trade going on there, pressure on shipping rates elsewhere etc.

Nope, its not fuel costs. In time charters, the charterer (renter of the ships) pays the fuel and port charges. In cases where the owner of the ship pays these charges, it gets built into the rate charged, and everyone tends to express things in "time charter equivalent" (i.e. with fuel and port charges backed out). It appears to be a case of not enough ships to go around. I read yesterday that the Yangtse River has surpassed the Mississippi for the most cargo volume handled on any river.
If you are interested:
- EGLE owns a high quality fleet, has modest debt levels, and fixes all its ships on medium to long term charters. I think it is high quality and low risk.

Bob, from a mariner's perspective, these guys appear to be actually able to handle an operations plan and a drydock schedule. Even with surprises built in, Eagle seems to be the 21st-century equivalent of selling pickaxes to the Yukon gold rush. Many of the Pacific Rim ports do not have modern cargo-handling facilities and EGLE has been focusing on a niche where their ships match their capacity to most shipper's cargos... plus they carry their own handling cranes. They've been on a spending spree of acquiring new ships, obtaining more credit (just filed the 8K yesterday), modernizing the fleet, and all the other classic growth symptoms.

http://www.eagleships.com/phoenix.zhtml?c=189576&p=irol-irhome

Want another boring stock that's been on a tear? Tate & Lyle PLC, the makers of the artificial sweetener Splenda.

Did I mention that Berkshire Hathaway is scheduled to report their quarterly on Friday night?