Reblog: The Drawbacks of Behavioral Finance During a Market Correction


The stock market got interesting again this week. Volatility is back after having gone missing for the past 18 months or so.I saw the following words spewed across the financial media this week: turbulence, fear, pain, panic, distress, agony. It’s still a little early for all of that. As of the close on Thursday, the S&P 500 is a little over 10% from its all-time highs.But try telling that to your emotions when you’re witnessing a decent percentage of your savings evaporate over the course of a little more than a week. The pain we feel from losses dwarfs the pleasure we feel from gains.

Because of the havoc they can wreak on our portfolios, investment professionals and advisors often instruct their clients to ignore their emotions during times like this.

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Reblog: How to Act in a Bear Market: Part 2


Last time, I wrote an article discussing a valuable piece of advice from Seth Klarman (Trades, Portfolio) on how to act in falling markets.

The key message of the article was that in a bear market, the best strategy to follow is to continue as you always have. As Klarman notes, “Controlling your process is absolutely crucial to long-term investment success in any market environment.” The last thing you should do is try to time the market:

“While it is always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed…the price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better.”

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Reblog: Seth Klarman: How to Act in a Bear Market


In today’s market, after nearly a decade of low volatility and steadily rising stock prices, it is easy to forget the turmoil that gripped the stock market, and the world, in 2008-09.

Even though a crash might seem a million miles away currently, you never know when the next decline might arrive, so it is always best to prepare for the worst. The best way to prepare is to read accounts of investors given at the time.

This will not give you answers as to when the next crash will arrive (all but impossible to predict), but it will provide a sort of template as to what goes on.

Learning from Klarman

One of the most fascinating accounts of investing during the crisis comes from Seth Klarman (Trades, Portfolio). In February 2009, Klarman wrote an article in Value Investor Insight titled, “The Value of Not Being Sure.” Within the article, he detailed how he was investing in the crisis and why he thinks fear is such a great motivator.

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Reblog: What a Complacent Investor Looks Like


During three separate interviews this week I was asked if I was seeing any signs of complacency among investors, markets, or clients.

If anything, the people I talk to are more concerned with the high probability of lower market returns in the future but my view is surely clouded by the clientele and readers I deal with on a regular basis.Whether my sample size is representative or not, measuring market sentiment is getting harder and harder these days. Everyone now has a megaphone to voice their opinions — social media, blogs, 24-hour financial television, podcasts, conferences, magazines, financial news websites, etc.I don’t see how you can reliably track sentiment when it comes at you every day like a wave that changes form and shape depending on people’s mood that day. There’s just not much signal in all of the noise anymore.Of course, investors have been given plenty of excuses to be complacent. It feels as though volatility and bear markets have been outlawed in 2017 and stocks in the U.S. haven’t seen a down year since 2008.Since I don’t see any reliable way to track the potential complacency of investors as a whole, I tend to look at different ways investors can be complacent depending on which type of market environment we’re in.For example, last month I read the Schroders Global Investors Study which surveyed over twenty thousand investors from around the globe to get their expected portfolio returns over the coming 5 years. The results show this group was a tad ambitious: Investors expect an annual return of 10.2% on their investments over the next five years, according to a major new study.The Schroders Global Investor Study (GIS) 2017, which surveyed 22,100 people from around the globe who invest, found millennials even more optimistic. Those born between 1982 and 1999 expected their money to make average returns of 11.7% a year between now and 2022.Older generations were more realistic. The Baby Boomer generation – born in the two decades after the Second World War – anticipated 8.6% a year.Millennials (born 1982-1999, aged 18-35): 11.7% Generation X (born 1965-1981, aged 36-52): 9.8% Baby Boomers (born 1945-1964, aged 53-72): 8.6% Silent Generation (born 1923-1944, aged 73+): 8.1%Double-digit annual returns over the next 5 years from current valuation and interest rate levels seems like a stretch to me. I could be wrong but investors with such lofty expectations after we just went through a period of above-average returns (at least in the U.S.) seems to be somewhat complacent to me.Here’s another example (although this is more delusional than complacent):
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