successful investing - over optimism
DESCRIPTION
Continuing our series on how not to be your own worst enemy. This presentation looks at over optimism when investing.TRANSCRIPT
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Successful Investing
“How not to be your own worst enemy”
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Over optimism
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Introduction1. Optimism is ingrained in the
human psyche
2. Vast majority always look on the bright side of life
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Introduction• Consider:
o 74% of 600 fund managers thought they were above average
o 70% of analysts think they are better than their peers (of the same number 91% had recommendations as buys or holds in February 2008)
o 80% of students think they will finish in the top 50% of their class
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Introduction• Why?
o Tendency to overrate our abilities is amplified by the illusion of control
o We believe we can influence the outcome:
• 30 coin tosses, rigged so everyone would get 50% right
• Those who started getting the correct answers first rated themselves better than those who started off badly
o Optimism is not bad, but when we overate our abilities then it becomes hope
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“Optimism may well be a great life strategy. However, hope isn’t a good investment strategy” – James Montier
Let’s see how we can beat over-optimism……
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Self-servicing biasPeople will:
• Act in ways that serve their perceived self invest, i.e. “don’t ask a barber if you need a hair cut”
• Read the things that support their views and talking to those who support their view
• Delete out dissenting voices or opinions
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Self-servicing bias
“But you need to kill the company”
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Optimism the right way
• On average the 5 year projections of analysts for their ten best growth stories, did no better over 5 years than their 10 worst stocks
• In 4 out of the last 9 years analysts haven’t been able to predict whether a stock will be up or down
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Optimism the right way
• On average the 5 year projections of analysts for their ten best growth stories, did no better over 5 years than their 10 worst stocks
• In 4 out of the last 9 years analysts haven’t been able to predict whether a stock will be up or down
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Optimism the right way
• Why?
o Focus on predication compounder
• 1) forecast economy 2) forecast interest rates 3) sector performance and 4) individual stock performance
o If you are right 70% of the time (which is high) this means even with variables you will only be right 24% of the time
Consider the right way……..
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Optimism the right way
o Ben Graham
• Analysts should be penetrative
• They should understand the nature of the business
• They should try to gauge the intrinsic worth of the business
• They shouldn’t try to guess the unknowable future
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Optimism the right way - summary
o To be successful we need to:
• Give up on that idea that we are investing “knowing” the future
• Focus in on what we can know
• Accept that it is better to approximately right rather than entirely wrong