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Michael Mauboussin: four common investor biases
Asset Management
<p>When it comes to achieving personal financial goals, you are your own worst enemy. Investors are always held back by common investor biases, which influence decisions and long-term goals.</p> <p>Both neuroscientists and psychologists have looked into these biases. Combined the two fields of science have established a field of neuroeconomics to understand better how the human brain decodes economic decisions.</p> <p>One of the goals of neuroeconomics is to understand how certain behaviors are linked to specific brain activity.</p> <p>In a report published at the beginning of this week, Michael Mauboussin and Dan Callahan, CFA, looked at four key investor biases, which cause investors to make poor choices. In each case, Mauboussin and his colleague looked at what caused the brain to make suboptimal investment decisions and how investors can overcome these biases to improve their decision making.</p> <p>Social conformity, herding or crowding is the first investor bias Mauboussin covered.<br /> Investor Biases number one: Social conformity<br /> Social conformity comes from our social nature as human beings. Conforming to other social trends encourages others to like you, and can confer loyalty and safety. However, you’re never going to outperform a peer group if everyone owns the same investments.</p> <p>The science behind social conformity is rather interesting. In the mid-2000s, neuroscientists used functional magnetic resonance imaging (fMRI) technology to pinpoint the mechanisms of social conformity within the brain.</p> <p>A study by Dr. Greg Berns and his colleagues showed that social conformity is consistent with activity in the occipital and parietal lobes, the visual process regions of the brain associated with perception. The research suggested that different social settings alter what the subjects perceive. What’s more, subjects that remained independent throughout the study showed increased activity in the amygdala -- a part of the brain that decodes emotion and is especially attuned to threats. In other words, independence creates an emotional burden and requires overcoming a wave of fear.</p> <p>Additional research supports Dr. Berns’ conclusion: social conformity is associated with activity in the part of the brain that detects errors and interacts with other parts of the brain to correct the error. Your brain notices when you’re going against the group and for many, it’s more rewarding to conform than remain independent.<br /> Investor biases two: Pattern seeking<br /> Mauboussin’s second key investor bias is that of pattern seeking. Humans are natural pattern seekers, but when they try to seek out patterns when none are there, problems arise, what statisticians call Type I error.</p> <p>Technical analysis is a good example of our desire to seek out patterns. We are naturally drawn to imposing order, even in cases where the underlying processes are random. Neuroscientists have looked into this trend and arrived at some interesting conclusions.<br /> "Scientists set up a box with two keys that a pigeon can peck with payoffs that are random. They then make one key much more attractive than the other—for example, the red key provides food with an 80 percent probability and the white key with a 20 percent probability (1 - .80). How will the pigeons choose?</p> <p>Once the pigeons figure out the relative probabilit</p>
Hedge fund managers stand to win millions from Brexit
Hedge Funds
<p>A group of billionaire hedge fund managers are supporting the drive to take Britain out of Europe, and stand to benefit financially from such a move.</p> <p>Two of the five top hedge fund billionaires in the country already have connections to campaigns supporting a so-called Brexit, writes Michael Bow in The Independent. Others are set to pledge their support in the next few months.</p> <p>Financial community split on Brexit<br /> The financial crisis of 2007 led to strict European rules on hedge fund activity, which would be threatened if the UK left the EU. Hedge funds stand to save around $393 million if the rules are lifted.</p> <p>“There are quite a few hedge fund managers who are anti-EU,” said one Mayfair hedge fund boss, who declined to provide his name. “Many are generally opposed to it.”</p> <p>The Governor of the Bank of England, Mark Carney, has pledged his support for continued UK membership of the EU. Financial firms in the City of London are split on the idea, with multinational investment banks such as Goldman Sachs and Citigroup backing continued membership while the Mayfair-based hedge funds call for an exit.<br /> Hedge fund managers riled by stricter EU regulations<br /> Crispin Odey, founding partner of Odey Asset Management, has been supporting a lobby group called Vote Leave.  “We joined an economic union, not a political union, and you should give voters a say,” Mr Odey said. “This is nothing to do with hedge funds and the EU. My criticism of the EU pre-dates the regulations which have come in.”</p> <p>Sir Michael Hintze, the fourt-richest hedge fund boss in the UK, is also connected to the campaign, although Vote Leave campaign head, Dominic Cummings, said last week that “no hedge funds have bankrolled us so far.”</p> <p>Financiers used to operating in the shadows were ruffled by the Alternative Investment Fund Managers Directive, which called for more transparency and a limit on individual salaries. The directive is estimated to have increased operating costs by 5% per year, according to KPMG.</p> <p>The Independent estimated that these costs are equivalent to around $393 million, but hedge fund trade body the Alternative Investment Management Association did not provide an estimated figure.</p> <p>This article was originally published by ValueWalk. <br /> Photo: Paul</p>
Recently spotted: A unicorn startup that is both profitable and from the Midwest
Venture Capital
<p>&nbsp;</p> <p>Now here's something really different:</p> <p>A unicorn startup that is both profitable and based in the Midwest. Should we call it a uni-unicorn?</p> <p>The rare beast is Chicago-based Uptake, which has raised $45 million from GreatPoint Ventures and other investors, giving it a $1.1 billion valuation, reports The New York Times.</p> <p>Uptake partners with well known companies to create software for gathering and interpreting data. CB Insights reports a total of 139 unicorns.<br /> Photo: yosuke muroya </p>
Problem children aren't derailing consumer staples ETFs
Asset Management
<p>Give the Consumer Staples Select Sect. SPDR (ETF) (NYSE: XLP) some credit. The largest consumer staples exchange-traded fund by assets is up 6.6 percent year-to-date despite strong dollar headwinds and the subsequent challenges created by speculation, though now dwindling, that the Federal Reserve will soon raise interest rates.</p> <p>Add to that, XLP has mustered its &gt;6.6 percent gain, one of the better year-to-date showings among the nine sector SPDR ETFs, with no help from Procter &amp; Gamble Co.(NYSE: PG) or Wal-Mart Stores, Inc. (NYSE: WMT).</p> <p>Procter &amp; Gamble, the world's largest maker of household products, and Wal-Mart, the world's largest retailer, are two of just seven members of the Dow Jones Industrial Average down at least 10 percent this year. Procter &amp; Gamble and Wal-Mart are XLP's largest and sixth-largest holdings, respectively, combining for 16.5 percent of the ETF's weight.</p> <p>Full story available on<br /> Photo: Mike Mozart</p>
Video: Point72 president discusses big data
Hedge Funds
<p>Big data is helpful, but also needs to be handled carefully, says Doug Haynes, Point72 Asset Management President, in this week's Wall Street Week. Granular data can provide more accurate pictures of what is happening in real time, before reports come out, but needs to be vetted intelligently and responsibly.</p>
Dan Loeb takes on Japan's convenience store giant
Hedge Funds
<p>Dan Loeb’s Third Point has just bought an activist stake in Seven &amp; I Holdings, the Japanese retail giant behind the 7-eleven convenience store franchise and other retail operations including Sogo and Seibu department stores.</p> <p>According  to Reuters, sources says Third Point wants Seven &amp; I to downsize its general merchandise business to improve profitability, and as taken a less than 5% stake to pressurize it into doing so.  </p> <p>The firm is actually not doing too shabby – Seven &amp; I’s  convenience store business in Japan and the U.S. yielded a record operating profit for the March-August half – but Ito-Yokado, its general merchandise chain, dragged it down by makring down a 9 billion yen ($73.6 million) loss for the same period. </p> <p>For now, Seven &amp; I has kept quiet on the deal but Loeb could have a fight on his hands, Japan does not react well to activist investors especially when they come from overseas. Many outside investors have struggled to crack open Japan notoriously conservative corporate giants.</p> <p>But Loeb's track record indicates that he is up to the job, with Third Point previously taking positions in Sony Corp, Suzuki Motors, and robot maker Fanuc Corp and has successfully pushed for reforms.</p> <p>Either way, investors have reacted well. Seven &amp; I saw its stock jump 3.7% when the news first broke yesterday.<br /> Photo: Mike Mozart </p> <p>&nbsp;</p>
It's tough being a bond fund manager
Asset Management
<p>You wouldn’t have thought so, but bond portfolio managers need to be more skillful than a decade ago. Central bank asset purchase programs have made core treasury markets a one-way bet and the mortgage-backed securities debacle still turns investors off complex structures. So, surely the job of bond manager should be easier, even plodding and dull.</p> <p>Not according to a survey conducted by Citigate for NN Investment Partners, a leading Europe-based fund manager.</p> <p>“The research reveals that 61% of institutional investors believe asset managers must address changing levels of liquidity better than they did 10 years ago while 42% said they have to be able understand and invest in wider geographies better than they did then. Other challenges cited that require greater attention included the ability to invest across wider credit ratings (39%) and managing overload (30%),” noted Citigate.</p> <p>Far from boring then. Indeed: </p> <p>“Respondents said the most attractive quality in the process of a fixed income strategy is risk control (57%), followed by a focus on controlling duration and matching liabilities (39%), the flexibility to invest in a wide range of investments (35%) and a focus on avoiding defaults (31%).”</p> <p>“Markets are in a very different place from where they were 10 years ago. Changes in global conditions, economic policies and financial markets have forced investors to adapt, and being able to adapt quickly will become an even more important skill,” said Sylvain de Ruijter, head of global fixed income at NN Investment Partners.<br /> Photo: marta ... maduixaaaa<br /> &nbsp;</p>
Reflation on its way; buy risk assets
Asset Management
<p>Uncertainty about Fed interest policy and reactive measures by other leading central banks confuse investors. Where should they allocate their cash if policy makers give unclear signals and the economic runes are so mixed?</p> <p>Step forward the strategists at Société Générale to part the mist. </p> <p>“Inflation risks are set to re-emerge on the back of reflationary policies in many areas. Even in the US, monetary policy normalization should be subdued and the Fed is expected to remain behind the curve, triggering inflation risk. Inflation should also be supported by a turning point in commodity prices,” write Alain Bokobza and Sophie Huynh in a report out today. </p> <p>Last month they told investors to “buy risk on dips”.</p> <p>Their view was predicated on the Fed acting softer than expected, the ECB would implement QE2, the Bank of Japan would signal further loosening and China’s policy makers would ease both monetary and fiscal policy.</p> <p>“We maintain our view that one should be invested in risk assets in order to continue to benefit from a synchronized global reflation process across the four biggest regions of the world,” they say.</p> <p>“2015 will be a great year for euro area assets and we maintain keep full weightings on both peripheral bonds and peripheral equities.”<br /> Photo:</p> <p>&nbsp;</p>
Buffett’s asset allocation advice: take it … with a twist
Asset Management
<p>Abstract: </p> <p>One of the most important decisions retirees need to make is the asset allocation of their portfolios. They can have a static or a dynamic allocation, and simplicity usually favors the former. Warren Buffett recently added another vote for static allocations by revealing that he had advised a trustee to split the bequest his wife will receive 90% in stocks and 10% in short-term bonds. The evidence discussed here shows that, relative to other static allocations, a 90/10 split has a very low failure rate and provides investors with very good upside potential and downside protection. The evidence also shows that two minor twists to the 90/10 split result in two very simple dynamic strategies with even better upside potential and downside protection.<br /> Buffett's Asset Allocation Advice: Take It ... With A Twist - Introduction<br /> Retirees need to carefully balance the risk of spending too much and outliving their savings with the risk of spending too little and lowering their lifestyle unnecessarily. The two main tools they can use to avoid falling on either side of the cliff are the portfolio’s withdrawal rate and asset allocation. Regarding the latter, in his 2013 letter to Berkshire Hathaway shareholders, Warren Buffett discussed the simple advice he gave to the trustee that will manage the bequest his wife will receive:<br /> “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short?term government bonds and 90% in a very low?cost S&amp;P 500 index fund. (I  suggest Vanguard’s.) I believe the trust’s long?term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high?fee managers.”<br /> Buffett does suggest in his letter that investors should follow a simple approach, passively investing in a broadly?diversified, low?cost portfolio; he does not suggest or imply, however, that investors should have a 90/10 stock/bond allocation. And yet his comment begs the question: Is the asset allocation Buffett advised for his wife appropriate for other investors? If yes, why? If not, why not?</p> <p>An obvious distinction between Buffett’s wife and the average investor quickly comes to mind. The average investor needs to implement an asset allocation that carefully balances the two risks already mentioned, overspending and underspending. Buffett’s wife, however, is likely to receive a nest egg large enough so that she will not have to worry about either risk. Put differently, just about any asset allocation will enable Buffett’s wife to live comfortably and still outlive her portfolio, which is not the case for most investors.</p> <p>That said, this article evaluates the merits of the 90/10 allocation that Buffett advised for his wife, relative to other static allocations with different stock/bond proportions, for investors at large. Furthermore, it explores two minor twists to the 90/10 allocation, one that accounts for the behavior of the stock market, and the other that accounts for the relative behavior of the stock and bond markets.</p> <p>In a nutshell, the evidence discussed here suggests that, besides having a very low failure rate, the 90/10 allocation results in an interesting middle ground between the upside potential of more aggressive static allocations and the downside protection of more </p>
Q3 wipes $700B from top fund managers
Asset Management
<p>Seven of the largest asset managers in the world lost a whopping $700 billion total during the third quarter. BlackRock alone lost $215 billion during those three months, reports the Financial Times.</p> <p>With end of year bonuses coming soon, everyone must be hoping for a much, much better fourth quarter.<br /> Photo: Purple Slog</p>