Showing posts with label Featured English Articles. Show all posts
Money can't buy me love
Indeed, love is a many-splendored thing. When we are passionately in love, nothing really matters in the world. But when the romance settles and financial issues start to pile up, can love be thrown out of the window?
MONEY certainly can’t buy us love but it can to some extent, prevent financial struggles. I have seen many relationships fall apart due to mismanagement of family finances. Arguments about money can also multiply into other emotional issues. That is why financial planning must start as early as family planning.
Couples must make time to ensure that money issues do not stand in the way of their relationship and their family goals.
In managing family finances, both partners need to be financially responsible and accountable.
There are many instances in a marriage that one of the partners takes charge of the finances. Usually he or she is the one with more financial knowledge and experience, the so called “Finance Minister”of the home, whilst the other partner is left tofocus on other family matters. This sort of arrangement can be beneficial as different partners focus on different areas in their family life.
However, it is advisable that the financially astute partner shares with his better half what he or she does with the family finances so that his partner is more aware of where the family money goes to and learns to be more financially literate. This becomes especially important in the unfortunate event where the “Home Finance Minister” passes away first or becomes unable to manage the family funds.
Manycouples make the mistake of leaving the family financial matters to solely one partner and the surviving partner becomes “financially incapacitated” due to financial inexperience. Involving your partner in the family’s finances must stretch beyond just having joint accounts to updating your partner about your loans, retirement plans, insurance policies, wills, and where important documents are kept.
If you hire a financial planner to assist you, make sure your better half is included in most of your discussions.
We have often heard that the love of money is the root of all evils. Conversely, the lack of it can be so too.
Think about it.
- The Star Biz
- The Star Biz
Why do investors behave the way they do?
ONE of the first things an investor learns is to "buy low, sell high". He knows the goal, but, more often than not, ends up doing the opposite.
It is common sense: buy when an asset is priced low and sell when it is priced high; yet investors routinely buy and sell in precisely the opposite manner. This is an ageless and eternal problem.
What stories do we tell ourselves when an investment doesn't work out? What psychological tendencies do we follow again and again when we play the investment game? There is a field of study called behavioural finance that combines the disciplines of human psychology and finance to explain investing behaviour.
Traditional finance assumes that by and large, human beings will act rationally, and that markets are efficient. Behavioural finance, however, assumes that investors can behave in ways that seem irrational and tries to figure out why they behave the way they do.
Certain tendencies have been identified by psychologists in this field, after analysing the mental process investors go through to come to a response, when they receive a stimulus.
It is my hope that by familiarising investors with these tendencies, they will be better able to consciously identify these traits and in future, better control their behaviour during difficult market periods. Once the awareness is there, then the possibility of true change exists.
Myopic Loss Aversion
Financial decisions spark activity in the limbic system, the part of our brain that deals with risk and reward. Researchers have discovered that people feel the sting of a loss twice as acutely as they feel the pleasure of a gain. This fear is only made worse by the financial media. Television channels are devoted to following the financial markets' every move worldwide, 24 hours a day, seven days a week. Countless websites, books, magazines and newspapers are devoted to feeding us investment information continuously. Popular wisdom says that investment decisions must be made objectively, taking into account the latest possible market information as often as possible. Is this true? The research says it's not.
Myopic loss aversion is the combination of greater sensitivity to losses than to gains and a tendency to evaluate and analyse our results frequently. Myopia means short-sightedness. Loss aversion is the strong tendency of people to avoid losses rather than acquire gains. This tendency has been found to be a general feature of the human condition; however, this feature does not produce good decision-making.
An experiment conducted in 1997 found that investors who received the most frequent feedback on how their investment was performing, or the most information and were able to change their investment allocation the most often, took the least risk and earned the least money. It turned out that investors who were updated on a monthly basis did worse in terms of money earned compared to those who were updated annually and those updated every five years. What can we take away from this finding? Investors who continually seek out frequent feedback about how their investments are doing are likely to act on their worst tendencies if they cannot control them consciously.
Order Preference
Order preference is the tendency for people to insist on certain things in a certain order for no other reason than societal convention. It causes investors to focus on the performance of individual components rather than the overall performance of the whole portfolio. Logically, investors should aim to pursue a long term, diversified asset allocation. Taking this approach will mean that the portfolio components will definitely not all perform well at all times. However when they examine their portfolios, investors tend to want each and every part of their portfolio to give a superior performance.
Even with a benchmark index like the Kuala Lumpur Composite Index (KLCI), you have stocks that performed spectacularly and those that were duds in 2007. However, taken as a whole, the KLCI was up 37.8 per cent in 2007 (Source: Bloomberg). Hypothetically, it doesn't matter that some component stocks were down 15 per cent or that other stocks climbed over 30 per cent. In total, the portfolio is up 15 per cent, which is what matters. It is the performance of the whole portfolio that impacts an investor's net worth. Investors should take caution not to focus on the individual parts to the point where they lose sight of what is important.
Confirmation Bias
Confirmation bias is the tendency to search for or interpret new information in a way that confirms one's preconceptions and avoid information and interpretations which contradict prior beliefs. An investor will tend to seek out supporting evidence of his pre-existing notions. Two investors can look at the same data and yet come up with two completely different conclusions.
For example, take the recent market volatility. There are investors who say this heralds an imminent slowdown, yet there are others who are equally convinced that this is a temporary blip and that Malaysia is still on track to perform. Sometimes, an investor will seek out a big name who says the same things he believes and relies on the big name as an authority for why he should do what he already wants to do.
To put it simply, whatever you believe, there are plenty of seemingly credible authorities to support what you believe. When it comes to investing, an investor should always carefully examine and weigh information and interpretations which contradict his prior beliefs.
Hindsight Bias
Hindsight bias is the inclination to see events that have occurred as more predictable than they in fact were before they took place. Hindsight bias has been demonstrated experimentally in a variety of settings, including in politics, games and medicine. In psychological experiments of hindsight bias, subjects also tend to remember their predictions of future events as having been stronger than they actually were, in those cases where those predictions turn out correct.
Investors deceive themselves into believing they have some special ability or knowledge that led to a good outcome. Everyone's vision is 20/20. Hindsight bias also leads us to presume prior patterns persist - the stock or asset class that did well will continue to be a star and the one that did not perform will
continue to underperform. It's a tendency to project the past into the future. This is why it's important to note that past performance is not necessarily an indication of future performance.
Overconfidence
Overconfidence is the tendency for an investor to overestimate his skill or knowledge. This may lead investors to trade too frequently, day-trade, or become overweight in a "hot" industry or sector. Overconfidence may lead an investor to concentrate his investments in one place and not properly diversify.
Remember Enron? Many lifelong Enron employees had regularly invested thousands, even millions of dollars in Enron stock to fund their retirement. The overconfidence of Enron employees in their company's prospects to the point where most of their retirement funds were invested in the company's stock is to blame for the near-total loss of their retirement accounts. This situation could have been completely preventable had they only diversified their investment holdings for retirement.
Conclusion
Investors need to be aware that all these tendencies don't work in isolation- they also work cooperatively, making completely nonsensical investment decisions seem rational even while investors make them. It does seem as if our minds are our own worst enemies, especially when it comes to investing.
Having these natural human tendencies doesn't mean you are destined to continually suffer the financial consequences. There are simple ways to curb these tendencies.
Actively control how often you update yourself on your investments and how often you follow the investment news. Make sure you're looking at things from the right perspective: taking a long-term view and analysing your portfolio as a whole, not by its individual parts. Seek out the opinions and conclusions of investors that you do not agree with and see if they have merit.
As in the area of medicine, it helps to get a second opinion. Realise that past performance is not necessarily an indicator of future performance. Finally, always properly diversify, even if you think one company or one industry is the one that will get you wealth beyond your dreams. It is essential that investors not let the primal human drives of fear and greed crowd out logic and judgment.
Datuk Noripah Kamso is the chief executive officer of CIMB-Principal Asset Management Bhd
It is common sense: buy when an asset is priced low and sell when it is priced high; yet investors routinely buy and sell in precisely the opposite manner. This is an ageless and eternal problem.
What stories do we tell ourselves when an investment doesn't work out? What psychological tendencies do we follow again and again when we play the investment game? There is a field of study called behavioural finance that combines the disciplines of human psychology and finance to explain investing behaviour.
Traditional finance assumes that by and large, human beings will act rationally, and that markets are efficient. Behavioural finance, however, assumes that investors can behave in ways that seem irrational and tries to figure out why they behave the way they do.
Certain tendencies have been identified by psychologists in this field, after analysing the mental process investors go through to come to a response, when they receive a stimulus.
It is my hope that by familiarising investors with these tendencies, they will be better able to consciously identify these traits and in future, better control their behaviour during difficult market periods. Once the awareness is there, then the possibility of true change exists.
Myopic Loss Aversion
Financial decisions spark activity in the limbic system, the part of our brain that deals with risk and reward. Researchers have discovered that people feel the sting of a loss twice as acutely as they feel the pleasure of a gain. This fear is only made worse by the financial media. Television channels are devoted to following the financial markets' every move worldwide, 24 hours a day, seven days a week. Countless websites, books, magazines and newspapers are devoted to feeding us investment information continuously. Popular wisdom says that investment decisions must be made objectively, taking into account the latest possible market information as often as possible. Is this true? The research says it's not.
Myopic loss aversion is the combination of greater sensitivity to losses than to gains and a tendency to evaluate and analyse our results frequently. Myopia means short-sightedness. Loss aversion is the strong tendency of people to avoid losses rather than acquire gains. This tendency has been found to be a general feature of the human condition; however, this feature does not produce good decision-making.
An experiment conducted in 1997 found that investors who received the most frequent feedback on how their investment was performing, or the most information and were able to change their investment allocation the most often, took the least risk and earned the least money. It turned out that investors who were updated on a monthly basis did worse in terms of money earned compared to those who were updated annually and those updated every five years. What can we take away from this finding? Investors who continually seek out frequent feedback about how their investments are doing are likely to act on their worst tendencies if they cannot control them consciously.
Order Preference
Order preference is the tendency for people to insist on certain things in a certain order for no other reason than societal convention. It causes investors to focus on the performance of individual components rather than the overall performance of the whole portfolio. Logically, investors should aim to pursue a long term, diversified asset allocation. Taking this approach will mean that the portfolio components will definitely not all perform well at all times. However when they examine their portfolios, investors tend to want each and every part of their portfolio to give a superior performance.
Even with a benchmark index like the Kuala Lumpur Composite Index (KLCI), you have stocks that performed spectacularly and those that were duds in 2007. However, taken as a whole, the KLCI was up 37.8 per cent in 2007 (Source: Bloomberg). Hypothetically, it doesn't matter that some component stocks were down 15 per cent or that other stocks climbed over 30 per cent. In total, the portfolio is up 15 per cent, which is what matters. It is the performance of the whole portfolio that impacts an investor's net worth. Investors should take caution not to focus on the individual parts to the point where they lose sight of what is important.
Confirmation Bias
Confirmation bias is the tendency to search for or interpret new information in a way that confirms one's preconceptions and avoid information and interpretations which contradict prior beliefs. An investor will tend to seek out supporting evidence of his pre-existing notions. Two investors can look at the same data and yet come up with two completely different conclusions.
For example, take the recent market volatility. There are investors who say this heralds an imminent slowdown, yet there are others who are equally convinced that this is a temporary blip and that Malaysia is still on track to perform. Sometimes, an investor will seek out a big name who says the same things he believes and relies on the big name as an authority for why he should do what he already wants to do.
To put it simply, whatever you believe, there are plenty of seemingly credible authorities to support what you believe. When it comes to investing, an investor should always carefully examine and weigh information and interpretations which contradict his prior beliefs.
Hindsight Bias
Hindsight bias is the inclination to see events that have occurred as more predictable than they in fact were before they took place. Hindsight bias has been demonstrated experimentally in a variety of settings, including in politics, games and medicine. In psychological experiments of hindsight bias, subjects also tend to remember their predictions of future events as having been stronger than they actually were, in those cases where those predictions turn out correct.
Investors deceive themselves into believing they have some special ability or knowledge that led to a good outcome. Everyone's vision is 20/20. Hindsight bias also leads us to presume prior patterns persist - the stock or asset class that did well will continue to be a star and the one that did not perform will
continue to underperform. It's a tendency to project the past into the future. This is why it's important to note that past performance is not necessarily an indication of future performance.
Overconfidence
Overconfidence is the tendency for an investor to overestimate his skill or knowledge. This may lead investors to trade too frequently, day-trade, or become overweight in a "hot" industry or sector. Overconfidence may lead an investor to concentrate his investments in one place and not properly diversify.
Remember Enron? Many lifelong Enron employees had regularly invested thousands, even millions of dollars in Enron stock to fund their retirement. The overconfidence of Enron employees in their company's prospects to the point where most of their retirement funds were invested in the company's stock is to blame for the near-total loss of their retirement accounts. This situation could have been completely preventable had they only diversified their investment holdings for retirement.
Conclusion
Investors need to be aware that all these tendencies don't work in isolation- they also work cooperatively, making completely nonsensical investment decisions seem rational even while investors make them. It does seem as if our minds are our own worst enemies, especially when it comes to investing.
Having these natural human tendencies doesn't mean you are destined to continually suffer the financial consequences. There are simple ways to curb these tendencies.
Actively control how often you update yourself on your investments and how often you follow the investment news. Make sure you're looking at things from the right perspective: taking a long-term view and analysing your portfolio as a whole, not by its individual parts. Seek out the opinions and conclusions of investors that you do not agree with and see if they have merit.
As in the area of medicine, it helps to get a second opinion. Realise that past performance is not necessarily an indicator of future performance. Finally, always properly diversify, even if you think one company or one industry is the one that will get you wealth beyond your dreams. It is essential that investors not let the primal human drives of fear and greed crowd out logic and judgment.
Datuk Noripah Kamso is the chief executive officer of CIMB-Principal Asset Management Bhd
Published: 2008/10/31
The Warren Buffett style of investment
MOST people would know that Warren Buffett is one of the world's richest men. Most would also know that he is easily the most successful investor the world has ever witnessed.
As a result, many of us would like to know his secret in investing and what makes him so successful. Many of us would like to emulate him, if not in terms of investment performance, then, at least in terms of investing style.
Many have the impression that Buffett must be very smart to have done so well. To have succeeded over such a long period, he is certainly smart. And yet in another sense, he is not that smart. Buffett has said that you do not need to have the IQ of Einstein or understand complex mathematical formulae in order to invest successfully. Compared with his mentor Benjamin Graham, or vice-chairman of his company Charlie Munger, he did not invent a new investment approach nor was he a founder of an investment theory.
Buffett is not smart in that sense. It was Graham, with his famous investment text “Security Analysis”, written in 1934, who created fundamental analysis. Buffett read it and has gained immensely from it. It was from another of Graham's books, “The Intelligent Investor”, written in 1949, that Buffett learned the central investment concept of “margin of safety”. It was Graham who started value investing. By following Graham’s investment philosophy, Buffett became very successful. But as time went by, Buffett was smart enough to recognise the inadequacies of what Graham had taught him. This realisation did not come easily nor did it dawn on him out of the blue.
Graham focused on investing in a stock that has an intrinsic value of RM1.00 and selling at 50 sen per share. It is this difference between the intrinsic value and the market price that determines the margin of safety that an investor looks for when investing in a stock. To Graham, the asset value of a company is important in calculating a company’s intrinsic value. To him, the balance sheet strength of a company is vital. This can be simply explained by the fact that he was writing “Security Analysis” in the depths of the Great Depression during which individual and corporate bankruptcies were the norm rather than the exception. Graham’s value investing was rather mechanical and essentially quantitative in approach. It was Munger, whom Buffett met in 1959, who helped transform Buffett from a strict Grahamite to what he is today.
Munger convinced Buffett that there is more to investing than just buying a share at 50 sen against its intrinsic value of RM1.00. While both Munger and Graham would start with the accounting figures, Munger would go beyond that. As he advised: “We’ve got to understand the accounting and the implications of the accounting and understand it thoroughly.” Besides assessing the direction of the general business climate of a particular business, Munger would also assess the quality of management and how a company is run.
One of the most important investment concepts that Buffett learned from Munger was to be able to identify a good business and invest in such a business at a reasonable price.
A good business is one which has a strong franchise, above average returns on equity or capital employed, a relatively small need for capital investment and a business that throws off cash. Munger advised that “the difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.” Munger taught Buffett the value of great franchises and the benefit of qualitative analysis, as opposed to Graham’s strictly quantitative style focusing exclusively on tangible assets. With Munger’s coaching, Buffett realised that “when you find a really good business run by first-class people, chances are a price that looks high isn’t high. The combination is rare enough; it’s worth a pretty good price.” Hence his huge investments in stocks like Coca-Cola in 1988 although Coca-Cola was not cheap by conventional standards.
Although there are significant differences between the two, it was Graham and Munger who introduced Buffett to the central concepts of value investing. But it is to Buffett’s credit that he was able to move away from a strictly Grahamite style while the other value investors have remained in the traditional Graham mindset. It is to Buffett’s credit that he was convinced by Graham and Munger’s investment logic and rational instead of charting the modern portfolio theory mumbo-jumbo. He was smart enough to know that he had much to benefit from Graham and offered to work for him free of charge and pestered Graham for three years until he was employed. In the run-up to the technology bubble, Buffett had the genius to recognise his circle of competence, stayed within that boundary and avoided the technology stocks even though Bill Gates is his buddy. Graham stressed a diversified portfolio and would sell when a stock reaches its intrinsic value. Buffett, like Munger, has a very focused portfolio and would hold the stocks for a long time. At the end, Buffett was smart enough to pick up the right things from the right people.
Can we apply the Buffett-Graham-Munger approach to Bursa Malaysia? Yes, except that one has to be very patient, disciplined and do the necessary homework. For whatever reasons, many claim to be a follower or non-follower of Buffett without really knowing his philosophy and methodology.
Many investors have blamed the Bursa Malaysia for losses or poor returns. Many have said that the Buffett-Graham-Munger investing style cannot be successfully applied to Bursa. Many investors do not realise that the real culprit of their losses or poor performance is themselves. Do not get us wrong. i Capital is not saying that Bursa and the listed companies are perfect. There is an endless list of things that can be improved and there are plenty of companies (probably the majority of them) that do not deserve an inch of support from genuine investors. But part of the fault also lies with the investing style of investors. Have they ever asked how they would perform if they had used the same method and invested in Tokyo, London or New York? Would they have the patience or the discipline?
i Capital hopes this week’s article would be beneficial to those who are or who want to be serious investors. By sharing these insight, i Capital hopes that everyone would have some of the early advantages that Buffett had.
By TAN TENG BOO, CEO, Capital Dynamics Sdn Bhd
As a result, many of us would like to know his secret in investing and what makes him so successful. Many of us would like to emulate him, if not in terms of investment performance, then, at least in terms of investing style.
Many have the impression that Buffett must be very smart to have done so well. To have succeeded over such a long period, he is certainly smart. And yet in another sense, he is not that smart. Buffett has said that you do not need to have the IQ of Einstein or understand complex mathematical formulae in order to invest successfully. Compared with his mentor Benjamin Graham, or vice-chairman of his company Charlie Munger, he did not invent a new investment approach nor was he a founder of an investment theory.
Buffett is not smart in that sense. It was Graham, with his famous investment text “Security Analysis”, written in 1934, who created fundamental analysis. Buffett read it and has gained immensely from it. It was from another of Graham's books, “The Intelligent Investor”, written in 1949, that Buffett learned the central investment concept of “margin of safety”. It was Graham who started value investing. By following Graham’s investment philosophy, Buffett became very successful. But as time went by, Buffett was smart enough to recognise the inadequacies of what Graham had taught him. This realisation did not come easily nor did it dawn on him out of the blue.
Graham focused on investing in a stock that has an intrinsic value of RM1.00 and selling at 50 sen per share. It is this difference between the intrinsic value and the market price that determines the margin of safety that an investor looks for when investing in a stock. To Graham, the asset value of a company is important in calculating a company’s intrinsic value. To him, the balance sheet strength of a company is vital. This can be simply explained by the fact that he was writing “Security Analysis” in the depths of the Great Depression during which individual and corporate bankruptcies were the norm rather than the exception. Graham’s value investing was rather mechanical and essentially quantitative in approach. It was Munger, whom Buffett met in 1959, who helped transform Buffett from a strict Grahamite to what he is today.
Munger convinced Buffett that there is more to investing than just buying a share at 50 sen against its intrinsic value of RM1.00. While both Munger and Graham would start with the accounting figures, Munger would go beyond that. As he advised: “We’ve got to understand the accounting and the implications of the accounting and understand it thoroughly.” Besides assessing the direction of the general business climate of a particular business, Munger would also assess the quality of management and how a company is run.
One of the most important investment concepts that Buffett learned from Munger was to be able to identify a good business and invest in such a business at a reasonable price.
A good business is one which has a strong franchise, above average returns on equity or capital employed, a relatively small need for capital investment and a business that throws off cash. Munger advised that “the difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.” Munger taught Buffett the value of great franchises and the benefit of qualitative analysis, as opposed to Graham’s strictly quantitative style focusing exclusively on tangible assets. With Munger’s coaching, Buffett realised that “when you find a really good business run by first-class people, chances are a price that looks high isn’t high. The combination is rare enough; it’s worth a pretty good price.” Hence his huge investments in stocks like Coca-Cola in 1988 although Coca-Cola was not cheap by conventional standards.
Although there are significant differences between the two, it was Graham and Munger who introduced Buffett to the central concepts of value investing. But it is to Buffett’s credit that he was able to move away from a strictly Grahamite style while the other value investors have remained in the traditional Graham mindset. It is to Buffett’s credit that he was convinced by Graham and Munger’s investment logic and rational instead of charting the modern portfolio theory mumbo-jumbo. He was smart enough to know that he had much to benefit from Graham and offered to work for him free of charge and pestered Graham for three years until he was employed. In the run-up to the technology bubble, Buffett had the genius to recognise his circle of competence, stayed within that boundary and avoided the technology stocks even though Bill Gates is his buddy. Graham stressed a diversified portfolio and would sell when a stock reaches its intrinsic value. Buffett, like Munger, has a very focused portfolio and would hold the stocks for a long time. At the end, Buffett was smart enough to pick up the right things from the right people.
Can we apply the Buffett-Graham-Munger approach to Bursa Malaysia? Yes, except that one has to be very patient, disciplined and do the necessary homework. For whatever reasons, many claim to be a follower or non-follower of Buffett without really knowing his philosophy and methodology.
Many investors have blamed the Bursa Malaysia for losses or poor returns. Many have said that the Buffett-Graham-Munger investing style cannot be successfully applied to Bursa. Many investors do not realise that the real culprit of their losses or poor performance is themselves. Do not get us wrong. i Capital is not saying that Bursa and the listed companies are perfect. There is an endless list of things that can be improved and there are plenty of companies (probably the majority of them) that do not deserve an inch of support from genuine investors. But part of the fault also lies with the investing style of investors. Have they ever asked how they would perform if they had used the same method and invested in Tokyo, London or New York? Would they have the patience or the discipline?
i Capital hopes this week’s article would be beneficial to those who are or who want to be serious investors. By sharing these insight, i Capital hopes that everyone would have some of the early advantages that Buffett had.
By TAN TENG BOO, CEO, Capital Dynamics Sdn Bhd
