The field of Behavioral Finance has helped us gain valuable knowledge into how human behavior can influence investment returns. Myopic loss aversion is one of the most important concepts to understand in order to keep you on a path to investing successfully. Until you understand it, you could end up making poor investment decisions that lead to poor returns. What is Myopic Loss Aversion? The concept of myopic loss aversion was first introduced by Daniel Kahneman and Amos Tversky in 1979. Myopia refers to a narrowing of a view – focusing on the most recent short-term results, even if the investment time horizon is 20-30 years.
Humans have a natural aversion to losing money, property or anything else they find value in. This helps us avoid scams, keeps us from over-spending and helps us save for a rainy day. Myopic loss aversion is different. It happens when we temporarily lose sight of the bigger picture and focus on what is immediately in front of us. For investors, this usually leads to panic selling during steep market declines such as normal, healthy corrections. Read more »
With the country’s attention focused directly on the government shutdown and the inevitable fighting about whether or not to raise the debt ceiling, the world has kept on spinning and new developments have continued to occur and be ignored. This is why investing based on what shiny ball the media is fixated on at any given time is almost always going to be a losing strategy. When the media focuses on one subject or issue, it’s already too late to profit from. It’s priced into the market. A clear example of this is how the market reacted to the Government shutting its doors. The S&P 500 was up more than 13 points on the first day without a fully functioning government.
IPOs on the Rise
What has gone mostly unnoticed is that the Initial Public Offering (IPO) market is heating up, especially in the technology sector. Last week 12 companies issued IPOs, five of which were in the Technology sector. Eight companies went public the previous week, 3 of those were in the Technology sector. Eight more companies are expected to go public this week. Relatively recently there have been high-profile tech IPOs like Groupon, Facebook and Zynga. Twitter and the online gaming company King, makers of Candy Crush Saga, are scheduled to file for their respective IPOs this week as well. The Chinese e-commerce giant Alibaba Group announced it will pursue an IPO in the U.S. markets. Read more »
Emerging markets have been hammered this year. The iShares MSCI Emerging Markets Index is down 11.39% year-to-date at the time of this writing. At the end of the day, the world economy is substantially lagging the U.S. economy. Additionally, the policy decisions of the U.S are benefiting the U.S economy while not particularly helping the emerging markets. Investor sentiment regarding emerging markets is near rock bottom. As a contrarian, I see this as a potential positive. For those investors looking to add an emerging markets component to their portfolio, this could be a great buying opportunity.
Fundamentals of Emerging Markets
Emerging markets, despite the recent performance, have many positives working in their favor. They now represent approximately half of global Gross Domestic Product (GDP) and their share should continue to grow in the coming years. According the International Monetary Fund ( IMF ), developed economies will expand by 1.2% while emerging economies will reach an average growth rate of 5.3% this year.
Many of these countries have large, young populations that will be critical for supporting economic growth. Read more »
Gold as investment has been discussed extensively the past few years leaving investors questioning whether or not to invest in this commodity. By breaking down the reasons investors buy Gold and looking at historical price trends, we hope to help explain why Gold is not truly an investment, but rather it is a speculation. First, let us consider that the gold market recently did something it hadn’t done since 1980. It fell 13% in two days and is now down dramatically from its 2011 highs. Let’s examine what caused this recent sell-off and determine if investors should be purchasing gold.
The reason for the recent sharp decline in gold prices is twofold. First, major analysts lowered their predictions for gold prices. Then, once gold fell to $1,550 an ounce, the market was hit with a huge backlog of sell stop orders. The result was once gold broke $1550 an ounce, it went down quickly on the weight of these stop loss orders.
A reduction in global inflation also played a role. Recent Producer Price Index (PPI) numbers have been Read more »
The Federal Reserve has been on a bond-buying spree since the start of the financial crisis, trying to flood the economy with cheap money. The Fed is currently buying $85 billion worth of Treasury and Mortgage-backed securities each month to help stave off deflation and accelerate economic growth. While the Fed’s action is just one of many reasons the S&P 500 is up more than 14% year-to-date, it hasn’t had the intended effect on the U.S. economy. Here is why:
Companies, especially banks, have been hoarding cash since the financial crisis in 2008. Banks have been worried about a repeat, being caught with too few reserves and too much toxic debt. Thus, instead of flooding the economy with cheap cash, Quantitative Easing has only flooded balance sheets with cash. The vast majority of the money has not been lent out, essentially blocking the money from reaching the broader economy and accelerating economic growth, which was the primary goal of QE. The monetary base has swelled from $800 billion before the crisis to nearly $3.4 trillion now. However, consumer loans at commercial banks have gone from approximately $800 billion to $1.1 trillion during the same period. Because of this Read more »
“After making several attempts to break through the psychologically important 1700 level, the S&P 500 ended the week down about 0.1%. This is the first week since mid-June that the S&P 500 declined. While I do not feel that the market is set for a large decline and see any substantial pullback as a long-term buying opportunity, I am expecting some degree of selling in the short-term. The reason is very simple. Although I expect the economy to accelerate in the second half of the year, the second quarter is looking relatively weak. Additionally, top-line revenue growth for the companies within the S&P 500 is looking more and more elusive and earnings growth is lackluster.
Instead of being driven by earnings, the market is rising because P/E multiples are expanding. At the beginning of the year, the S&P 500 had a P/E multiple, based on expected 2013 earnings, of 13.8. As of the end of July, the forward P/E multiple of the S&P 500 is 15.7 times projected earnings estimates. Effectively, P/E valuation multiples have expanded by 13.7% so far this year. As of July 26th, the S&P 500 is up 19.9%, or 18.8% if you exclude dividends. This means that the majority of the market’s gain can be attributed to stocks becoming more expensive, not underlying earnings growth. Read more »
Mitch Zacks, Senior Portfolio Manager at Zacks Investment Management: “The S&P 500 gained 2.4% in the second quarter. Like many equity investors, I am anticipating that the second half of the year will be far more volatile than the first half. The reason for the volatility is that interest rates are going to be rising, which will play havoc with the fixed-income markets, and the stock market will likely suffer collateral damage. In the end, my best guess is that the S&P 500 will end 2013 roughly 3-4% higher than current levels due primarily to the strengthening economic recovery.
Fluctuations in interest rates will remain center stage in the second half of 2013. Usually, the ten-year treasury yield should be about 200 basis points, or 2%, above the inflation rate. Right now, as of the end of June, the ten-year treasury is yielding 2.5%. The problem is that inflation is not even close to 0.5%. Most likely, depending on how it is calculated, core inflation is running around 1.1% annually and projected to rise to around 1.5% in the third quarter of 2013. This is below the Federal Reserve’s target of 2% and is also substantially below the average inflation rate we have seen in the U.S. The current low inflation rate implies that the ten-year treasury should be over 3%. The reason the ten-year rate is not that high is Read more »
By Mitch Zacks, Senior Portfolio Manager at Zacks Investment Management, Inc.
“The market is always looking out six to eight months. For this reason, investing using macro-economic data is not necessarily a winning strategy. Macro-economic data tends to be backward looking. The unemployment numbers tell you what has happened in the past; however, they don’t give a good read as to what might happen in the future. The S&P 500 does not care what the GDP numbers were last quarter. Instead, it is looking at what GDP growth is going to be in the coming quarter and, most importantly, whether that growth will come in stronger or weaker than current expectations. For this reason, I almost always prefer to follow an investment strategy that focuses on forward looking metrics, like changes in analysts’ earnings estimates, rather than trying to decipher what the latest CPI number is telling us about the market.
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“The Bank of Japan recently announced that it would start purchasing long-term Japanese government bonds. This quantitative easing program in Japan is roughly equivalent to the size of the program here in the U.S. However, the quantitative easing in Japan is larger than what is happening in the U.S. when compared to the size of Japanese GDP. The recent rally in Japanese equities is a result of the monetary announcement. Should you invest in Japanese equities today? To answer this question, we will take a look at the economic situation in Japan and the actions taken by the Bank of Japan.
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