Investiv Daily Has Arrived

[Is Your Brain Wired For Investing?] By Sven Carlin on October 6, 2016 [pexels-photo-88768] - Recency bias, probability neglect and aversion loss are just a few of the concepts that we, as humans, find difficult to avoid in our investing. - The average U.S. investor underperformed the market by 7.4% per year in the last 30 years as a result of taking action under the influence of emotions. - Fundamentals, valuations and dollar cost averaging can help you put your emotions aside. Introduction Today we’ll discuss how humans aren’t really mentally prepared for investing. We are wired to survive in the woods with a freeze, fight or flight system, which has nothing do to with the markets. There is no threat of death when it comes to investing in the markets. We’ll discuss how our natural psychological predispositions affect our investing decisions and will give you some rules that you can apply to your investing to help you avoid letting your returns be dominated by your emotions. Recency Bias: The Turkey Problem We’re always reading stories online about the stock market, economy, and the latest news, as you’re doing right now reading this article. This immediate availability of information is bound to have an effect on your actions as our brain is wired to accept as reality the information we feed it most often. This can be a danger to your investing. The market’s inherent nature is cyclical which means that the reality we create for ourselves within a cycle can abruptly end when the cycle does, catching us on the wrong foot. A great example is the “Turkey Problem” discussed by Nassim Taleb in his book the [Black Swan]. If we plot a turkey’s days alive with his growth and life happiness, we get a perfect growth curve. [figure-1-turkey-problem] Figure 1: Turkey’s life happiness and length. From the turkey’s perspective, life seems great, the bird has been fed regularly and by looking at past data it expects the trend to continue. But then something the turkey can’t foresee happens, Thanksgiving. [figure-2-turkey-dead] Figure 2: Turkey’s life happiness and length after Thanksgiving. As investors, we have to be careful to avoid taking the turkey’s perspective (or recency bias) when it comes to the stock market as history has shown us that black swans—or unforeseen cataclysmic events—are always around the corner. As the world becomes increasingly more interconnected, a black swan could come from anywhere which is why we need to learn to think in probabilities as doing so will allow us to properly assess the risks rather than just expecting the recent market behavior to replicate into the future. [This might come as a complete shock but, it’s absolutely true.] The most profitable investing strategy ever has nothing to do with company or market fundamentals? One trader Ed Seykota turned $5,000 into over $15 million (300,000%) Michael Marcus turned $30,000 into over $80 million (266,000%) John Henry used it to become a billionaire and now owns a stake in the Boston Red Sox. Their strategy is very “unorthodox.” They don’t care about balance sheets, P/E ratios, or return on equity. All they care about is price and price trends and are trend following traders [To put a Trend Following Strategy to work in your portfolio risk-free for the next 30 days click here.] [Is This Junior Mining Company Your Next 10-Bagger ?] What I’m about to reveal to you is, in my option, the trade of the next decade. One Wall Street titan, who is arguable the single greatest investor of all time (hint: not Buffett), has just invested $1.2 billion of his own personal money into this opportunity. [To Get The Urgent Details Click Here.] Thinking In Probabilities As human beings, we’re not used to thinking in probabilities. The concept that stems from this unfamiliarity is called “probability neglect” and can be described as being only able to focus on what could possibly happen and not on how probable that possibility is. For us, this can be good or bad, either we are healthy or sick, happy or unhappy. This isn’t such a moment when you are contemporaneously extremely happy about one thing but also extremely sad about something else. A person can be happy for a moment and then be unhappy in the next, but usually not both at the same time. The same is true with stocks, we think a stock is a good or bad investment because of possible future catalysts, but we don’t think about how probable those future catalysts are likely to become. To be a great investor, we need to think in probabilities and objectively assess those probabilities along with the impact of each probable risk factor and future catalyst. However, to think in probabilities, we need to remove something else inherent to our human nature, emotion. Emotional Investing Cycle Our investing goals are typically linked to some personal goals, like retiring early, buying a bigger house, or finally having enough for that trip around the world. We don’t look often at the stock market as a place where we can achieve a good long term return for inherent risks, but rather as a place where dreams come true. The problem that comes with this is that when a negative event or bear market puts more distance between us and our goals, emotion tends to take over. In both cases—when the market is helping us achieve our dreams, and when it is doing the opposite—our brain employs that recency bias we discussed a moment ago and extrapolates into the future, which is what has been happening recently, as though it will continue forever. When markets keep going up—as we’ve seen in this seven year bull market—we get euphoric, and when the markets fall we become scared and eventually depressed. [figure-x-emotions] Figure 3: Emotions and markets. Source: [Michelle Perry Higgins]. Both emotional states are very detrimental for our investment returns because they cause investors to put their money in at the wrong time (times of euphoria), and pull their money out at the wrong times (capitulation time), when the best thing to do is the opposite. In the last 30 years, thanks to the fantastic emotions our brain gives us, the average U.S. investor has severely underperformed the S&P 500. [figure-4-u-s-investor] Figure 4: U.S. investor and S&P 500 in the last 30 years. Source: [Bloom]. The real reason behind this behavior is loss aversion, we are terrified of losing out on money we could be making when the markets keep reaching higher in their euphoria, and we are terrified of losing all our money when the markets go down. This results in us buying when we should be selling in the case of a euphoric market, and selling when we should be buying cheap assets in a bear market. Loss Aversion Loss aversion comes from a natural instinct, fear. Our amygdala protects us from danger by inducing fear and a fight or flight reaction when things get rough. This is why we strongly prefer avoiding losses over acquiring gains. Some studies show that losses are as much as twice as psychologically powerful as gains. Unfortunately, in investing when things get rough, it is usually the best time to go all in and enjoy the benefits of a recovery that has always arrived in the past and always will. Even the old Romans had a saying, “Post nubila Phoebus” or “After clouds, the sun.” What To Do To Get The Full Market Return? You might think that we can’t compete against our brains, but we can as our brains and the emotions they produce are a tool to use at our discretion. We can force ourselves to do the right thing at the right moment by creating long term investing rules and then sticking to them no matter what our current emotional state is. Two examples are: - Dollar cost averaging: “I am going to invest in the market a certain sum every month no matter what is going on in the world.” This way you buy at the top of the market but also at the bottom which should provide you with excellent returns in the long run. - Fundamentals and valuations: “I am going to trim my stock portfolio in favor of cash when valuations surpass a certain target.” With this rule you end up selling stocks at a point you are no longer comfortable owning the stocks for the long term, and are unhappy sticking with the dividend yield for an inherent 50% downside short term risk in case of a bear market. You may buy the stock back again when they are below your target, which is a good indicator to use the cyclically adjusted price earnings ratio that uses 10-year average earnings, eliminating cyclical influences like recessions and bubbles. After all, if we are to believe the Efficient Market Hypothesis, a stock’s returns are perfectly correlated to inherent earnings. Conclusion Investing is a very personal thing, as are your life goals. Therefore, it’s difficult to describe the best strategy for everyone, but we hope we’ve given you some insight into how your brain is wired when it comes to investing and what the dangers are of being human for your stock returns. Look at your investing goals and try to find a way to reach them not based on one possible outcome, but rather on long term assessments of probabilities. By doing so, you will limit your risks and increase the probability of reaching your investing goals. [No Comments »] | Filed under: [View all posts in Investing Strategy], [View all posts in Investiv Daily], [View all posts in Stocks] | Tags: No Tags --------------------------------------------------------------- If you are having trouble reading this email, you may [view the online version] This email was sent to {EMAIL} by Investiv, LLC 3400 North Ashton Blvd. | Suite 170 | Lehi | UT | 84043 [Forward to a friend] | [Unsubscribe] Disclaimers Investing is Inherently Risky There are risks inherent in all investments, which may make such investments unsuitable for certain persons. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. You may lose all of your money trading and investing. Do NOT enter any trade without fully understanding the worst-case scenarios of that trade. And do NOT trade with money you cannot afford to lose. Past performance of an investment is not necessarily indicative of its future results. No assurance can be given that any implied recommendation will be profitable or will not be subject to losses. Hypothetical Results Are Reported Results and examples used in the Company’s advertisements, books, videos, websites, and other media—including on the Site and the Network—are, in some cases, based on hypothetical (simulated) trades. Plainly speaking, these trades were not actually executed. Hypothetical performance results have certain limitations. Unlike an actual performance record, hypothetical results do not represent actual trading. Also, since the trades have not been executed, the hypothetical results may have under-or-over compensation for the impact, if any, of certain market factors, such as lack of liquidity. Hypothetical trading programs generally are also subject to the fact that they are designed with the benefit of hindsight. Hypothetical results also do not account for commissions or slippage. The Company’s simulations assume purchase and sale prices believed to be attainable. Yet traders are going to be getting into trades at different times and using various exit approaches, which may result in different pricing and outcomes. You may or may not receive the best available price on the purchase or the sale of a position in actual trading. Information provided by the Company is not investment advice. The Company is not a registered investment adviser, stock broker, or brokerage. You agree that the Company does not represent, warrant, or take responsibility that any account will or is likely to achieve profit or losses similar to those shown. Examples published by the Company are selected for illustrative purposes only. They are not typical and do not represent the typical results of all stocks within the Company’s software or its individual scans and searches. No independent party has audited any hypothetical performance contained at this Web site, nor has any independent party undertaken to confirm that they reflect the trading method under the assumptions or conditions specified. Offers Disinterested Commentary and Analysis The Company does not receive any form of payment or other compensation for publishing information, news, research, or any other material concerning specific securities on the Network that is intended to affect or influence the value of securities. The Company, and its personnel, do not engage in front-running of recommendations and do not trade against one’s own recommendations. The Company and its management may benefit from an increase or decrease in the share prices of the profiled companies, and/or may have other actual or potential conflicts of interest. If a particular security featured in a newsletter publication is concurrently owned by the Company in its corporate brokerage account, or in any of the individual accounts of the Company’s principals or analysts / writers, that fact will be disclosed. The Company, its principals, analysts and writers may choose to purchase a security or derivative featured in one of its newsletter publications, but typically will wait three (3) trading days from the date of publication before initiating said purchase. [Disclaimers, Terms & Conditions] | [Privacy Policy] Copyright 2016