How Money Managers Fight Their Emotions and Sometimes Lose - News and Current Events | futures io social day trading
futures io futures trading


How Money Managers Fight Their Emotions and Sometimes Lose
Updated: Views / Replies:233 / 0
Created: by kbit Attachments:0

Welcome to futures io.

(If you already have an account, login at the top of the page)

futures io is the largest futures trading community on the planet, with over 90,000 members. At futures io, our goal has always been and always will be to create a friendly, positive, forward-thinking community where members can openly share and discuss everything the world of trading has to offer. The community is one of the friendliest you will find on any subject, with members going out of their way to help others. Some of the primary differences between futures io and other trading sites revolve around the standards of our community. Those standards include a code of conduct for our members, as well as extremely high standards that govern which partners we do business with, and which products or services we recommend to our members.

At futures io, our focus is on quality education. No hype, gimmicks, or secret sauce. The truth is: trading is hard. To succeed, you need to surround yourself with the right support system, educational content, and trading mentors – all of which you can find on futures io, utilizing our social trading environment.

With futures io, you can find honest trading reviews on brokers, trading rooms, indicator packages, trading strategies, and much more. Our trading review process is highly moderated to ensure that only genuine users are allowed, so you don’t need to worry about fake reviews.

We are fundamentally different than most other trading sites:
  • We are here to help. Just let us know what you need.
  • We work extremely hard to keep things positive in our community.
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts.
  • We firmly believe in and encourage sharing. The holy grail is within you, we can help you find it.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

Reply
 
Thread Tools Search this Thread
 

How Money Managers Fight Their Emotions and Sometimes Lose

  #1 (permalink)
Elite Member
Aurora, Il USA
 
Futures Experience: Advanced
Platform: TradeStation
Favorite Futures: futures
 
kbit's Avatar
 
Posts: 5,872 since Nov 2010
Thanks: 3,301 given, 3,332 received

How Money Managers Fight Their Emotions and Sometimes Lose

Jeff Schwarte was in a quandary. The manager of the $3.5 billion Principal Large Cap Value Fund had held a big stake in Apple stock since 2004. Eight years later, in mid-2012, his analysts remained bullish on the stock. But since the start of the year, the algorithms in Schwarte's quantitative valuation models had warned that Apple's profit margins were shrinking.

As Schwarte weighed the evidence, he got an e-mail about his Apple stake from behavioral finance consulting firm Cabot Research. It was an automated alert about positions that Cabot -- which Principal Funds had hired to analyze manager portfolio holdings and trades for behavioral flaws -- sends about positions that might indicate a bias. In this case, Schwarte said, his analysts had fallen victim to "the endowment effect": Someone with a winning position is reluctant to let it go even if there are good reasons to do so.

So he trimmed his stake in Apple. Since June 30, 2012, Apple's stock price has declined from $584 to $543, or 7 percent. During the same period, the Standard & Poor's 500 has risen 39 percent. “Our models were quicker to identify the problem than our analysts were willing to accept,” said Schwarte.

Since the 2008 financial crisis, the notion that investors often behave irrationally has become axiomatic. What's more controversial is whether money managers can avoid making -- or even exploit -- the mistakes of the investing masses.

Cabot has worked with managers running a total of some $600 billion to overcome their biases, detecting patterns of harmful behavior from past trades and identifying stocks that might fit the pattern. “The vast majority of managers have one bias that is costing them at least one percentage point of return a year,” said Michael Ervolini, Cabot's chief executive officer.
No Regrets

Becoming emotionally invested in your winners, that endowment effect, is the most common bias among professional investors, occurring in one in four portfolios, said Ervolini.

Then -- wouldn't you know it? -- there's what happens when managers find a good investment but are afraid to buy too much of it, in case they're wrong down the road. They establish a tiny position that allows them to pat themselves on the back if they’re right and avoid big regrets if they’re wrong. That's called regret aversion, and it occurs in one in six managers.

The most common bias among individual investors, Cabot finds, is the rarest among the pros: loss aversion, or holding on to losers too long. The emotion behind loss aversion is pretty basic -- it's the pain of accepting that you’ve made a mistake. Instead of acknowledging that to yourself, you hold on to the asset in the hope that it will rebound. Managers have a greater incentive to get rid of their losers faster than individuals do, because when they report holdings to shareholders they'll have to confront that losing position.

While Cabot helps managers avoid errors, some professionals seek to profit from others’ behavioral mistakes. J.P. Morgan runs some $20 billion in U.S. stock mutual funds and institutional accounts that use behavioral finance to exploit other investors' goofs. All but one of its seven Intrepid funds that use this strategy have beaten their peers over the last 10 years.

Investors too often fall victim to judgment shortcuts, said Dennis Ruhl, J.P. Morgan’s chief investment officer of U.S. Equity Behavioral Finance. They believe a good company must also be a good stock, or a mediocre company a bad stock. In behavioral finance land, that's called representativeness.

“The reality is, a good company is a good stock if you pay the right price for it,” he said. “But we find good companies are often overpriced, and sometimes you’re better off buying a slightly less good company at a much cheaper price.”

Computer and printer maker Hewlett-Packard is a good example, said Ruhl. In 2012, he saw the stock as extremely cheap. Because it was a company facing big challenges, many investors judged it not worth buying at any price. At such a deep discount, it was indeed worth buying, he said. After investors realized the end wasn’t nigh, Hewlett’s stock rallied by more than 100 percent in 2013.
Peer Reviews

That doesn't mean his investment team isn't subject to biases, said Ruhl. To avoid them, analysts have peer reviews of their ideas by more objective team members. Also, while analysts and Ruhl weigh in on individual aspects of a company, perhaps tweaking what they think earnings prospects might be, quantitative models often make the final decision. This takes the emotion out of difficult buy and sell decisions.

Quants claim to have a distinct advantage when it comes to behavioral finance. “Our portfolios are more about math, science and technology,” said Gregg S. Fisher, chief investment officer of Gerstein Fisher, a New York money manager with $1 billion in assets. “There’s very little subjectivity to what we do.” He jokingly compares his management process to modern manufacturing: “They say at manufacturing plants you need two individuals to run them -- a person and a dog. The person to work the computer, and a dog to bite the person if he doesn’t listen to the computer.”

But what about the humans who designed the quantitative models? Could there be some emotional biases built into their design? Quants can get overly attached to their models -- a bias known as anchoring. “Every quant gets anchored to a few factors, such as the value or momentum effect,” said Harin de Silva, president of Analytic Investors, a quant shop in Los Angeles. “You can probably convince yourself there’s some economic or behavioral theory that makes them work. But in reality someone found them and we sort of backed into the explanation. It’s not like a law of physics.”

If quant models aren’t immune to bias, what about Nobel Prize winners in behavioral finance?

Financial planner Harold Evensky of Evensky & Katz Wealth Management likes to tell a story about one of his clients, Nobel winner Daniel Kahneman. When Evensky's partner gave Kahneman a standard test to see if he was objective about his investments, he failed. Kahneman wasn't surprised. “Of course,” he said. “I’m human.”

How Money Managers Fight Their Emotions and Sometimes Lose - Bloomberg

Reply With Quote

Reply



futures io > > > > How Money Managers Fight Their Emotions and Sometimes Lose

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)

Linda Bradford Raschke: Reading The Tape

Elite only

Adam Grimes: TBA

Elite only

NinjaTrader: TBA

January

Ran Aroussi: TBA

Elite only
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
IT’S OFFICIAL: Keep Your Money In This System & LOSE It All Victory Trader News and Current Events 2 September 1st, 2012 02:30 PM
Top 50 Reasons Why Futures Traders Lose Money iTrade2golf Psychology and Money Management 2 February 22nd, 2012 11:40 AM
How The FAZ-Mobile Promises To Lose 99.6% Of Your Money Even If The Market Crashes By Quick Summary News and Current Events 0 December 25th, 2011 11:10 PM
Money managers doublebee Trading Reviews and Vendors 2 November 10th, 2011 12:17 PM
How Much Money Are You Willing To Lose Today? hondo69 Psychology and Money Management 3 December 16th, 2009 06:15 AM


All times are GMT -4. The time now is 01:29 PM.

Copyright © 2017 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts
Page generated 2017-12-11 in 0.09 seconds with 19 queries on phoenix via your IP 54.145.16.43