Behavioral Finance
One major bias is the propensity of investors to hold on to "losers" too long and sell "winners" too soon.
Confirmation bias: growth companies' confidence in forecasts, which causes analysts to overestimate growth rates for growth companies ans overemphasize good news and ignore negative news.
When there is a shift in sentiment, noise traders (nonprofessional with no special information) move together, which increase the prices and the volatility of securities during trading hours.
Escalation bias: investors put more money into a failure that they feel responsible for rather into a success. This also refers to "averaging down" on an investment that has declined in value since the initial purchase rather than consider selling the stock if it was a mistake.
Fusion investing is the integration of 2 elements of investment valuation - fundamental value and investor sentiment. The market price of securities is its fundamental value plus a term that indicates the demand from noise traders who reflect investor sentiment.
Portfolio management with superior analysts: the superior analysts should be encouraged to concentrate their efforts in mid-cap and small-cap. The superior analysts should pay particular attention to the BV/MV, to the size of stocks being analyzed, and to the monetary policy environment.
If you lack access to superior analysts, you should:
1. Determine and qualify your risk preferences.
2. Construct the appropriate risk portfolio by dividing the total portfolio between risk-free assets and a risky assets.
3. Diversify completely on a global basis to eliminate all unsystematic risk.
4. Maintain the specified risk level by rebalancing when necessary.
5. Minimize total transaction costs.
No comments:
Post a Comment