Loss aversion, art, analyst forecasts, Jim Rogers and pension panic - the best investing blogs and podcasts from the past week
Of all the behavioural and cognitive flaws that humans are prone to, anchoring and loss aversion are two that really stick out in investing. In bear markets like this, they’re perhaps even more troublesome than normal.
The problem is that both these psychological trap doors intensify when prices are falling.
Take anchoring, which is when an individual uses a prior data point - like the share price they paid - as a guide to interpreting what’s in front of them. Put another way, people fixate on favoured but irrelevant information and drag their heels when it comes to updating their views.
Loss aversion describes the fact that humans feel the pain of a loss much more than the joy of a win. In Annie Duke’s new book Quit, she points to two versions of this human instinct: standard loss aversion (which stops you from starting) and ‘sure’ loss aversion (which stops you from stopping something you’re doing).
These broad behavioural traits spill into all sorts of overlapping errors and flaws. But the point is that faced with falling market prices, big changes in sectoral trends, and an outlook that’s more uncertain than normal, it’s not hard to see how something like ‘sure’ loss aversion might be exacerbated.
At times like this, the investment case for what might have been a long-term holding may change. And if it does, can you rely on yourself to make the best decision about whether to hold or sell it?
Research earlier this year found that a decision like that might be much harder than you think.
An interrogation of art sales through big auction houses like Christie’s and Sotheby’s set out to detect whether anchoring and loss aversion were at play in the behaviour of sellers (Graddy et al). You can find the study here: Empirical Evidence of Anchoring and Loss Aversion from Art Auctions
Now, unless you’re hanging share certificates on the wall, fine art and equities have some differences. Like the stock market, demand for a piece of art can change over time and from auction to auction. But unlike a company share, the quality of an artwork, all things being equal, usually remains the same. You can’t say the same for companies.
In this study the researchers examined the repeated sale of the same artworks to understand the relationship between auction house presale estimates and the sellers’ secret reserve prices. And in this respect, art and shares have similarities - sellers have control over the price they sell at.
There were two key findings. One was that anchoring is an important factor in the prices of artworks that are resold quickly. The other is that loss aversion becomes much more potent the longer the seller has owned the art.
What does this mean? Well, while art and equities are hardly the same, it’s undeniable that investors have a habit of falling in love with their best decisions, and those shares may well fall into the category of long-term holdings.
So you could certainly see how ‘sure’ loss aversion might be more extreme the longer you’ve held a share for. And in markets that are pushing down prices and asking tough questions of investors, that makes the emotion-free decision-making of holding or selling those shares just a little bit harder.
Top posts from the past week
Verdad Research - The Sages of Wall Street
This analysis from Brian Chingono and Greg Obenshain at value-focused asset manager Verdad, continues a series of articles looking at the forecasting ability of analysts. Analyst forecasts tend to get a rough ride, which I’ve mentioned a lot in this newsletter recently. But this analysis shows mixed results. They pick up and mimic previous studies showing that forecasts get less and less accurate the more specific you get about profits and the further out you look. In fact, just using GDP growth as a proxy for likely earnings growth gets a far more accurate result. That said, analysts do show some skill and get directional calls more right than wrong in firms they expect to grow the fastest - but even then the degree of error in forecasts is high. It once again points to the age-old problem of overconfidence among analysts.
PI World - Sell it to the City October 2022
This month, Tamzin Freeman’s PI World brought back their Sell it to the City video series. It’s a simple format: a handful of private investors get 10 minutes each to pitch their best investment ideas to a group of professional fund managers. In this episode we get three university undergraduates (Ralph, Kai and Rachel) presenting pitches to Andy Brough of Schroders, Judith MacKenzie of Downing and Stephen English of Stellar Asset Management. The shares up for discussion include CPP (LON:CPP), Vector Capital (LON:VCAP) and Norcros (LON:NXR), none of which are particularly easy companies to analyse. In the end, the pros pass judgement on both the pitches and the shares… but I won’t ruin it.
This Week in Intelligent Investing podcast - Reflections on Buffett’s Famous Essay, ”How Inflation Swindles the Equity Investor”
As the title suggests, this podcast with co-hosts Phil Ordway (Anabatic Fund), Elliot Turner (RGA Investment Advisors) and John Mihaljevic (The Manual of Ideas) orbits an essay Warren Buffett wrote for Fortune magazine back in 1977. In it, Buffett set out some remarkably prescient views on the headwinds facing companies and how that would affect investment returns. Fast forward to today and the re-emergence of inflation, and Buffett’s essay still hits the mark. But this time around there are many structural differences in companies and accounting that give rise to a whole host of questions about what we can expect and how to position yourself as an investor. TWIII has quite an unusual format that gives the hosts time to explain their thoughts in depth - but it works really well on fairly deep subjects like this.
If you want to read the original Fortune magazine essay by Buffett, you can find it on the CS Investing blog here: How Inflation Swindles the Equity Investor
Jamie Catherwood, Investor Amnesia - Legends Of Market History: Abraham Van Ketwich
If you’re looking for a bit of diversion from the miserable market conditions, you could try this new series of articles from Jamie Catherwood. His historical take on finance is something a bit different. This article tracks the achievements of Dutch financier Abraham van Ketwich who basically came up with the world’s first mutual fund. Back in 1772, the East India Company was blowing up and taking a lot of over-exposed investment houses with it. In the aftermath, Van Ketwich formulated the first diversified, somewhat passive and surprisingly low cost mutual fund. A follow up fund that launched a few years later looks very much like the world’s first value fund - using techniques not dissimilar from what Ben Graham was advocating 150 years later. This article follows the first in the series, which looked at the founder of Japanese financial services giant Nomura: Legends Of Market History: Tokushichi Nomura II
UK Dividend Stocks Blog - UK Dividend Stocks Portfolio 2022 Q3 Update
Jon Kingham’s UK Dividend Stocks Blog looks like it’s in the right place at the right time in the current conditions. Yes, the market value is down, but the portfolio’s dividend income has been growing strongly. With yields up across the market this year, it’s a win for longer-term income investors prepared to roll with the punches. That said, it’s undeniably scary out there, so no surprise that Jon’s reinforcing his defences.
Meb Faber Research - Episode #449: Jim Rogers – The Adventure Capitalist’s View of Global Markets
I’ve been trying to resist too many mentions of Meb Faber’s podcast episodes recently, but then this came along. If my maths is right, Jim Rogers will be 80 next week. He’s undoubtedly had a big-hitting career, which includes co-founding the Quantum Fund with George Soros, and he’s clearly still enjoying his investing (and the press love to quote him). The benefit of listening to someone like Jim is that he’s literally had decades of experience, taking in inflationary and recessionary environments like we have now.
The conversation weaves its way around economics and central bank action, how people should be positioning their portfolios (stay with what you know and be boring) and investing in commodities. Jim’s well known for investing internationally, particularly in disaster zones that are poised to recover (which currently includes Uzbekistan). Overall, he’s humble and has some solid, sensible views on the ways investors should behave - and why they should be thinking long term.
A Long Time In Finance podcast - The Great Pension Fund Panic of 2022
Kwasi Kwarteng might have been given the boot as UK Chancellor, but if you are still bemused by the recent debacle in the gilt market and the blowback on pension schemes, then this podcast is for you. It certainly was for me. I’m not sure whether I’m more or less concerned after listening to Neil and Jonathan interview pensions expert John Ralfe. But what seems to be the case is that an originally good idea in pension scheme management has been spun into complex products that introduce way more risk than they should do. It’s all born of the assumption that gilt markets will always behave in certain ways - which they’ve proved recently that they don’t. This problem - assuming the immediate urgency passes relatively soon - seems like it has much further to run.
Have a great weekend,
Ben
PS. Catch up below with the best of the rest from the past week…
Thinking & Strategy (Blogs)
Top global income manager: You have to be prepared to take some short-term volatility
Fund research from Trustnet
What’s the Worst Case Scenario For Stocks?
A Wealth of Common Sense
HFEA 8 – Leveraged Neapolitan Portfolio and Factor Tank
7 Circles
What is the Story Behind Trend Following?
Alpha Architect
The major incentive problem at the heart of active management|
The Evidence-Based Investor
The Survival Game
Behavioural Investment
Why Trussonomics cannot work
Klement on Investing
Little Rules About Big Things
Morgan Housel
The Triumph of Logos
Of Dollars And Data
The Evolution of Endowment Investing (Plus: Upcoming Live Discussion)
Neckar's Minds and Markets
Thinking & Strategy (Podcasts)
Saba Capital Management’s Weinstein on Whales, Tails, & Fails
The Big Picture
The Value Perspective Podcast episode – with Doomberg
The Value Perspective
Rodrigo Gordillo and Corey Hoffstein – Return Stacking: Strategies for Overcoming a Low Return Environment (The Best Investment Writing Volume 6)
Meb Faber Research
Show Us Your Portfolio: Dr. Daniel Crosby
Excess Returns
David Senra — Pick The Right Heroes (EP.127)
Infinite Loops
#137 - Cullen Roche - Pragmatic Capitalism and Monetary Economics
Opto Sessions
Annie Duke – Ideas Lab Series – October 12th, 2022
Top Traders Unplugged
Madhavan Ramanujam - How to Price Products - [Invest Like the Best, EP.298]
Invest Like the Best with Patrick O'Shaughnessy
Securities & Markets (Blogs)
Small Caps Live Weekly Summary
Small Caps Life
Capital gains tax on gilts
Monevator
What does the UK bond market crisis mean for investors?
Investing | Mail Online
Performance review 9M 2022 – Comment: “David Einhorn, Bumsbuden & Short selling”
value and opportunity
Dividend Income Update September 2022
DivHut
Meta Meets Microsoft
Stratechery by Ben Thompson
Does Facebook today resemble Microsoft in 2011? META
Yet Another Value Blog
Securities & Markets (Podcasts)
Bad News is Good News
The Reformed Broker
TIP483: Down But Not Out w/ Cathie Wood
We Study Billionaires - The Investor’s Podcast Network
Animal Spirits: A Tough Break
A Wealth of Common Sense
The Companies and Markets show: YouGov, software winners, and Musk's Twitter deal back on?
Investors' Chronicle
The safety of pensions, top tips for mortgages and the big stories on the stock market
AJ Bell Money & Markets
Will Disney Bet Big On DraftKings?
Stock Club
E105 - Tesco, Pennon, Spoons, CVS Group, Imperial Brands & Pepsi
The Investor Way
Small Caps Podcast with Paul Scott – Episode 15
Quality Small Caps
Weekly Investment Trust Podcast with Jonathan Davis (08 Oct 2022)
Money Makers