Driving Emotions From Your Investment Process: A 12-Step Program
Posted on September 5, 2014 | AAII Journal
For many years, I conducted an AAII Stock Analysis seminar in which I presented a variety of techniques for analyzing and valuing stocks.
Beyond presenting specific techniques, I also discussed ways to remove emotions from a decision process. Now that I manage money professionally and have delved into the ever-growing body of behavioral science research, I am more convinced than ever that ruthlessly driving emotions from stock-picking decisions is essential to generating superior returns. In fact, if you don’t, you cannot outperform.
There is now a large body of research showing that investors depend on emotions and anecdotal information when making decisions. You are no doubt aware of this and are familiar with the resulting cognitive investment errors. There have been numerous articles dealing with how investors can avoid such errors and, as a result, do a better job of managing investment portfolios.
Unfortunately, industry professionals apply techniques and put policies in place that encourage investors to continue making emotional decisions. So even if the investor wants to drive emotions out of the investment process, the industry is set up to encourage them to do otherwise.
To help you make this transition, I present a 12-step program to show how to ruthlessly drive out emotions and thus make it possible for you to make superior investment decisions.
How to Safely Navigate Through Crowded ETF Waters
Posted on August 28, 2014 | AAII Journal
I once interviewed a successful exchange-traded fund (ETF) sponsor and had the temerity to offer some suggestions where some ETFs were needed.
The response from this person was: “Look, we’re not interested in filling needs as much as we are in building a business.” This made an important point: Investors must align their investments to match their needs versus the business interests of sponsors.
The market for exchange-traded funds has never been more robust and expansionary. The most prominent activity for sponsors is similar to a game of Battleship in which the winner fills all the slots before the next guy. Why? Because the “first mover advantage” to a sector and index cements their brand as “the go-to shop.”
The most important activity for investors remains focusing on those ETFs that work and matter to them versus any sponsor’s marketing campaign.
It’s hard to imagine that in 2005 we published an essay in our newsletter, the ETF Digest, entitled “The ETF Tsunami” that discussed the then-impending flood of new ETF issues about to hit the markets. Obviously, it seemed even then the sector was undergoing explosive growth, but with today’s level of issuance “tsunami” seems an understatement.
Retirement Planning May Improve Your Health
Posted on August 25, 2014 | AAII Journal
Whether or not a person contributes to a 401(k) plan may influence his or her health. Commenting on their study of employees with access to company-sponsored wellness testing, Timothy Gubler and Lamar Pierce of Washington University said they found that “retirement savings and health-improvement behaviors were highly correlated. Individuals who had previously chosen to save for the future by making 401(k) contributions improved their health significantly more than non-contributors did, even though there were few health differences between the two groups prior to program implementation.”
The study was limited in scope, but its authors believe the results demonstrate the impact of time-discounting preferences. Time discounting refers to whether a person prefers to realize a benefit now (e.g., the payment of cash) or prefers to postpone in exchange for a better benefit in the future (e.g., a larger payment of cash). The authors opine that if discounting preferences can be changed in one domain, such as the setting aside of a portion of current pay for retirement, discounting preferences are also easier to change in other domains, such as health.
Finding Growth Stock Winners: Focus on 8 Fundamental Factors
Posted on August 14, 2014 | AAII Journal
There are eight tried-and-true key fundamental factors that drive stellar stock price performance and have stood the test of time.
ETFs and ETNs: Knowing What You Own
Posted on August 13, 2014 | AAII Journal
The liquidity composition of a fund’s underlying assets, the historical tracking error and fees are important characteristics to consider when investing in an ETF.
ETFs are one of the fastest-growing investment vehicles, with total assets reaching $1.4 trillion in 2012 (Figure 1). Like open-end mutual funds, exchange-traded funds typically hold a basket of underlying securities. The basket can consist of stocks, bonds, futures, options, forwards (a non-publicly traded contract to deliver a cash commodity at a specified date in the future), the rights to physical commodities, or any combination thereof.
Figure 1. U.S. ETP Assets & Number of ETPs by Year
Real Returns Favor Holding Stocks
Posted on August 12, 2014 | AAII Journal
Stocks are good hedges against inflation, preserve purchasing power, and, over long periods, are less risky than bonds.
CBOE’s Volatility Index (VIX)
Posted on August 6, 2014 | AAII Journal
An explanation of the so-called “fear gauge” and insight into how it is used.
The VIX is a measure of the implied or expected volatility of S&P 500 options over the next 30 days. Implied volatility is the market’s estimated future volatility and is reflected in the premiums paid for options.
Originally launched in 1993, the VIX underwent a change in calculation in September 2003. The “original” VIX was calculated using at-the-money put and call options on the S&P 100 index OEX. Furthermore, the original VIX was based on prices of only eight at-the-money OEX puts and calls, the most actively traded index options at the time.
By 2003, the S&P 500 index SPX option market was the most actively traded option market, while trading volume in OEX index options had fallen off significantly. Also, portfolio managers were using options more as a means of insuring their portfolios, specifically with out-of-the-money and at-the-money index puts. Therefore, the new VIX calculation includes put and call options with a wide range of strike prices, including those in-the-money, at-the-money and out-of-the-money.
The Individual Investor’s Guide to Exchange-Traded Funds 2014
Posted on August 1, 2014 | AAII Journal
Detailed return information and data on 446 ETFs and ETNs, including an overview of the current trends in the ETF industry.
Five Common Traits of Successful Value Screens
Posted on August 1, 2014 | AAII Journal
Though investing gurus differ in what they look for in a stock, there are five common traits we see across the AAII value-oriented screens.
Wouldn’t you love to get Benjamin Graham’s thoughts on whether a stock you are considering is priced attractively?
Or how about getting a warning message from David Dreman before you fall for a common emotional trap after a beloved company just missed its earnings target? Who wouldn’t want some tips from Warren Buffett on how to identify if a company has a competitive advantage?
We have adapted the works of the best investing minds on Wall Street and created simple stock selection rules that individuals can use to find attractive investments. AAII members can learn more about stock market gurus and their strategies and even see which stocks currently match each approach on the Stock Screens segment of AAII.com or in AAII’s stock screening and analysis tool Stock Investor Pro.
If you look at the approaches of these gurus and stock market experts, you will quickly notice that successful approaches within a given investment style tend to have similar elements. Sure, the Dreman approach on AAII.com may emphasize the price-earnings ratio to locate value companies while the Piotroski strategy uses the price-to-book-value ratio, but every successful value-oriented approach not only looks for a low price-related multiple, but also some measure of expected growth or financial strength.
Money Funds and the Regulators
Posted on July 31, 2014 | AAII Journal
Following the 2008 financial crisis, there has been debate about how much regulatory change is needed, including whether floating net asset values should be required.