Investors behaving badly
Posted on October 15, 2007 by Richard Beddard
Filed Under Investing |
Some views from around the Internet:
Although I’ve yet to start reading his book, instinctively I’m a fan of James Montier. He’s a behavioural investing expert who enjoys trashing conventional investment theory. Perhaps that’s because it’s a mathematical construct which tends to overlook the human factor.
Back in the real world everyone knows psychology drives markets.
Recently Mr Montier claimed sector rotation is an investment dead end, and…
…useful investment characteristics such as value and momentum are better defined at the stock level rather than the industry level.
Here he is quoting research by Nobel Prize winning economists Eugene Fama and Kenneth French to demonstrate that most investment returns come from dividends. Since value stocks pay out twice as much as growth stocks, that’s good news for value investors. But value stocks also make bigger capital gains as the market re-rates them:
From a behavioural standpoint this is exactly what we would expect to see, if investors over pay for growth. Of course, Fama and French prefer a rational explanation which I find far from convincing, but the bottom line is that the return decomposition can’t help us distinguish between the rational and behavioural explanations - we have observational equivalence.
And friend of the Interactive Investor blog, Graeme Pietersz, renews his interest in mechanical strategies after reading a paper on James Montier’s Blog. They all seem to be agreed that index tracking destroys value. Although Graeme describes himself as a passive investor, he would prefer a:
…mechanically selected buy and hold portfolio, trading only when a holding ceases to be value share.
Perhaps I could be so bold as to point him in this direction 
Mr Montier’s not the only behaviouralist with a new book out, though. Barry Ritholz recommends Inside the Investor’s Brain: The Power of Mind Over Money.
All that glitters…
This surprised me… Controlled Greed picks up on an article that claims gold is not a safe haven, in fact it has a miserable long-term record against inflation.*1
Late to the party…
And this didn’t. Alphaville reports on a spate of dewey-eyed number crunching. Profits are high, the earnings yield is low (they forgot debt is still cheap) - the bull must go on (though not indefinitely). Without wishing to sound big-headed, we’ve been saying that here, here, here, here, here, here, here, and lots of times here!! (I think it’s worth two).
A new blog for the roll…
The Rogue Analyst, who describes himself as a UK financial analyst and former fund manager.
Footnotes:
- For an alternative view, see Peter Temple in this week’s FT.
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