Thursday, May 2, 2019

Investor psychology

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Stories play an important part in investing (Link)
Investment decision-making is a domain in which stories assume particular importance in driving, informing and justifying conclusions. Stories aid our comprehension and can lead us to believe that we understand something. They allow investors to both simplify and justify decisions to buy inherently complex investment products. Financial markets can be very unpredictable and uncomfortable. Stories are our surest means of coping with this discomfort to manufacture meaning by forging a relationship between the data and an explanation. They help us explain why the data is what it is and how it got that way. Our focus on narratives during these times of uncertainty is a major driver of some of our most damaging behaviours. We struggle to comprehend that asset prices often move in a random or unpredictable fashion; therefore, we must attach some explanation to it. 

Most of us won’t make an investment decision without it being supported by some form of story, and that’s understandable; stories are effective and can be very valuable.  However, we must also take the time to consider the credibility of the narrative, the data that underpins it and our own role in shaping it.

The Anatomy of a Market Correction (Link)
Market corrections can happen for any reason and sometimes they happen for seemingly no reason at all. Typically, corrections are rooted in psychological factors or fear and are not based on market fundamentals. Here are some quick stats.

The average correction lasts for 71.6 days. On average, there is one market correction that occurs each year. The average correction involves a 15.6% decline.
From 1980 to 2018 there were 36 corrections in the U.S. market, and only 5 (14%) of them resulted in bear markets. Most ended up being just blips on the radar of an otherwise intact bull market.