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Behaviour Finance
I was first exposed to this subject discipline from learning briefly the basic important elements of behaviour finance in my investment management module. It offers fitting explanations why there are anomalies in the stock market, which efficient market hypothesis fails to do so. When we are learning, it is important to separate 'make sense' theories out of 'does not make sense' theory. That is how Warren Buffett does in his own university days, learning investment. Here, I only comment on 'make sense' theory from behaviour finance, which there is consensus or/and I strongly agree. To start, briefly explained, behaviour finance is a literature that is a combination of psychology and finance. In a investment textbook written Bodie et al, behaviour finance is currently consisted of two sections: information processing and behaviour biases.
I entirely agree 4 most important facts under the information processing section: forecasting errors, overconfidence, conservatism, and sample size neglect and representativeness. I do agree that very large percentage of people will claim that they are better than average in a certain skill. A empirical evidence shows that based on the survey taken in Sweden, about 90% of drivers answered that they are better than average. Woah, it is sure sign of overconfidence. Bodie et al links this with another empirical evidence related to stock market. The finding shows that men trade fare more actively than women and it is consistent with the greater overconfidence among men. Bodie et al writes as follows: the top 20% of accounts ranked by portfolio turnover has average returns 7 percentage points lower than the 20% of accounts with the lowest turnover rates. The conclusion of overconfidence from latter empirical evidence is that trading is hazardous to your wealth.
Behaviour finance literature stats that there is conservatism, implying that people react slowly to update their beliefs in response to the new evidence. In this case, the price of a particular stock will not change immediately upon the new information but will increase gradually as that new information is reflected in the price. It make sense to me.
Well known figures, Tversky and Kahnemann confirm the forecasting errors, where people give too much weight to recent experience compared to prior beliefs when making forecast. In addition, people tend to make the extreme forecasts given uncertain information. James Montier clearly produces a lot of empirical evidence to confirm this facts. Sadly, today, many professionals still forecast. In every analyst report I receive, there is always the element of forecasting in all analyst report. I prefer to see definite information that has highest possibility of certainty.
Under 'sample size neglect and representativeness', people take small sample, thinking that it is just a representative of a large sample. Because of that, they extrapolate. Bodie et al writes as follows: a short-lived run of good earnings reports or high stock returns would lead such investors to revise their assessments of likely future performance, and thus generate buying pressure that exaggerates the price run-up. As a result, the market will recognise the error and correct it by making the price fall. This explains why there is price reversals, that is, stocks with the best recent performance fund its price falling gradually over time.
As for me, I strongly agree one theory among all theories under behavioural biases section. Framing is excellent example, where people are greatly affected by similar types of questions with different terms. For example, if one is to make bet with the thought of the risk of making possible gain, one will reject the bet. But if one is to make similar bet with the thought of the risk of making possible loss, one will accept the bet. Bodie et al conclude as follows: individual may act risk averse in terms of gains but risk seeking in terms of losses. It is clearly proved by Robert Shiller in his 'Irrational Exuberance' book.
James Montier linked behaviour finance and value investing very well by using empirical evidences as a proof. I once wrote a quote in previous few blog entry as follows: Value investing is not a concept that can be learned and applied gradually over time. It is either absorbed and adopted at once, or it is never truly learned. My friend, Edward once asked me a following question in few months ago: why does people do value investing? I gave an rough answer with no example. Probably not so convincing although it is quite common sense. The first thought come to anyone mind is that it is hard to do value investing without patience. Essentially, it is holding stock for certain period of time, which is probably 2-5 years or even longer. Not many people can stomach this. Even Warren Buffett and Charlie Munger demonstrate publicly in discreet way how attractive value investing is. And yet, too few people out of world population do value investing. James Montier offers an interesting explanation, which is very convincing than my explanation (as above). He sum it up saying that knowledge is not equal to behaviour which means that people may know the actual result of doing value investing and yet, they don't do at all. He cites an interesting empirical evidence.Dinkelman et al (2006) makes the difference between knowledge and behaviour all too clear. Their examination is to find how big difference between the knowledge of HIV/AIDS and its prevention, and actual sexual behaviour. The result shows that 91% of men (92% of women) knew the use of condom prevent the spread of HIV/AIDS and yet only 70% of men (63% of women) used a condom. INCREDIBLE! That clearly explains why minority of investors are value investors. Simply too many people are trading stocks in hope for short-term gains. or look for exciting growth stories that associated with stocks (e.g. the next microsoft or the next intel).
Action is louder than words. If you say that you are going to be value investor, the chance of you becoming one is very low. James cites an interesting empirical evidence written by Koehler and Poon (2006). Their questionnaire ask people whether they want to give blood at upcoming donation clinic. This is used to gauge participants' current intention strength. The predicted probability of blood donation is around 30 percentage points higher than actual outcome of blood donation. James concludes that this implies that the current intentions have an overly strong effect on prediction of behaviours but not on behaviour itself.
James points outcome biases, where many people are obscene with the outcome. James highlight that several of successful athletes is asked by the following question: What was going through your mind before the event? Were you thinking of the gold?. Their response are that they are focused on the process, not the outcome. Based on this, we have no control on outcome but have control on process. I agree with this one. James summarises as follows:
This emphasis on outcomes and not on process can be highly detrimental. Evidence suggests that holding people accountable for outcomes tends to 1) increase their preference for less ambiguity (even if the risk involved is equal), 2) increase the collection and use of information, 3) increase a preference for compromise options, and the selection of products with average features, and 4) increase the degree of loss aversion. In investment terms, that translates as fund managers avoiding uncertainty, chasing noise, and herding with consensus. Doesn't sound much like a recipe for good performance to me.James illustrates that more information is not necessary good. He cites the empirical evidence written by Tsai et al (2008). Their test is to check American football fans' ability to predict the outcome and point spread in 15 NCAA games. 30 participates, graduates and college students from University of Chicago, get 62% accurate predictions regardless the amount of the information. They get more confidence as they get more information. At 6 items of information, their level of confidence is at 69% and then at 30 items of information, their level of confidence is at 80%. When humans' prediction ability is compared with statistical mode's, the latter gets more accurate as more information provides. James concludes this that when dealing with humans rather than computers, a very different result was uncover, that is, more information is better for statistical models but not likewise for humans. I remembered that Seth Klarman wrote that too much information was not necessary because it was not possible to know entirely about company and its industry. Furthermore, James cites another empirical evidence by Dijksterhuis et al (2006) that under low level of information condition, nearly 60% of participants choose the best car but under high level of information condition (information overload), only around 20% of subjects choose the best car.
James points out that many investors and even managers have confirmatory bias, which means that they look for information that agree with them. In this case, they will never look for information that confirms that they are wrong. I think the solution to getting rid of confirmation bias is to invert, which Buffett and Munger often do that. I learn this invert solution from Charlie Munger-related book. For example, if you want to have Singapore safe, you will ask yourself the usual standard question: How can Singapore be protected from any possible invasion? You can invert this question by asking as follows: How can Singapore fall to the invaders? This way, you can just avoid all bad things. Therefore, you get no bad outcome/result for doing that. I find it pretty smart.
The Pampered Chef
I read 'Of Permanent Value The Story of Warren Buffett Volume 1' and spot an interesting article on a firm name called the pampered chef, who was bought by Warren Buffett from a lady ex-owner, Doris Christopher. I find her business story impressive. She started this business with a loan of $3,000 from life insurance policy in 1980s. From what I read, she left the position of home economic teacher to start a business. At that time, before starting her own business, she was demonstrating kitchenware to a number of people in her friend's home. Because of this demonstration, she was asked by them to do similar demonstration at their homes.Therefore, she decided to start her own business, demonstrating the kitchenware to people at their homes with the aim of sufficient time to look after her two daughters. This statement impresses me the most! Her business grew to the business value of $900 million, which is the rumoured value that Buffett paid for in 2002. From 1980s to 2002, the number of staff, i guess based on the book, is from one to about 70,000. I leave the rest of the details for you to read on that book.
Book
Book Title: Benjamin Graham on Investing: Enduring Lessons From the Father of Value Investing
Author(s): Rodney G. Klein and David M. Darst
Rating:7/10
Remark:
This rating is due to insufficient commentary and explanation by these authors on Graham's magazine articles on investing analysis. It is difficult to understand writings that are written older generation. We are not alon, having this problem. Fortunately, with my moderate background of finance and experience of practical equity investing, I enjoy the most on part 3 and part 4 of that book. All the articles written by Graham tells me that he is very intelligent, making logical, clear, and intellectual analysis on each stock he hears or finds. I do want to buy this book just to analyse his article rather than the authors' commentary. It will be few years time after I accumulate enough experience in equity value investing.
Book Title: Of Permanent Value The Story of Warren Buffett 2009 Woodstock Edition Volume 1 and 2
Author: Andrew Kilpatrick
Rating:10/10
Remark:
When I heard so much about good things of mentioned book, I was under impression that it is detailed biography version of Warren Buffett in chronology from his birth to today. Upon reading these two books, I was surprised that it is not in chronology order like usual biography. Despite of my surprise, I am so impressed that there are so much details that I have not heard or read from other biographies associated with Warren Buffett. I like financial statements prepared by teenager Warren Buffett for his pinball machine business if i recall correctly. My favourite part is to see how Warren E Buffett and Walter Schloss operate their investment funds on their own. I like the idea of operating investment funds with shoe-string budget. It is clearly better than Alice Alive Schroeder's official Warren Buffett biography.
Book Title: Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition
Author: Peter D. Kaufman
Rating:9.5/10
Remark:
It is really incredible book teaching the morals of the life and emphasising the importance of using multidisclipinary approach. I highly recommend you to read this book to improve your methodology of doing things in your whole life.
Book Title: Value Investing: Tools and Techniques for Intelligent Investment
Author: James Montier
Rating:9/10
Remark: James Montier tries to demonstrate how wonderful value investment and behavioural finance are in the real world by showing numerous empirical evidences. The more you read, the more convincing it is. I highly recommend this book for anyone to have better grip on practical investment. It is extremely dangerous to let emotions to take over you when you are investing.
Book Title: Applied Value Investing: The Practical Application of Benjamin Graham and Warren Buffett's Valuation Principles to Acquisitions, Catastrophe Pricing and Business Execution
Author: Joseph Calandro Jr
Rating:7/10
Remark: It is very interesting book that guides us on how to apply Bruce Greenwald's valuation methods - reproduction cost and earning power value- and his franchise value and growth value methods. There are a lot of insights to learn from this book. However, I am slightly disappointed with chapter 5 regarding macroanalysis.
Movies and Dramas
Code Blue Season 2 (Japanese Drama 2010)
Synopsis:
This Japanese drama shows different snapshots of different life-threatening emergency cases that requires interns to do the right treatment decisively. At the end of the story, who will graduate from the 'Doctor Helicopter' program.
Rating:7/10
Remark: Sometimes interesting stories at certain episodes...More exposure about the detail of the major characters
Defendor (Hollywood Movie 2009)
Synopsis:
A (probably) low-IQ man aim to be some kind of superhero protecting the public. However, he has no special power like Superman, Spiderman and so on. Being haunted by his past experience - seperated from his mother-, he wants to punish Captain Industry for separating his mother and his other bad deeds.
Rating:6/10
Remark:Nothing exciting but meaningful story in the end.
The Collector (Hollywood Movie 2009)
Synopsis:
A man is trying hard to make a living for his wife and daughter. His wife is in debt and the loansharks caught them, asking him to steal all valuable items from the house who is owned by a rich family. Little wonder, someone else broke into the house to satisfy his excitement by torturing and killing. Nightmare begin from this point...
Rating:8/10
Remark: I rarely watch horror movies but this blow me out with horrible bloody murders. Brilliant traps...
An Education (Hollywood Movie 2009)
Synopsis:
The story timeline is based on 1960 in UK. A smart woman, who have excellent education result in her junior college. She is one step away to her dream university, Oxford by taking the exam. However, she meets a older man who changes her life a lot. Over time, she realise the mistake. She is going to rectify that mistake. Can she realise that dream?
Rating:6/10
Remark: Interesting love story that educates young women to judge men based on their daily lives with their own eyes.
The Blind Side (Hollywood Movie 2009)
Synopsis:
In USA, a black, burly, and young man is separated from his mother. Apparently, he has low IQ. At start, his black friend is trying to get him in a proper school for his education. One day, a white woman sees him frequently around the area near the school. Eventually, she takes him in and gives him a proper life. She is trying to lead him to the path of the future he probably will be doing. What is his future? It is based on the real life story.
Rating:9/10
Remark: Brilliant story. It touches my heart so much that I feel like crying for him.
Jeonwoochi (Korean Movie 2009)
Synopsis:
The three ancient wizards have one task to prevent evil goblins from taking the pipe of prophecy. However, those goblins are disguised as humans. They have to figure out who they are.
Rating:6/10
Remark: Average movie
No Mercy (Korean Movie 2009)
Synopsis:
Someone wants to challenge forensic pathologist by giving hints. These hints are dismembered body limbs. These hints will lead the identity of the murderer. However this murderer up the ante by kidnapping that pathologist's daughter. Hell has gone loose. WHO IS THE MURDERER? This question is in the mind of pathologist
Rating:9/10
Remark: Stunning and meaningful story with clever murder plots. Nobody expect the ending.
Bloody Monday Season 2 (Japanese Drama 2010)
Synopsis:
The big-scale terrorism will be back, attacking Tokyo. Fujimaru, as a hacker, is assisting special police to prevent terrorist attacks and identify terrorists. The truth is proven to be shocking to Fujimaru.
Rating:7/10
Remark: Average story
Real Clothes (Japanese Drama 2010)
Synopsis:
A international well-known fashion designer, Japanese-born, was appointed as a boss of the fashion department in the shopping centre in Japan. Her task is to improve the sales of fashion department. Meanwhile, she choose a lady, who is not interested in fashion to be part of her team. It proves to be surprise for that lady. Eventually, this lady became interested in fashion after being exposed to the fashion retail departments.
Rating:6/10
Remark: Average story
Ip Man 2 (Hong Kong Movie 2010)
Synopsis:
Ip man and his family moves to Hong Kong after the world war 2. He has difficult attracting disciples to learn Wing Chun martial art. As the time went by, he has some disciples to learn. One day, there is martial art conflicts and fighting challenge issued by western boxer.
Rating:7/10
Remark: Good fighting choreography.
Fantastic Mr Fox (Hollywood Animation 2010)
Synopsis:
Mr Fox wants to have a wild and exciting life, stealing foods from humans. One day, he is married to Mrs Fox and has a son. Because of that, he has to retire from that kind of life so that his wife needs not to be worry about him being caught by humans. As the time passes by, he cannot stand living boring life. He sets his sight to steal foods from three evil farmers. After successful theft, there is a war between these farmers and Mr Fox. Who survive?
Rating:6/10
Remark: Mildly interesting cartoon.
The Slammin' Salmon (Hollywood Movie 2009)
Synopsis:
The boss of the restaurant issues ultimate to his manager that the waiters and waitresses need to get certain amount of money by today straight from the today sales. He need it to repay the debt to the Japanese Yakuzas. There is a monetary reward for the waiter or waitress.
Rating:5/10
Remark: Decent movie
Tenderness (Hollywood Movie 2009)
Synopsis:
A police detective is on the quest to monitor the teenager, who have killed his parents and is released by the prison due to certain circumstances. He suspects that this teenager may kill someone else again.
Rating:5/10
Remark: Boring story but slightly surprising ending.
Attack The Gas Station 2 (Korean Movie 2010)
Synopsis:
The owner of the gas station finds that his workplace is trashed by a motorbike gang. His feebly employees cannot stop that gang from trashing. Therefore, he wants to exact his revenge on that gang by hiring employees who can fight. At the same time, his new employees will prevent another gang to trash gas station. Can this plan succeed?
Rating: 6/10
Remark: Part 1 is more lively and funnier than Part 2.
H.I.T (Korean Drama 2007)
Synopsis:
A lady, who works as uniformed cop, sees her boyfriend, plain-clothed cop being killed by serial killer, who has killed numerous women. Because of that, she became plain-clothed detective in the same department as her boyfriend. Mysteriously, that serial killer has not reappear since then. Along the way, she leads her department to solve murder cases as soon as possible. From there, H.I.T team is formed after she, in drunken state, spill the beans about a particular murder case. Will she nab that serial killer in one day?
Rating:8/10
Remark: The quest of nabbing serial killer is excellent. I was totally hooked by this quest.
Painter of the Wind (Korean Drama 2008)
Synopsis:
A lady, who had to disguise herself as a man in order to study in painting school, is very talented painter herself. In her lifespan, she gets to work with a excellent male painter. Along her learning curve, she finds the truth of who killed her parents and why they are killed.
Rating:9/10
Remark: This female lead actress is excellent. Top class acting skill. No wonder, she won the award. No doubt, it is the correct decision to award her.
Birth of Rich (Korean Drama 2010)
Synopsis:
A man is looking for his father as his mother is unable to contact his father since the first meeting of each other. He choose to work in a hotel where many rich families go there because the only clue is that his father is very rich. Can he find his father?
Rating:9/10
Remark: Very good story. You will feel something for him each time he finds any possible clues that will establish the location of his father and identify who his father is.
Last Operations Under The Orion (Japanese Movie 2009)
Synopsis:
Someone, American, wants to pass the letter to the the family of the right owner in Japan because this owner of the letter, Japanese submarine officer somehow give it to the American warship officer. The current living person from that family is a woman, who then takes this letter to the survivor who uses to work under that Japanese submarine officer for the attempt of understanding the situation at the World War 2. That survivor recalls and tells that happening to her....
Rating:6/10
Remark: I think American movies about submarines are better than this one. Slightly boring.
Exam (Hollywood Movie 2009)
Synopsis:
It is about 8 selected people, who pass through many rounds of interviews, taking exam in the final round. There is only one winner to take the only one position in the prestigious firm. The exam paper, they see, is blank! What and how can they answer it? What is the answer?
Rating:9.5/10
Remark: Excellent storyline with unbelievable amount of suspense. You will be stunned about the answer.
Prosecutor Princess (Korean Drama 2010)
Synopsis:
Ma Hye Ri was forced by her father to be prosecutor. She has no desire to wear like those female prosecutors. She deems to have her right to wear colourful clothes at her workplace, where many prosecutors wear only black and white coloured suits. Can she survive there for being different and unique from her work colleagues?
Rating:7/10
Remark: At start, it was funny and exciting. At the end, the excitement reduced episode after episode. I couldn't recognise Kim So Yeon with her short hair and being skinny. I do think that she is excellent actress.
Grandma Gangster (Korean Movie 2010)
Synopsis:
Three grandmothers want to save certain amount of money in order to enjoy their holiday at Hawaii. The moment they deposit their money in the bank, there was robbery. After robbery, it is quite unfortunate for them to find that their deposits are not insured as there is no red coloured stamp on their deposit slip. They are so furious that they set out to find the culprits before choosing the option to rob the bank.
Rating:6/10
Remark: Average story that is within your expectation.
Parallel Theory (Korean Movie 2010)
Synopsis:
The second youngest judge is set to find out whether his entire life is similar to the life of the first youngest judge, who is killed in 30 years old. He thinks this is in the case since he is in charge of the case who the owner of parallel theory is the main suspect, who kill his wife. Can he debunk the parallel theory that is going to happen to him?
Rating:8/10
Remark: Interesting story with plentiful of suspense.
Team Batista 2 (Japanese Drama 2010)
Synopsis:
Once again, there is a case in the same hospital. This time it is not about batista murder. Kohei Taguchi was asked to investigate a possible graft case that may take its place in that hospital. Keisuke Shiratori joins in as he 'smell' it on his own. Who is the main suspects for the graft case?
Rating:8/10
Remark: Yet another excellent story with nice suspense.
Pasta (Korean Drama 2010)
Synopsis:
A lady, who gets her wish to work in Italian restaurant as a chef trainee is promoted to chef in 3 years later. In 3 years later, her head chef, Italian, is sacked due to his high overseas telephone bill. At the same time, a new head chef, Korean, who is trained in Italy, is hired. This new chef wants no women in his kitchen as well as no romance. Her 3 years hard work is wasted. She decide to be thick-skinned and hang on to that chef position. Can she succeed?
Rating:6/10
Remark: Interesting love story
Tony Del Piero wrote and posted at at 5:38 pm
