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Hi IIfians, I and saurabh have thought upon to start this new thread on " Learning the Art of Value Investing" to share articles and information for our members to improve on our Investment Process. I request all members to actively participate in this Thread and share views and articles and information from various sources in this thread so as into improve our knowledge. More Hands if join together can help us dig into lot of available investment insights ,for us to improve in future. The Focus is to Improve our INVESTMENT PROCESS. regards, Wise Investor Seth Klarman On Preventing Mental Mistakes Seth Klarman, in his 2011 letter to Baupost investors, wrote: “Understanding how our brains work—our limitations, endless mental shortcuts, and deeply ingrained biases—is one of the keys to successful investing.” He stressed a few key mental errors made by both individual and institutional investors. Here are some mental errors that we should all watch out for: Overreacting to the latest news Klarman had this to say about overreacting: “Investors emotionally pile in on good news and rush for the exits on bad news, causing prices to overshoot.” We tend to act in the heat of the moment and make quick buy and sell decisions without any significant thought. The average investor’s mindset, according to Klarman, is this: “Most of us like a stock more when it has risen in price and less when it has fallen.” If a company reports an increase in earnings, our brains might feel
something golden and jump on the bandwagon. Tech giant Intel (INTC) recently reported increased earnings for the 1st quarter of 2012. Does that mean we should buy it right away? What we should do is to reverse our thinking about the latest hot news and look for reasons why a company like Intel may not be a good investment. As Sir John Templeton once noted, “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell”. So when the stock market is down, it is time to look for opportunities, not to sit back and do nothing. Klarman suggests a common error when searching for investment opportunities: “The herd can irrationally lose sight of the underlying assets and long-term prospects of a business when it focuses on price movements.” Looking in the rearview mirror As Klarman states, “Our expectations about future events are distorted by past experience.” When we think too much about the past, we become more hesitant to take risks. And Klarman further states: “Actions that seemed prudent in foresight can look horribly negligent in hindsight.” We likely fail to overcome the extreme fear that prevented smart decision-making. Fear, particularly upon suffering a loss, causes people to ignore bargains in the market. Banking businesses like Citigroup (C) were a bargain following the low point of the economic recession. But did anyone bother to look at Citigroup’s future outlook? People in the market today are scared due to their memories of the recent financial crisis. However, “Protective actions, whether by individuals or governments, tend to be designed to prevent a recurrence of the worst such disaster previously experienced, ” wrote Klarman. We tend to become too cautious in trying to prevent the worst of such disasters. We tend to look back at the worst scenario that may not happen again. In Montier’s words, we become afraid of the big, bad market. Focusing on results rather than processes Klarman makes the ultimate point about focusing less on results: “A good result says nothing about whether the process involved was a good one and whether or not the success might be replicable.” Montier takes this a step further: “You could have a good process but a bad outcome. Or you could have a bad process but a lucky outcome. The bad process/lucky outcome combination is worse because it sets investors up for a higher likelihood of failure in the future.” Klarman explained: “The focus on benefits lessens our concern about what could go
wrong.” The biggest mistake we make is not remembering our past mistakes. With a good outcome, we are less likely to remember and analyze our weaknesses. Klarman notes: “Those who have been lucky are almost never punished for having taken too much risk.” With good results that may turn out to be pure luck, we are quick to praise the positive outcome on genuine skill that we don’t really have. Letting intuitive hunches take over rationality Klarman stressed the importance of being a rational thinker: “It is good to buy investment bargains, but it is far better if you know why they are bargain-priced.” In essence, it is important to focus on logic and rationality. Look no further than Warren Buffett, whose investment logic is to buy businesses with good-tosuperb underlying economics run by reliable people. Investor irrationality comes from the two systems in his or her brain: an intuitive brain, System One, and an analytical brain, System Two. Our intuitive brain makes quick, unconscious decisions on the spot. Our analytical brain takes more time to process the information and formulate solutions. This is how our brains tend to work, according to Klarman: “When System One substitutes an easier question for a harder one, it is easy to make mistakes.” The best investors are the ones with a strong analytical brain. We, by human nature, think we know the difference between right and wrong without extensive analysis, if we have been around the business for a long time. So we come to believe that our decisions are always rational no matter what. We need to always be conscious of whether we are making rational decisions or not. Klarman wrote: “No one should be confident that they are immune from irrational behavior from time to time.”
Regards, Wise Investor.
Will share few details from my side too. .IIF. he/she may have vested interest in doing so. its members and managers do not take any responsibility for any consequences (financial.A new thread Great Idea. -DISCLAIMER IIF members recommending/discussing any stock/stock idea shall without prejudice. legal or otherwise) resulting from action based on views discussed in the forum. be deemed to be construed that. https://groups. Fellow IIF members are requested to complete their own research /due dligence in addition to the stock idea and \ or consult a qualified financial advisor before taking any action.google. Only make investments that suit your particular goals and capital constraints.Guru Post reply Re: [IIF:20045] "Learning the Art of Value Investing" .A new thread PFA some articles I found interesting & helpful. .show quoted text Wise Investor.com/group/intelligent-investor-forum?hl=en Anuj Anandwala Post reply Re: [IIF:20046] "Learning the Art of Value Investing" . I will be able to learn a lot because of this.show quoted text .
Cheers ! . I would like to start by focusing on the various biases we have in investing and we can discuss each bias for a week or 3-4 days.pdf 131 KB View Download Charlie Munger .AVAILABILITY BIAS The availability bias is a mental shortcut that operates on the notion that "if you can think of it. BIAS 1:.A new thread Hi All. it must be important". ~ monkk ~ Attachments (2) Stumbling on value investing.Art of Stock Picking.pdf 297 KB View Download Constant Seeker Post reply Re: [IIF:20052] "Learning the Art of Value Investing" . In investing terms it is our tendency to make a judgment on whether to buy/sell a stock on basis of .show quoted text -Warm Regards.
How easy is information available on the price of stock so that you "feel" u have enough knowledge to buy that stock Remembering instances when how easily yourself or others have made money doing such trades. Whenever any event happens like a rate cut or elections the price rises and falls of impacted stocks are shown in a very vivid and easy to absorb fashion. more attention grabbing news and focus more on silent undercurrents. Bakshi puts it lightly " If the girl I like is not near me . As Prof. Ways to counter this ( i am still trying to follow them :P) Underweight the extra.Munger. i like the girl near me" :) Example: Just have a look at any business channel to see this in action. Due to the availability of this data in we tend to form an opinion on such events and start to base our buy sell decision on such instances rather than fundamentals. Similarly most of the times focus is on high volume stocks where even a small gain or loss is highlighted. An idea or a fact is not worth more because it is readily available to you. . So if someone has ideal cash his usual bias will be to enter these stocks for quick gains rather than looking at it on a fundamental level. Regards. In other words initially be skeptical to any idea you generate Views invited.
The file attached is a snapshot from Daniel Kahneman Book . https://groups... be deemed to be construed that. regards.Saurabh ... its members and managers do not take any responsibility for any consequences (financial.show quoted text - Wise Investor Post reply Re: [IIF:20063] "Learning the Art of Value Investing" . Fellow IIF members are requested to complete their own research /due dligence in addition to the stock idea and \ or consult a qualified financial advisor before taking any action. The point which Saurabh has raised on Availability Bias could be addressed partially through Daniel work and research.com/group/intelligent-investor-forum?hl=en .google..Thinking Fast and Slow.. Wise Investor. Good Morning.A new thread Hi IiFians.IIF. Interesting Reading . DISCLAIMER IIF members recommending/discussing any stock/stock idea shall without prejudice. Only make investments that suit your particular goals and capital constraints. he/she may have vested interest in doing so. It addresses the way our minds are designed to think and how r we forced to think in that pattern. legal or otherwise) resulting from action based on views discussed in the forum.
A new thread The mental habit of thinking backward forces objectivity. Blindness and How We Think. Fellow IIF members are requested to complete their own research /due dligence in addition to the stock idea and \ or consult a qualified financial advisor before taking any action.show quoted text -DISCLAIMER IIF members recommending/discussing any stock/stock idea shall without prejudice.---Charlie Munger . One of the ways you think a thing through backward is you take your initial assumption and say. he/she may have vested interest in doing so.Attachments (1) Bias. . Let’s try and disprove it. turn around and avoid those ways. Only make investments that suit your particular goals and capital constraints. For example. it would be very helpful to determine the three best ways to increase man-years of misery in India—and. then. legal or otherwise) resulting from action based on views discussed in the forum. be deemed to be construed that. So think it backward as well as forward. It’s a trick that works in algebra and it’s a trick that works in life.IIF. you’ll never be a really good thinker. If you don’t.pdf 129 KB View Download Guru Post reply Re: [IIF:20080] "Learning the Art of Value Investing" .show quoted text . if you were hired by the World Bank to help India. its members and managers do not take any responsibility for any consequences (financial.Daniel Kahnenam.
For many major pharmaceutical. of course. Then. A few public hangings will really change behaviour.https://groups."---Charlie Munger . they would engage in channel stuffing — if you were selling through a middleman.A new thread "A lot of opportunities in life tend to last a short while. sell a building or two. there is an obsession with meeting quarterly earnings targets.show quoted text - Guru Post reply Re: [IIF:20080] "Learning the Art of Value Investing" . For each of us.google.A new thread "In many corporations. if that was not enough.com/group/intelligent-investor-forum?hl=en Guru Post reply Re: [IIF:20080] "Learning the Art of Value Investing" .sell stock at a capital gain. at the end of quarter. this was very common. reallygood investment opportunities aren't going to come along too often and won't last too long...show quoted text - .. That is pretty well over. consumer products and software companies. you could unload your product at the end of the quarter and make the current quarter look better but.. To do so. they'd fudge a little. due to some temporary inefficiency. so you've got to beready to act and have a prepared mind”---Charlie Munger . the next quarter would be worse.
of course. deepakgajra On 5/4/12.com> wrote: > *"In many corporations. this was very common. For > many major pharmaceutical."---*Charlie Munger > > On Fri.I think almost near stock market doing intraday trade and no one can make money. May 4. they'd fudge a little. they would > engage in channel stuffing — if you were selling through a middleman. A few > public hangings will really change behaviour. Then. so you've >> got to beready to act and have a prepared mind”---*Charlie Munger . 2012 at 8:36 AM. you > could unload your product at the end of the quarter and make the current > quarter look better but.sell stock at a capital > gain. if that was not enough. the next quarter would be worse. due to some >> temporary >> inefficiency. there is an obsession with meeting quarterly > earnings targets. at the > end of quarter. reallygood investment opportunities >> aren't going to come along too often and won't last too long. For each of us. How to control emotion or how one can avoid himself from day trading . there is only looser there thxxxxxxx regd.com> wrote: > >> *"A lot of opportunities in life tend to last a short while. That is pretty well over... Guru <gurudatta22@gmail. Guru <gurudatta22@gmail.. consumer products and software companies. sell a building or two.hardik gajra Post reply Re: [IIF:20115] "Learning the Art of Value Investing" . To do so..A new thread dear all.
So think it backward as well as forward. then. you’ll never be a really good thinker. May 4.A new thread They say that 10% of the people make 90% of the money in trading.show quoted text - ANISH POOJARA Post reply May 8 Re: [IIF:20126] "Learning the Art of Value Investing" . anish poojara . No intraday for him also.>> >> >> On Fri. For example. Guru <gurudatta22@gmail. >>> It’s >>> a trick that works in algebra and it’s a trick that works in life. if you were hired by >>> the World Bank to help India. If you >>> don’t.show quoted text - agnostic Post reply May 8 . 2012 at 8:17 AM. Let’s try and disprove it. So far I have come across only one guy who makes money in trading and that also positional trading in futures. it would be very helpful to determine the >>> three best ways to increase man-years of misery in India—and. turn >>> around and avoid those ways.---*Charlie Munger . One of the >>> ways you think a thing through backward is you take your initial >>> assumption >>> and say.com> wrote: >> >>> *The mental habit of thinking backward forces objectivity.
Anish Poojara <anish..@gmail. you . Shambo. The above is based on my experience and whatever I have read so far. No intraday for him also. they would > > > engage in channel stuffing — if you were selling through a middleman.sell stock at a capital > > > gain. > > > deepakgajra > > > On 5/4/12. about 20% make money. sell a building or two.@gmail. Guru <gurudatt. To do so.. On May 8.pooj. barely 2-3% make and retain money. deepak Gajra <hardikga.com> wrote: > They say that 10% of the people make 90% of the money in trading. > > How to control emotion or how one can avoid himself from day trading > > ... Carlos.com> wrote: > > dear all. When it comes to trading. 3:38 pm.com> wrote: > > > *"In many corporations. there is an obsession with meeting quarterly > > > earnings targets... 2012 at 12:09 PM. there is only looser there > > > thxxxxxxx > > > regd. Then. they'd fudge a little.When it comes to investing (buy & hold). > anish poojara > > > > > > > > On Fri.. > So far I have come across only one guy who makes money in trading and that > also positional trading in futures.. May 4. if that was not enough.@gmail.I think almost near stock market doing intraday trade and no one can > > make money.
For > > > many major pharmaceutical.---*Charlie Munger > > > >>> On Thu. Guru <gurudatt.."---*Charlie Munger > > > > On Fri.. So think it backward as well as forward.show quoted text - Guru Post reply . consumer products and software companies. May 4.. If > > you > > >>> don’t. this was very common. > > >>> It’s > > >>> a trick that works in algebra and it’s a trick that works in life.com> wrote: > > > >>> *The mental habit of thinking backward forces objectivity.wisd.. > > turn > > >>> around and avoid those ways. Wise Investor < > > investor. 2012 at 9:56 AM. 2012 at 8:17 AM. if you were hired by > > >>> the World Bank to help India. so you've > > >> got to beready to act and have a prepared mind”---*Charlie Munger > > > >> On Fri.@gmail. Guru <gurudatt. then. For example. A few > > > public hangings will really change behaviour. due to some > > >> temporary > > >> inefficiency. One of the > > >>> ways you think a thing through backward is you take your initial > > >>> assumption > > >>> and say. at > > the > > > end of quarter.com> wrote: > > > >> *"A lot of opportunities in life tend to last a short while. the next quarter would be worse... you’ll never be a really good thinker. of course.com . 2012 at 8:36 AM.@gmail.@gmail. For each of us. That is pretty well over.. May 3.. May 4. Let’s try and disprove it. it would be very helpful to determine the > > >>> three best ways to increase man-years of misery in India—and. reallygood investment opportunities > > >> aren't going to come along too often and won't last too long.> > > could unload your product at the end of the quarter and make the current > > > quarter look better but.
be deemed to be construed that. Thanks. you are the right person to share few good articles and notes about great investors. You being one of deep value investor and considering your patience to find gems at bottom and your vast knowledge. Guru . Notes on Berkshire Hathways Annual Meeting 2012. he/she may have vested interest in doing . Wise Investor -DISCLAIMER IIF members recommending/discussing any stock/stock idea shall without prejudice. regards. Agree 100% with you.May 8 Re: [IIF:20394] Re: "Learning the Art of Value Investing" .A new thread Hi.A new thread Hi Carlos.show quoted text - Wise Investor Post reply May 9 Re: [IIF:20399] Re: "Learning the Art of Value Investing" .
IIF.so. https://groups.A new thread the guy has neither a cleaning lady nor a cook at home! marrying a drudge has its own benefits! shiv kumar . legal or otherwise) resulting from action based on views discussed in the forum. Only make investments that suit your particular goals and capital constraints.pdf 498 KB View Download Shiv Kumar Post reply May 9 Re: [IIF:20418] Re: "Learning the Art of Value Investing" . Fellow IIF members are requested to complete their own research /due dligence in addition to the stock idea and \ or consult a qualified financial advisor before taking any action.google.com/group/intelligent-investor-forum?hl=en Attachments (1) 92763946-Berkshire-Hathaway-Annual-Meeting-2012. its members and managers do not take any responsibility for any consequences (financial.show quoted text - paringala Post reply May 9 .
we realize.The Power of Beliefs to Move Markets and Mindsets by Dominic Barton and Conor Kehoe | Mindsets matter. Beliefs drive actions and altering our belief systems will ultimately do more than anything else to amplify and reinforce the kinds of behavioral changes that. And yet . . 1) Believe in your power to make markets efficient — but abandon the efficient market dogma The global financial markets are an extraordinary information processing engine. Nothing beats the tracking mechanism of stock prices when it comes to quantifying the constant push-and-pull of thousands and thousands of investors and managers. old attitudes die hard. in the end. such as a growing turn away from the standard practice of issuing quarterly earnings guidance. it's an extraordinary leap of . . Together with Harvard Business Review and the Management Innovation eXchange. More and more. are the only measure that counts. the crucial first step is to tackle our deeply embedded intellectual frameworks. boards of directors and investors from "quarterly capitalism" to what we call "capitalism for the long term". we have issued a challenge calling for the most instructive case studies and provocative ideas that will help us re-imagine capitalism for the long term. pursuing and acting upon different strategies. For more than two years. we and others have been talking about the need to shift the prevailing view among managers. Despite promising signs of change. In this blog post we'd like to focus on two belief shifts that are critical.
Such a belief implies that any and all decisions that improve a company's short term share price must logically also be improving its long term health and vice versa. In fact. managers and boards of directors need to think in terms of how they can actively make it more efficient.faith to go from acknowledging this fact to believing. regardless of the long term value creation).and then be ready to stick to their guns. as orthodox efficient market theory holds. that markets are so efficient that all relevant information is always and immediately embedded in prices. they need to develop and contribute viewpoints to the market not assume the market already contains them . 2) Believe in the real game — long-term value creation — and stop acting as if you are meeting your highest calling if you simply play by the rules . or so the theory goes. There can be no contradiction. This is the way both to achieve higher returns and make the market more efficient. merely damns it to inefficiency. it appears. in the first few years. In short. our own research at McKinsey suggests businesses that reallocate their capital more aggressively can generate higher long term returns than their more passive peers . much evidence suggests that the market often gets it very wrong in the short term — with the most telling example being the 2008 financial crash itself. Beyond such large and violent macro-swings. Assuming the market is perfectly efficient. such actions initially reduce previously expected earnings (and thus may prompt a set of investors to sell down the stock. Our suggestion: instead of passively accepting that the market is always right.even if. investors.
engage with those investments as an active long-term owner — and stop tracking the indexes. such as the trustees of pension funds and sovereign wealth funds or a company's independent directors. One path could be to concentrate one's portfolio. than at other critical corporate players. then they need to increase one critical . Or it may involve keeping a wide portfolio but concentrating governance efforts on shaping management and strategy at a few stocks at a time and doing so either alone or in collaboration with others. For big pension fund and SWF managers. Another course might be to take more activity 'in house'. they could and should play a much more vital role in pursuing the real prize. For example. Does anyone honestly think this crowd today are doing all they could to provide good governance and proper stewardship? Sadly no. that role change starts with spending the real time required to understand and have a forwardlooking viewpoint on their investments. once belief systems shift. with over 100 billion euros under management. Independent directors confront the same challenge: currently they too often serve as the box-checking last step in signing-off on a CEO-run strategic process. especially if contracting investment management out makes it difficult to achieve alignment with one's chosen asset managers. who are out there getting muddy and trying to score goals every day.We direct this urgent call less at operating managers. Too often they focus more on checking the boxes and ensuring that they have met their (not inconsiderable) compliance obligations. decided a few years ago to focus one of its 3 billion euros of its equity portfolio on 15-20 stocks. But with a crucial mental reset. which is long-term value creation. Dutch pension fund PGGM. If they want to move beyond obeying the letter of the laws governing their fiduciary duties and delve deeply into the content of strategy. There are many ways to achieve this end.
In a recent survey of some 1600 members of boards of directors. is for more and more institutional investors and independent board members to abandon old orthodoxies and embrace a new belief: the belief that through greater engagement and more active ownership/ stewardship they can enhance the market's efficiency while delivering greater value creation for stakeholders and shareholder alike. PE partners with extensive M&A experience delivered better results when the companies they were overseeing were also embarked on an aggressive M&A strategy. Obviously much more needs to be done to foster a capitalism that is truly patient. it also helps if an active independent director's relevant skills match up with the strategy of the company he aims to steward. This won't be easy. some of the flaws and inequities in executive compensation. The key step is to foster deeper board engagement. Our recent research on 110 large European companies managed by private equity firms found a strong correlation between successful value creation and the skill set of the partner serving as lead director. we have learned. Beyond that. is to carve out 10 more days a year for their board duties (a third more time than they are currently spending). . we're convinced.investment: their time. they believe. The list stretches from adopting an investor relations policy that concentrates on fostering a long term investor base and developing better metrics to tackling. but there are signs the core belief system may be changing. We intend to continue exploring those issues--and the solutions required to better address them--in our ongoing research. Similarly companies pursuing organic growth created more value when the lead directors from their PE owners had backgrounds with deep management expertise. we found that their number one goal is to spend more time on strategy and the best way to achieve this. principled and socially accountable. with guidance from active owners. But the critical first step.
.. Guru <gurudatt. May 8. > > You being one of deep value investor and considering your patience to find > gems at bottom and your vast knowledge.Always display images in Intelligent Investor Forum HI IIFians Interesting paper by James Montier on Quants success over human .@gmail.com> wrote: > Hi Carlos.com>wrote: .show quoted text - Wise Investor Post reply May 11 Re: [IIF:20448] Re: "Learning the Art of Value Investing" ..@gmail. 8:29 pm.Always display images from Wise Investor .A new thread Images are not displayed Display images in this post .. > > Guru > > On Tue.. > > Agree 100% with you...Parin. > > Thanks. 2012 at 5:18 PM.. if anyone is following/ using such quants in its stock picking pls do share with the grp for everyone learning. On May 8. you are the right person to share > few good articles and notes about great investors. Wise Investor. Regards. agnostic <dartthrowingmon..
they still managed to underperform the model. self-serving bias and inertia combine to maintain the status quo. the models performed much better. For instance.2%. whereas the quant models had an average hit ratio of 73. Grove et al located a mere 8 studies that found in favour of human judgements over the quant models. · * All 8 of these studies had one thing in common. Across the full range of papers that Grove et al examined. This isan important point. The human participants had access to information not available to the quant models. in their study of over 130 different papers. criminal recidivism and I have in common? They are examples of simple quant models consist-ently outperforming so-called experts. · * Even when the human participants were given access to the quant model's results as aninput for them to use if they chose. wine pricing. university admissions. One of the most common responses to quant superiority is that surelythis could be a base for qualitative improvements by skilled users? However. · * There is now an overwhelming amount of data to suggest that in many environments. Where quant models and human had the same information set. the average human participant had a 66.5% accuracy rating. the evidence is clear: . simple quant models significantly outperform human (expert) judgements. covering decision-making contexts as wideranging as occupational choice to the diagnosis of heart attacks. Why should financial markets be any different? So why aren't there more quant funds? Hubristic self belief. medical diagnosis.Global Equity Strategy: Painting by numbers: an ode to quant James Montier discusses the superiority of models over human judgement What could baseball.
quant models have become relatively accepted. Thirdly. after all what a mess our industry would look if 18 out of every 20 of us were replaced by computers. terms like 'black box' get bandied around. · * So why don't we see more quant funds in the market? The first reason is overconfidence. We tend to overweight our ownopinions relative to those of the models. Secondly. in some fields. · * The good news is that. inertia plays a part. it is a step in the right direction. Finally. However.We all think we can add something to a quant model. Whilst this is far from conclusive proof of the superiority of quant. and consultants may question why they are employing you at all. Both have admirable track records in terms of outperformance.quant models usually provide a ceiling (from which we detract performance)rather than a floor (on which we can build performance). quant is often a much harder sell. It is for reasons like these that quant investing will . if 'all' you do is turn up and crank the handle of the model. Those that do pursue a quant path tend to be rocket scientist uber-geeks. over half the states in the US use a quant model when considering parole for convicts. However.self-serving bias kicks in. the quant model has theadvantage of a known error rate. Two explicitly behavioural based funds stand out in my mind LSV and Fuller & Thaler.For instance. Once in a while a fairly normal 'quant' fund comes to light. It is hard to imagine a large fund management firm turning around and scrapping most of the process they have used for the last 20 years. in finance a quant approach is far from common. whilst our own error rate remains unknown.
the model started to output bullish signals. criminal recidivism and I might have incommon. but it setsthe scene for the studies to which I now turn. wine. This is only anecdotal(and economist George Stigler once opined "The plural of anecdote is data"). At first this model worked just fine. no matter how successful it may be. However.I promise. Of course. I chose to override the model. The answer is that they all represent realms where simple statistical models have outperformed so-called experts. Painting by numbers: an ode to quant Don't worry dear reader. I spent about 18 months being thrashed in performance terms by my own model.remain a fringe activity. after a few months. assuming that I knew much better than it did (despite the fact that I had both designed it and back-tested it to prove it worked). pause again for a moment and consider what baseball. Neurosis or psychosis? .medical diagnosis. Long-time readers may recall that a few years ago I designed a tactical asset allocation tool based on a combination of valuation and momentum. university admissions. despitethe title . there will be no gratuitous use of poetry in this missive. However. generating signals in line with my own bearish disposition. much to my chagrin and the amusement of many readers.
As Fig. based on 10 MMPI scores. Fairly obviously. This is a very important point: much as we all like to think we can add something to the quant model output.1 shows. He developed a simple statistical formula. The statements range from "At times I think I am no good at all" to "I like mechanics magazines".The first study I want to discuss is a classic in the field. The standard test to distinguish the two is the Minnesota Multiphasic Personality Inventory (MMPI). the simple quant rule significantly outperformed even the best of the psychologists. the truth is that very often quant models represent a ceiling in performance (from which we detract) rather than a floor (to which we can add). to predict the final diagnosis. Goldberg then gave MMPI scores to experienced and inexperienced clinical psychologists and asked them to diagnose the patient. they still underperformed the model. Lewis Goldberg1obtained access to more than 1000 patients' MMPI test responses and final diagnoses as neurotic or psychotic. This consists of around 600 statements with which the patient must express either agreement or disagreement. It centres on the diagnosis of whether someone is neurotic or psychotic. The treatments for the two conditions are very different. whereas someone suffering neurosis is in touch with the external world but suffering from internal emotional distress. those suffering paranoia are more likely to enjoy mechanics magazines that the rest of us! In 1968. His model was roughly 70% accurate when applied out of sample. . More bizarrely. so the diagnosis is not one to be taken lightly. Even when the results of the rules' predictions were made available to the psychologists. those feeling depressed are much more likely to agree with the first statement than those in an upbeat mood. which may be immobilising. A patient suffering psychosis has lost touch with the external world.
University admissions Dawes3 gives a great example of the impotence of interviews (further bolstering our arguments as to the pointlessness of meeting company managements . in the realm of assessing intellectual deficit due to brain damage. I can't help but wonder if the findings above apply here as well.The . Do the fund managers who receive the lists then pick the ones that they like. However. Whenever we produce such a note.Every so often. I publish a quant note in Global Equity Strategy. the inexperienced did better than the experienced!). When given the output from the model the scores improved to 68% and 75% respectively . groups of inexperienced and experienced professionals working from the same data underperformed the model with only 63% and 58% accuracy respectively (that isn't a typo. much like the psychologists above selectively using the Goldberg rule as an input? Brain damage detection Similar findings were reported by Leli and Filskov2.still both significantly below the accuracy rate of the model. The last one was based on the little book that beats the market (see Global Equity Strategy. They studied progressive brain dysfunction and derived a simple rule based on standard tests of intellectual functioning. the improvement appeared to depend upon the extent of the use of the model. Intriguingly. This model correctly identified 83% of new (out of sample) cases. and always with the aid of a member of the quant team. 9 March 2006). the standard response from fund managers is to ask for a list of stocks that the model would suggest.
When the school was told to add another 50 students. absconded. 86% of this sample had failed to get into any medical school at all.D. as ranked by the interview procedure. They were interviewed by a parole specialist who assigned them a score on a five point scale based on the prognosis for supervision.seven sins of fund management. The three factor model had a . The parole board predicted none of these. the Texas legislature required the University of Texas to increase its intake of medical students from 150 to 200. In 1979. November 2005). For instance. 25% of the parolees were recommitted to prison. The parole board's ranking was correlated 6% with recidivism. with that of a prediction based on a three factor model driven by the type of offence. The prior 150 had been selected by first examining the academic credentials of approximately 2200 students. Robert DeVaul and colleagues4 decided to track the performance of the two groups at various stages . These 800 were called for an interview by the admissions committee and one other faculty member. Carroll et al5 compared the accuracy of prediction from the parole board's ranking. risk of future crime. 85% of those appearing before the board were granted parole. the end of the clinical rotation (fourth year) and after their first year of residency. and the proportion granted honours was constant etc. These rankings were then averaged to give each applicant a score. 82% of each group were granted the M. all that were available were those ranked between 700 and 800. Criminal recidivism Between October 1977 and May 1987. The 150 applicants who ended up going to Texas were all in the top 350. At the conclusion of the interview. etc. 1035 convicts became eligible for parole in Pennsylvania. The obvious conclusion: the interview served absolutely no useful function at all.i. each member of the committee ranked the interviewee on a scale of 0 (unacceptable) to 7 (excellent). degree. The results they obtained showed no difference between the two groups at any point in time. 743 of these cases were then put before a parole board. they were exactly equal at all stages.e. the decisions (bar one) following the recommendation of the parole specialist. or arrested for anothercrime within the year. the number of past convictions andthe number of violations of prison rules. No one within the academic staff was told which students had come from the first selection and which had come from the second. and then selecting the highest 800. the end of the second year.
The entries for each of the vintages in the remaining columns are . In 1995. a classic quant model was revealed to the world: a pricing equation forBordeaux wine. and "good" vintages may be underpriced. rain inSeptember and August. Now for somethinglighter. Bordeaux wine So far we have tackled some pretty heavy areas of social importance. This implies that "bad" vintages areoverpriced when they are young. and the rain during the months preceding the vintage (October-March). the age of the vintage. Ashenfelter et al also uncovered that young wines are usually overpriced relative to whatone would expect based on the weather and the price of old wines. As the wine matures. The second column gives the value of the benchmark portfolio inGBP. Ashenfelter et al6 computed a simple equation based on just four factors. This model could explain 83% of the variation of the prices of Bordeaux wines.3 shows the basic pattern. 64 and 66 vintages. It shows the price of a portfolio of wines fromeach vintage relative to the (simple average) price of the portfolio of wines from the 1961.correlation of 22%.prices converge to the predictions of the equation. Fig.62. the average temperature over the growing season (AprilSeptember).
this data is from a different sample than the original estimation of the equation. Furthermore. Across these studies 64 clearly favoured the model." Meta-analysis Ok enough already. to conclude. 64 showed approximately the same result between the model and human judgement. He has examined purchasing managers at 300 different organizations. let me show you that the range of evidence I've presented here is not somehow a biased selection designed to prove my point. diagnosis of heart attacks to academic performance. All of these eight shared one trait in common. the humans had more information than the quant models. and (d) a simple formula outperforms the average (and the above average) manager even when the formula only has half of the information as compared to the manager. But. Snijders concludes "We find that (a) judgments of professional managers are meagre at best. Theresults will not be surprising to those reading this note. so it amounts to an out of sample test7.simply the ratios of the prices of the wines in each vintage to the benchmark portfolio. The predicted price from the equation is also shown. and (b) certainly not betterthan the judgments by less experienced managers or even amateurs. Incidentally. Purchasing managers Professor Chris Snijders has been examining the behaviour of models versus purchasing managers8. . If the quant models had the same information it is highly likely they would have outperformed. I agree. you may cry9. The range of studies covered areas as diverse as criminal recidivism to occupational choice. Grove et al10 consider an impressive 136 studies of simple quant models versus humanjudgements. and a mere 8 studies found in favour of human judgements. (c)neither general nor specific human capital of managers has an impact on their performance.
LSV and Fuller & Thaler. it is time to draw a practical conclusion. Fig.Fig. However. predicting everything from the outcomes of football games to the diagnosis of liver disease and when you can hardly come up with a half a dozen studies showing even a weak tendencyin favour of the clinician.4 shows the aggregate average 'hit' rate across the 136 studies that Grove et al examined. As Paul Meehl (one of the founding fathers of the importance of quant models versus human judgements) wrote: There is no controversy in social science which shows such a large body of qualitatively diverse studies coming out so uniformly in the same direction as this one.6 shows the performance of their funds relative to benchmark since inception. this doesn't prove that quant investing is superior.5% of the cases they were presented with correct. However. Fig..5 shows the number of states in which the decision to parole has a quant prediction instrument involved. in the field of finance most still shy away from an explicit quant process.2%. For instance. . A few brave souls have gone down this road.. But it is a nice illustration of the point I suspect is true. I would need a much larger sample to draw any valid conclusions. Two explicitly behavioural finance groups stand out as using an explicitly quantitative process . the quant models did significantly better with an average hit ratio of 73. With only one exception all of these funds have delivered pretty significant positive alpha. The good news The good news is that in some fields quant models have become far more accepted. Of course. The average person in the study (remember they were all specialists in their respective fields) got 66.
Yaniv and Kleinberger11 have a clever experiment based on general knowledge questions such as: In which year were the Dead Sea scrolls discovered? Participants are asked to give a point estimate and a 95% confidence interval. For instance. as mentioned above. . The most common response to these findings is to argue that surely a fund manager should be able to use quant as an input. Fig. the evidence suggests that quant models tend to act as a ceiling rather than a floor for our behaviour. with the flexibility to override the model when required. and asked for their final best estimate and rate of estimates. We all think that we know better than simple models.7 shows the average mean absolute error in years for the original answer and the final answer. The key to the quant model's performance is that it has a known error rate while our error rates are unknown. Additionally there is plenty of evidence to suggest that we tend to overweight our own opinions and experiences against statistical evidence. The final answer is more accurate than the initial guess. Having done this they are then presented with an advisor's suggested answer.So why not quant? The most likely answer is overconfidence. However.
two in particular stand out as relevant to the discussion here. However. "If people use their direct experience to assess the likelihood of events. and to underestimate the importance of those that have not". even if the information is equally relevant and objective. Grove and Meehl13 suggest many possible reasons for ignoring the evidence presented in this note. they are likely to overweight the importance of unlikely events that have occurred to them. participants were not doing this (they would have been even more accurate if they had done so). In over half the trials the weight on their own view was actually 90-100%! This represents egocentric discounting . Instead they were putting a 71% weight on their own answer. Secondly. the fear of technological unemployment. In fact. the industry has a large dose of inertia contained within it. Similarly. 18 out of every 20 analysts and fund managers could be replaced by a computer. in . Simonsohn et al12 showed that in a series of experiments direct experience is frequently much more heavily weighted than general experience. the results are unlikely to be welcomed by the industry at large. This is obviously an example of a self serving bias. They note. say. If. It is pretty inconceivable for a large fund management house to turn around and say they are scrapping most of the processes they had used for the last 20 years.The most logical way of combining your view with that of the advisor is to give equal weight to each answer.the weighing of one's own opinions as much more important than another's view. Firstly. Simonsohn et al found that personal experience was weighted twice as heavily as vicarious experience! This is an uncannily close estimate to that obtained by Yaniv and Kleinberger in an entirely different setting. in one of their experiments.
its members and managers do not take any responsibility for any consequences (financial. if 'all' you do is turn up and run the model and then walk away again.google.IIF. It is for reasons like these that quant investing is likely to remain a fringe activity. Only make investments that suit your particular goals and capital constraints.order to implement a quant model instead. be deemed to be construed that. and fund managers rooting out hidden opportunities. The term 'black box' will be bandied around in a highly pejorative way. regards. Fellow IIF members are requested to complete their own research /due dligence in addition to the stock idea and \ or consult a qualified financial advisor before taking any action. he/she may have vested interest in doing so. Wise Investor -DISCLAIMER IIF members recommending/discussing any stock/stock idea shall without prejudice. Another consideration may be the ease of selling.com/group/intelligent-investor-forum?hl=en Saurabh Shankar Post reply May 1 . However. legal or otherwise) resulting from action based on views discussed in the forum. We find it 'easy' to understand the idea of analysts searching for value. Consultants may question why they are employing you at all. no matter how successful it may be. https://groups. selling a quant model will be much harder.
Re: [IIF:20052] "Learning the Art of Value Investing" . or "anchor. Internally. If this has happened then we have unknowingly let bias come into our decision. a ratio etc. BIAS-2 :ANCHORING BIAS This bias describes the common human tendency to rely too heavily.A new thread Hi IIFians. During normal decision making.show quoted text - Brijesh Post reply . Regards. there is a bias toward adjusting or interpreting other information to reflect the "anchored" information. an event. Similarly. anchoring occurs when individuals overly rely on a specific piece of information to govern their thought-process. growth potentianl etc etc). my favorite as i suffer often :( from this and the one where most investors can trip. This time we would look at another bias called the "anchoring bias". bad sector." on one trait or piece of information when making decisions. Views and experiences invited. For example. you will tend to ignore negatives of the company and start to justify why this seems a great story. this anchor could be anything a person. Once the anchor is set. For a moment stop here and think at the latest stock which you had bought and think how one single information has influenced your buying/selling heavily ( low P/E. if say you are a ardent follower of Rakesh Jhunjhunwala and he buys Delta Corp. saurabh .
.we have numerous example before us.their due diligence is ram bharose. One lesson which I learned from small experience that never rely on news like ( PE fund is investing. I think one should not only always think as a critic while investing (ultimately it is our hard earned money) but also note down the points both negative or positive. BIg FII like Goldman.. GMO are buying or other Indian warren buffets kind buying. Blackstone .. QI Constant Seeker Post reply May 1 Re: [IIF:20530] "Learning the Art of Value Investing" .....May 1 Re: [IIF:20526] "Learning the Art of Value Investing" . . Human minds are very sharp and if we note down points then it actually help our brain to analyze the things from different perspectives which actually help to take better decision... It seems very childish ( noting down ) but actually it help in a gr8 way.A new thread Hi saurabh.evething is useless these PE and FII are playing with others money and only interested in their fee and hence one should not carried away from their decision.A new thread Hi QI.
etc. or Brands etc. broking House. Anchoring bias has big effect on decision making. In a store. Clubbed items in big bazaar. Forget Stock market. 2) When we go for shopping. Certain market participants.A new thread Hi Saurabh. if you just think abt in variuos fields. Obviously in this process one should always note down one's thoughts and then decide Regard Saurabh On May 12. Anchoring plays a major role in it. At times Discounts . "Quant Investor" <quantinvestor@gmail. 3) In our market also. 2012 5:43 PM. Anchoring plays a very important role. There are lot areas if we start thinking we shall realise that Anchoring a major role in our daily life decision also. analyst. even if we dont wanna buy. eg. Our Decision gets linked by their information.com> wrote: Wise Investor Post reply May 1 Re: [IIF:20536] "Learning the Art of Value Investing" . we end up buying. . 1 ) how media hooks us to topics and diverts our mind from ongoing affairs. play a role of an anchor when some information is given out through them.I think one should not be a critic but rather should remain skeptical and always try and invert.
A new thread Hi Wise Investor. he/she may have vested interest in doing so.show quoted text -DISCLAIMER IIF members recommending/discussing any stock/stock idea shall without prejudice.If any one wants to read more about it do let me know. Wise Investor . be deemed to be construed that. i hv few papers worth reading.show quoted text . Yes. anchoring is a huge bias in all my decisions and i didn't even knew about this bias 4-5 month ago :P. https://groups.IIF.google. Fellow IIF members are requested to complete their own research /due dligence in addition to the stock idea and \ or consult a qualified financial advisor before taking any action.show quoted text . Only make investments that suit your particular goals and capital constraints. . legal or otherwise) resulting from action based on views discussed in the forum. its members and managers do not take any responsibility for any consequences (financial. regards. Regards. Please send across the papers.com/group/intelligent-investor-forum?hl=en Constant Seeker Post reply May 1 Re: [IIF:20536] "Learning the Art of Value Investing" .
.. analysts still push stocks of banking clients and are richly rewarded. Here are ways to spot outrageous claims. A tiny subset has forensic accounting skills and digs into financials cross-checking with third-party resources from the government. It's earnings season. But not all analysts are shady salesmen. so before buying into an analyst recommendation make sure to sanity check it. Even after the embarrassing revelations of financial bubbles. They sometimes mask ulterior motives. [More from Forbes: How to pick a financial advisor] What stops the bulls? The cliff.A new thread Hi. Vague Descriptions . 1.Saurabh ..show quoted text - Brijesh Post reply May 1 Re: [IIF:20536] "Learning the Art of Value Investing" . In the endgame. industry or other companies. a data point can nullify conventional wisdom sending the stock into a freefall. and they find contrary indicators. A small percentage has industry expertise and does homework. [More from Forbes: Is it time to fire your financial advisor?] 2. Interesting read. They do surveys for feedback. but rely on emotion sprinkled with faulty logic. These analysts look for inconsistencies and gather enough facts to make bold bearish calls. Style over Substance Beware of the table-pounder who promotes stocks without hard evidence. These bulls are charismatic and personable.
5. Without these details. an A6 processor and supports 4G LTE". They make the valuation look lower (better). like "The New iPad has a 2048 X 1536 retina display. Watch out for use non-standard metrics.A company description should be quantified and concise. An assessment of customer price sensitivity would be good. 3. the analysis should be ignored. 7. like taking the company's cash out of the analysis. Techno-Speak Poor analysts lapse into industry jargon and stats. switches and servers for enterprise networks". "Qualcomm missed the quarter based on component shortages but the outlook is good" is contradictory. or expectations may have run away. so claims of "truly amazing performance" or "enormous gains" and other exaggerations don't fit. costs (supply chain) and milestones (sales forecasts). A key way to identify B. which are black holes for investors. Investor Saturation For the stock to go up. good or bad" connotes nothing. [More from Forbes: How to give difficult feedback] 4. You invest in products and services not vagaries. Fantasy Price Targets . Calling a quarter "strong. Results may differ from reality as there are many unaccounted variables in future streams discounted to the present. A bad one is. Hyperbole and superlatives create buying frenzies. weak. Questionable Valuations Stock valuations are standard formula to predict stock prices and are based on projected revenue or profits. If your nanny just bought a share of Apple. The analyst should quantify performance and cite time periods. good news is discounted into the stock. is to look for long streams of adjectives. investor demand must exceed supply. An example is: "Cisco is a $45 B company that makes routers. chances are the market is saturated and it won't climb even if revenues grow 70%. It does not give the essential elements that investors need.S. like "state of the arts. My experience is the uninformed combine long descriptions with clichés. namely catalysts (contracts or deals). low bit error rate equipment with many bells and whistles". Analysts should explain cost-benefits for new features. "Cisco is a global leader in communications innovation". Excessive Adjectives Confusing adjectives have no place in financial analysis. At some point. [More from Forbes: 10 ways to be more confident at work] 6. Hype and Hyperbole Financial analysis is not advertising. 8.
Repetition Ignore the pump-and-dumpers that scream at every 2% contraction. A reasonable analyst sets price targets with 20% headroom and recalibrates on news. may be gamed. and emboldened Henry produced excessive hype mislabeled as financial analysis. QI . Starmine Sweepstakes A recent study suggests Starmine. There is little downside for an analyst to bid up a price. A serial winner in Starmine rankings with top marks across-the-board for most of their companies may be a cheat. Henry Blodget. Rgds. [More from Forbes: What makes emerging markets great investments] 9. no one will remember. who was later barred from the securities industry. which ranks analysts according to accuracy of forecasts. it is "Christmas in June". When Amazon was trading at $200. The stock hit the target in a month. He was wrong and everyone remembered. not the investor. now trading at $560 may be fantasy. set his one-year price target at $400. 10. His rationale: if right. I will become a rock star and if wrong.Price targets are an arms race that serves the analyst. The $1000 price targets on Apple.
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