This is your brain

This is your brain on Equities.

Any questions?

Presentation by Barry Ritholtz

Agora Financial Investment Symposium
Thursday, July 28 4:40PM-5:20PM
British Columbia Ballroom
Fairmont Hotel, Vancouver, CA
 This is Your Brain.
This is Your Brain on Drugs
1987 PSA
 This is your Brain . . .
This is your Brain on Stocks
 This is Your Brain.
This is Your Brain on Equities
1. Emotions change the way you 6. Self: Understanding your own desires
perceive events
7. Selective Retention:
2. Over Confidence: Gee, I had all these winning trades
why am I down this month – ?
Overly Optimistic Assumptions
7 Billion Errors Per Day 8. Herding, Groupthink

3. Articulate Incompetents: 9. Underestimating Risk:

Ignorant Certainty vs Reward ALWAYS relative
Low Probability Catastrophes
Ambiguous Reality
10. MPT:
4. Recency Effect Why stock selection matters much
less than you think
5. Selective Perception:
11. You invest like a girl (that’s good)
Looks closer if you like it
 “Expert” Forecasting versus Ambiguous Uncertainty

Bennett Goodspeed, The Tao Jones: “The articulate incompetents”

1.  The more confident an expert sounds, the more likely he is to be believed by
TV viewers

2.  Experts who acknowledge that the future is unknowable, that they have no idea
what the outcome of an election, or where the Dow will be in a year are
perceived with uncertainty.

3.  Expert forecasters do about as well as the average public

4.  The more self-confident an expert is, the worse their track record.

5.  Forecasters who get a big outlier correct are more likely to underperform

Source: Ritholtz.com,
 Herding & Groupthink

Source: Ritholtz.com, Bloomberg

 Lose the News: Beware the Recency Effect

WSJ: 2007 WSJ: 2010

Source: Ritholtz.com, WSJ

 Buy Buy Buy!  

1.  Only 5% of Wall Street Recommendations Are “SELLS”

-NYT, May 15, 2008

2. Why Analysts Keep Telling Investors to Buy

-NYT, February 8, 2009

3. Equity Analysts Too Bullish and Bearish at the Exact Wrong Times
-McKinsey, June 2nd, 2010

Source: Ritholtz.com, Bloomberg

 Analysts (Still) Think Alike  

“Analysts have been persistently overoptimistic for the past 25

years, with estimates ranging from 10 to 12 percent a year,
compared with actual earnings growth of 6 percent… On average,
analysts’ forecasts have been almost 100 percent too high”

-McKinsey study

It is better for one's reputation to fail conventionally than to succeed unconventionally.

-John Maynard Kyenes
Source: Ritholtz.com, McKinsey
Analysts Coverage: US Steel  
Your Brain Is Easily Fooled
 You Invest like a girl!

Source: Ritholtz.com, The Star-Ledger

 Invest like a girl!

Men: Women:

Tend to be overconfident Greater desire for financial

discipline
More aggressive risk-takers
Less Financially Literate
Buy and sell often
(churn to lower returns) Trade less, return more

Only 3% hedge fund managers are women, on average they delivered nearly double the
return on investment vs male counterparts, according to Hedge Fund Research, 2009

Source: Ritholtz.com, Hedge Fund Research

 2003: Politics and Asset Management Don’t Mix

These are poorly designed tax cuts - Stay Out of Markets!

Source: Ritholtz.com BigCharts.com

 2003: Politics and Asset Management Don’t Mix
2003 Tax Cuts > $1 Trillion

How did that political trade – up over 90% over 4 years –

work out for you . . . ?

Source: Ritholtz.com, BigCharts.com

 2009: Political Investing  

Obama is a Socialist! Stay Out of Markets!

Source: Ritholtz.com, BigCharts.com

 2009: Politics and Asset Management Don’t Mix  
FASB 157, ZIRP, QE +VERY Oversold Markets

How did this political trade – up over 78% over 11 months –

work out for you . . . ?

Source: Ritholtz.com, BigCharts.com

 What Drives Prices Higher?
Ask random people what drives stock prices,
and you will receive a list of factors:

Economy Company Revenues Blah blah blah !

Interest rates Management teams
Taxes CEO
Psychology New Products
Inflation War
Analyst Ratings R&D
Government policies Business Cycles
Consumer Spending Profits
Employment (NFP) Services
Industry Wall Street Banks
News

Source: Ritholtz.com,
 Magnetic Attraction vs. Money over Time

The exciting
E Q P HOT stock of the
M U R Psychology moment
O A I Media Coverage
T L C Celebrity CEO Steady, boring firms
I I E Hot Product that grow revenues,
Momentum earnings, dividends
O T BUZZ
N A G
A T A
COOL
L I I
Revenue
V N Cash Flow
E S Earnings
Dividends

QUANTITATIVE BUSINESS PERFORMANCE

Source: Ritholtz.com ANALYTCIAL
 Has Human Nature changed
much between these two images?

Answer: Zero
 for more information, contact

Barry  L.  Ritholtz    

CEO,  Director  of  Equity  Research  
Fusion  IQ  
535  Fi@h  Avenue  
New  York,  NY  10017  
212-­‐661-­‐2022  
516-­‐669-­‐0369  
The  Big  Picture  
hQp://www.ritholtz.com/blog