Behavioral Finance: Why watching CNBC won't make you rich
Investors withdrew $6.8 billion from US stock funds in September, $15.5 billion in August and $22.9 billion in July... Warren Buffet, meanwhile, invested $23.9 billion in US markets in Q3 - his fastest pace of investment in 15 years. As of March 2011, Buffet was worth about $50 billion, so who do you think is making the correct assessment of the investing climate?
We believe that the current confluence of strong and rising earnings, low stock price valuations and exceptionally low interest rates presents one of the best stock buying opportunities in 50 years. We also believe that most Americans will not take advantage of that opportunity because most invest with their hearts, not with their heads, and right now their hearts are filled with fear! To help our clients invest with their heads, we present:
Since the 1950's, academic researchers postulated the existence of Homo Economicus who coolly and calmly evaluates investment decisions based on a careful measurement of risk and return. The problem is that this model doesn't adequately explain boom and busts, whether in dot.com companies, real estate, emerging market shares, or, as we saw in the 17th century, tulips.
In recent decades, researchers explored why investors often make decisions that are contrary to their long term financial health. The answer, we believe, is that our decision making has not evolved much beyond that of our caveman ancestors, even though the world we live in today is unbelievably complex. Faced with complexity, we take short cuts. For example, if you stood in a hotel lobby and all of a sudden two dozen people ran past you out the door, would you stay put to understand what the danger was, or would you run just as briskly? 15,000 years ago, the caveman who stood around wondering most likely fed a saber tooth tiger.