Successful investing - over optimism

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Successful Investing “How not to be your own worst enemy”

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Continuing our series on how not to be your own worst enemy. This presentation looks at over optimism when investing.

Transcript of Successful investing - over optimism

Page 1: Successful investing - over optimism

Successful Investing

“How not to be your own worst enemy”

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Over optimism

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Introduction1. Optimism is ingrained in the

human psyche

2. Vast majority always look on the bright side of life

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Introduction• Consider:

o 74% of 600 fund managers thought they were above average

o 70% of analysts think they are better than their peers (of the same number 91% had recommendations as buys or holds in February 2008)

o 80% of students think they will finish in the top 50% of their class

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Introduction• Why?

o Tendency to overrate our abilities is amplified by the illusion of control

o We believe we can influence the outcome:

• 30 coin tosses, rigged so everyone would get 50% right

• Those who started getting the correct answers first rated themselves better than those who started off badly

o Optimism is not bad, but when we overate our abilities then it becomes hope

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“Optimism may well be a great life strategy. However, hope isn’t a good investment strategy” – James Montier

Let’s see how we can beat over-optimism……

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Self-servicing biasPeople will:

• Act in ways that serve their perceived self invest, i.e. “don’t ask a barber if you need a hair cut”

• Read the things that support their views and talking to those who support their view

• Delete out dissenting voices or opinions

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Self-servicing bias

“But you need to kill the company”

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Optimism the right way

• On average the 5 year projections of analysts for their ten best growth stories, did no better over 5 years than their 10 worst stocks

• In 4 out of the last 9 years analysts haven’t been able to predict whether a stock will be up or down

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Optimism the right way

• On average the 5 year projections of analysts for their ten best growth stories, did no better over 5 years than their 10 worst stocks

• In 4 out of the last 9 years analysts haven’t been able to predict whether a stock will be up or down

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Optimism the right way

• Why?

o Focus on predication compounder

• 1) forecast economy 2) forecast interest rates 3) sector performance and 4) individual stock performance

o If you are right 70% of the time (which is high) this means even with variables you will only be right 24% of the time

Consider the right way……..

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Optimism the right way

o Ben Graham

• Analysts should be penetrative

• They should understand the nature of the business

• They should try to gauge the intrinsic worth of the business

• They shouldn’t try to guess the unknowable future

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Optimism the right way - summary

o To be successful we need to:

• Give up on that idea that we are investing “knowing” the future

• Focus in on what we can know

• Accept that it is better to approximately right rather than entirely wrong