Successful investing - over optimism

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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

  • 1. Successful InvestingHow not to be your own worst enemy

2. Over optimism 3. Introduction1. Optimism is ingrained in the human psyche2. Vast majority always look on the bright side of life 4. Introduction Consider:o 74% of 600 fund managers thought they were above averageo 70% of analysts think they are better than their peers (of the same number91% had recommendations as buys or holds in February 2008)o 80% of students think they will finish in the top 50% of their class 5. Introduction Why?o Tendency to overrate our abilities is amplified by the illusion of controlo 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 themselvesbetter than those who started off badlyo Optimism is not bad, but when we overate our abilities then it becomeshope 6. Optimism may well be a great lifestrategy. However, hope isnt agood investment strategy JamesMontierLets see how we can beat over-optimism 7. Self-servicing biasPeople will: Act in ways that serve their perceived self invest, i.e. dont ask a barber ifyou need a hair cut Read the things that support their views and talking to those who supporttheir view Delete out dissenting voices or opinions 8. Self-servicing biasBut you need to kill the company 9. Optimism the right way On average the 5 year projections of analysts fortheir ten best growth stories, did no better over 5years than their 10 worst stocks In 4 out of the last 9 years analysts havent beenable to predict whether a stock will be up or down 10. Optimism the right way On average the 5 year projections of analysts fortheir ten best growth stories, did no better over 5years than their 10 worst stocks In 4 out of the last 9 years analysts havent beenable to predict whether a stock will be up or down 11. Optimism the right way Why?o Focus on predication compounder 1) forecast economy 2) forecast interest rates 3) sector performanceand 4) individual stock performanceo If you are right 70% of the time (which is high) this means even withvariables you will only be right 24% of the timeConsider the right way.. 12. Optimism the right wayo 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 shouldnt try to guess the unknowable future 13. Optimism the right way - summaryo 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 entirelywrong