Sunday, November 6, 2011

Canadian MoneySaver Magazine

Here is some personal confirmation bias.  I have said a number of the points mentioned in the article below.  What is interesting is Mr Hodson comments come from someone who earn their living from working in the financial services sector. 

I stumbled across an interesting article by Peter Hodson (Click Here To Read).  While I never really liked much of what that came out of Sprott, Mr. Hodson has left and has now purchased Canadian MoneySaver Magazine.  With Mr. Hodson's other business he seems committed to helping individual investors.  What I particularly found interesting in the article is a number of things I have said over and over.  Here are a few of my favorite quotes: 


Every time there is a crisis, investors re-discover the fear of the unknown. As investors, of course we do not know when the current crisis – whatever it may be – is going to end. The problem, though, is that investors act as if the crisis will NEVER end.

Even the Greece/Eurozone crisis will come to an end even though everyone is acting like it's the end of the world.  No need to buy gold and ammo. 

In the 2008 credit crisis, for example, S&P reported than more than 1,100 companies actually traded below their net tangible cash balances. Investors were so scared, effectively, that they were willing to give away cash, literally.

As an investor you much be able to separate you emotion from your thinking.  My current employer has placed a strong emphasis on critical thinking and teaches every supervisor critical thinking skills.  Recent we have been discussing how our Amygdala (part of the limbic system in our brain) can be hijacked and our rational faculties disappear.  When subjected to a threat, either physical or psychological, our natural tendency is to fight back or take flight.  If you have spent anytime reading or understanding human behavior you will know what I am talking about. 

One example we discussed was what we do when we hit our hand with a hammer.  What is our natural tendency?  Often people would throw the hammer and express some verbal anger.  That is an example of an Amydala hijack.  Is throwing the hammer rational? 

The same goes for investing.  Some investors immediately hit the exits during a crisis because their thinking has been hijacked and they aren't think clearly.  Emotion and adrenaline take over.  Selling something for less than tangible cash is not rational. 

The good news for value investors is that isn't going to change any time soon, so enjoy and take advantage of the wild market swings. 

A similar investment lesson involves brokers and research analysts. In my cynical viewpoint, changes in brokers’ recommendations and target prices are designed to do only one thing – generate trading activity

I don't think much more need to be said.  Much of what analysts say is useless drivel.  I have a friend who is an analyst in the O&G sector and he has told me it is difficult to continually come up with something to say when nothing has really changed. 

Finally... watch out for conflicts. Everyone, it seems, makes money in the investment business, except the individual investor. Advisors earn fees, investment bankers earn fees, fund managers earn fees, traders earn fees, and analysts get bonuses.

Always ask what is in it for the other guy.  If research was truly independent it might be useful, but due to the inherent conflict I would avoid most of what they say.  

Lastly, it's funny how many people complain about how much money is made in financial services, but here's the thing.  People are continually paying for these services so until people speak with their money and avoid the fees nothing is going to change. 

Enjoy the entire article at the link above. 


Best Regards,
Kevin

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