Tuesday, 30 August 2011 - 20:00
With the turmoil in markets in the second week of August, both locally and abroad, one has to ask the question why common sense and rationality often does not prevail in markets.
The Efficient Markets Hypothesis (EMH) states that market prices reflect all available information, and that it is impossible to outperform the market consistently on a risk-adjusted basis. Whenever new information becomes available in the public domain, EMH proposes that a share’s price will quickly adjust to a new level implied by the underlying value of the share, given this new information. However, it is clear that as soon as humans and financial markets start interacting, EMH often does not hold at all!
The field of behavioural finance tries to examine and explain why we sometimes make irrational and incorrect choices when faced with financial decisions. Some of the more interesting observations in this field are:
Anchoring and Adjustment: When required to value a certain asset, most people start with an initial estimate and then adjust their answer away from this anchor. A good example may be a car advertised in the local newspaper for a certain amount, or “nearest cash offer”. The advertised price will immediately influence buyers’ valuation of the car, even though the anchor may be ridiculously high! In the investment environment it is prudent to distance oneself from unrealistic anchors observed in the market. Valuations are often driven up by fellow investors’ exuberance, and prices start to deviate too far from the underlying values. When investing for value as opposed to growth, be certain that the fundamentals of the proposed investment are sound!
Framing: In a past study an audience were asked either how “long” or how “short” the movie they saw was. The average answer to the first question was 2 hours and ten minutes, and to the second question only 1 hour and 40 minutes! In the financial sphere questions can often be framed either in terms of gains or losses, and the specific wording can have a big impact on the decision made. We feel the pain of a loss more intensely than the joy of a gain, and as a result we may be more risk-seeking when faced with potential losses in order to try and avoid the pain.
Status Quo bias: People often have a preference for maintaining their current situation and avoiding possible changes, despite all evidence and advice pointing in a different direction. An example might be an investor being invested in a specific fund for a very long time, and then being too foolhardy or sluggish to pull out when things take a turn for the worse.
Confirmation bias: Many investors start off with a certain view on a specific asset class or fund, and then hunt for evidence to support that view. Evidence not supporting the original view will merely be dismissed or not valued highly enough. With the wealth of data, ratios, and performance analysis tools out there, it is often said that almost any view can be supported by just discovering the right statistics. Always make sure that an asset’s value is supported by healthy fundamentals when faced with statistics and past figures that paint a very rosy picture.
At Seed we realise that investors driving markets are often irrational, and the challenge is to focus on our established methods of asset class valuations and manager research throughout the market cycle. The human factor will always be present in our decision-making process, but being aware of the factors mentioned above enables us to constantly improve our investment processes and research.
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Cor van Deventer
021 9144 966
Tue, 30 Aug 2011
More than 200,000 South African municipal workers who walked off the job two weeks ago demanding an 18 percent salary rise, will return to their posts on Wednesday while negotiations continue, a union spokesman said.. . .
The rand hit a three-week high on Tuesday as commodity currencies globally held on to gains from upbeat investors, while bonds are likely to firm if second quarter GDP data shows the economy is in deeper trouble than forecast.. . .
World Markets (Spot Prices)
|JSE Top 40||17:00||27097.75||48.51||0.18%|
|JSE Indust 25||17:00||26991.78||166.95||0.62%|
|Rand / Dollar||19:58||7.0802||0.0333||0.47%|
|Rand / Pound||19:55||11.5058||-0.0358||-0.31%|
|Rand / Euro||19:55||10.2102||-0.0242||-0.24%|
|Rand / NZD||19:57||6.0288||0.0594||1.00%|
|Rand / AUD||19:55||7.5580||0.0325||0.43%|
|Yen / Dollar||19:58||76.7000||-0.1300||-0.17%|
|Euro / Dollar||19:55||0.6932||0.0045||0.65%|
|Dollar / Euro||19:58||1.4421||-0.0093||-0.64%|
|Pound / Dollar||19:55||0.6134||0.0044||0.72%|
Click here for the Sharenet Spot Price page
The JSE Today
|Index Name||RP||Move||% Move|
|Financial & Ind. 30||29,980.78||15.44||0.05%|
|Oil & Gas ||24,717.69||492.73||2.03%|
|Oil & Gas Producers ||13,290.25||264.94||2.03%|
|Basic Materials ||27,534.17||29.57||0.11%|
|Forestry & Paper ||12,585.89||-127.20||-1.00%|
|Industrial Metals ||27,521.20||156.09||0.57%|
|General Industrials ||74,326.83||186.25||0.25%|
|Consumer Goods ||26,637.40||83.67||0.32%|
|Automobiles & Parts ||3,577.84||-33.97||-0.94%|
|Health Care ||32,606.05||184.93||0.57%|
|Index Name||RP||Move||% Move|
|Food Producers ||47,986.26||123.04||0.26%|
|Personal Goods ||393.41||4.89||1.26%|
|Consumer Services ||53,281.00||821.83||1.57%|
|General Retailers ||44,563.74||704.12||1.61%|
|Travel & Leisure ||3,579.13||50.73||1.44%|
|Support Services ||2,228.37||16.15||0.73%|
|Non-life Insurance ||31,681.44||397.69||1.27%|
|Life Insurance ||15,249.62||-89.22||-0.58%|
|General Financial ||2,145.30||-6.41||-0.30%|
|SHARIAH TOP40 ||2,939.73||11||0.38%|
|FTSE/JSE SHARIAH ALL||3,005.38||11||0.38%|
|FTSE JSE Fledgling ||4,428.15||-19||-0.43%|
|FTSE/JSE Alt X ||1,100.59||8||0.76%|
|SA LISTED PROPERTY ||389.56||-0.30%|
|CAPPED PROPERTY ||316.40||-0.60%|
|FTSE/JSE RAFI 40||6,305.26||2||0.03%|
|Capped Top 40||14,242.66||32||0.23%|
|Capped All Share||15,336.47||40||0.26%|
Click here for the Sharenet Index Summary page
Latest Consensus Changes**
|CAT||CAXTON & CTP PUBLISHERS &...||BUY||26 Aug|
|ASA||ABSA GROUP LIMITED||BUY||26 Aug|
|SHF||STEINHOFF INTERNATIONAL H...||BUY||26 Aug|
|EMI||EMIRA PROPERTY FUND||HOLD||26 Aug||
|Expected||Company Name||Fin. Date|
|31 Aug 2011||ARM||June 2011 (Final)|
|31 Aug 2011||DIAMONDCP||June 2011 (Interim)|
|31 Aug 2011||LIATH||June 2011 (Interim)|
|31 Aug 2011||M-R-HLD||June 2011 (Final)|
|31 Aug 2011||MAS||May 2011 (Q)|
|TKGB||Telkom SA Ltd||30/08/2011||Confirmed|
|TKGA||Telkom SA Ltd||30/08/2011||Confirmed|
|TKG||Telkom SA Ltd||30/08/2011||Confirmed|
|WKF||Workforce Holdings Ltd||31/08/2011||Confirmed|
|ERBP||Erbacon Investment Holdings Ltd||31/08/2011||Confirmed||
Stock Exchange News Service
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