Personal Benchmark: Integrating Behavioral Finance and Investment Management (Chuck Widger; Dr. Daniel Crosby, 2014)

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  • What investor looking for
    • Safety and growth, invest for the future and also get to enjoy it now
    • Swing portfolio and stablise it; equity like volatility and managed volatility
    • Returns reach current income
    • Transparency, objectively, predictable & communication
    • Rather make $50k out of average $25k than $100k out of $250k average
  • Efficient Market Hypothesis (EMH) - stocks are priced according to their inherentments
  • Long Term Capital Management (LTCM) - convergence trade
  • Subjective Expected Utility (SEU) - each individual calculate the likelihood of return on investment
  • Bias fatigue - tired of making trading mistakes
  • Hometown bias - only promote what they know
  • Recency bias - let recent event weighs in heavily
  • Survivorship bias - only good managers remain in the game
  • Backfill bias - only strong strategies can see the light
  • Emotional decisions are: myopic, reactive & associative
  • Discount rate = Risk Free Rate + Investment Beta (Market Rate - Risk Free Rate) [r = rf + B(rm - rf)]
  • Efficient frontier: higher returns = higher risk = higher chance, higher returns = lower risk = lower chance
  • Investment theories:
    • Determining the intrinsic value of business is important - Benjamin Graham
    • Go forth and diversify - Harry Markowitz
    • Going for a random walk - Burton Gordon Malkiel
    • It is all about options - Fischer Black and Myron Scholes
    • Go for value and go for small - Eugene Fama
  • Risk theories:
    • Easy as 0, 1, 2, 3 - Leonardo Pisano Bigoilo
    • Tell me the odds - Blaise Pascal
    • Sampling poll is born - Jacob Bernoulli
    • Ring my bell curve - Abraham de Moivre
    • Adjusting to new information - Thomas Bayes
    • Overall we are average - Francis Galton
    • What biased fools these mortals be - Daniel Kahneman
    • Our relationship with the market? It is complicated - Dimiris N Chorafas
  • Economic theories:
    • The wealth of nations - Adam Smith
    • The dismal outlook by the dismal science - Thomas Robert Maithus
    • The communist manifesto - Karl Marx
    • Keynesian; government spending to the rescue - John Maynard Keynes
    • The wonders of creative destruction - Joseph Schumpeter
    • Set my market free - Frederick Hoyak
    • Prisoner’s dilemma - John Nash
    • Long-term growth as people, capital, and technology - Robert Solow
    • Show me the money - Milton Friedman
  • 6 asset classes
    • Domestic equity - high risk high return - mature economic growth exposure
    • International equity - high risk high return - international economic growth exposure
    • Fixed income - low risk low return - stability and income
    • Absolute return - various risk various return - low corrections to the market
    • Real assets - high risk high return - short-term inflation hedge
    • Private equity - very high risk very high return - young business growth exposure
  • Trading analysis can be predicted by sentiment, valuation, technical and macroeconomic environment
  • Diversification is not recommended based on trading costs, taxes, humility (uncertainty) and diversification
  • Lola Lopes: Security Potential / Aspiration (SP / A)
  • Investment bucket: safety - low volatility, income - cash flow, tactical - volatility and opportunity, accumulation - risky
  • Sex is discussed freely in the news but we still do not know how to talk to each other about money
  • Framing: can you save 20% of your income vs can you live on 80% of your income
  • Facebook makes people depressed because everyone brags about how good their lives are
  • How financial decisions are made: objective information (history & current) > perceived information (interpretation) > information processing (satisfactory & self-deception) > decisions (buy/sell/hold) > activation (procrastination) > action
  • Variance drains returns: 10% ↑ 1st year & 10% ↓ 2nd year have difference between average and compound return
  • How advisors can be benefitted:
    • Creative ways to frame, structure and monitor investments
    • Manage behavioural biases
    • Develop staying power
    • Simplified strategy selection and investment rebalancing
    • Ease of use and fewer entry barriers for small accounts
    • Allow even smaller account to be established
    • Simplified account consolidation
    • Continuous access
    • Clear, thorough reporting
    • Service differentiation
  • Golden circle (goal setting, in strict sequence): why > how > what


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