Profiting and protecting from investor psychology
People often ask Steve Johnson, ‘what’s your edge? What do you do differently that allows you to outperform?’ His answer is straightforward: “we don’t have a big team, we don’t have an informational edge, we are not smarter than the people we compete against.” What they can do though, is take advantage of other investors’ irrational behaviour. Terms like narrative bias, anchoring, and confirmation bias have become part of investor vocabularies in the past 10 years, but how can these ideas help investors make better decisions?
“Why do you look at stocks that are down 80% over the past 12 months? You might as well look at stocks that have doubled. Well, people hate losing money. So, when their stock is down 80%, they will sometimes do things that are irrational.”
In this enlightening presentation, Johnson shares some examples of times he’s fallen victim to these biases, and times when he’s managed to overcome.
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Comments
James Marlay
This was a really insightful and entertaining presentation. I can highly recommend taking the time to check it out. A few good laughs in there too....
Daniel Rolley
Refreshing honesty in a world of ego maniacs!
sangela@internode.on.net
Such self reflection and honesty!! As a psyscholgist I totally approve
Steve Johnson
Thanks Daniel and Sangela. There are humble fund managers out there ... they just aren't very good at selling!
Parth Desai
Great preso Steve, gripping.
Jeremy Angelis
entertainingly fluid & honest presentation which exposes key errors we are all prone to and guilty of, but importantly can improve on. :-)
James Rees
Great presentation Steve. With the ability to have an information edge effectively gone, I completely agree that controlling our cognitive biases is the key to strong investment performance. In the mid-1970s Benjamin Graham noted that he had largely abandoned his fair value methodologies because market had become too sophisticated and he now preferred to focus on a simple (almost quant based) value methodology. But most people continue to attempt to use his systems 40 years later. Paradoxically, with everyone trying to be Warren Buffet and be a value manager and a contrarian - sometimes it's actually contrarian to just follow the herd. You'll clearly be familiar with the concept of The Wisdom of Crowds. I often find that it's somewhat irrational to assume my individual judgement of fair value is better than the weighted sum of everyone else's (the market price).