Presentation by Barry Ritholtz Agora Financial Investment Symposium Thursday, July 28 4:40PM-5:20PM

British Columbia Ballroom Fairmont Hotel, Vancouver, CA

This is your brain This is your brain on Equities.

Any questions?

This is Your Brain. This is Your Brain on Drugs

1987 PSA

This is your Brain . . . This is your Brain on Stocks

This is Your Brain. This is Your Brain on Equities

1. Emotions change the way you perceive events

2. Over Confidence: Overly Optimistic Assumptions 7 Billion Errors Per Day

3. Articulate Incompetents: Ignorant Certainty vs Ambiguous Reality

4. Recency Effect

5. Selective Perception: Looks closer if you like it

6. Self: Understanding your own desires

7. Selective Retention: Gee, I had all these winning trades why am I down this month – ?

8. Herding, Groupthink

9. Underestimating Risk: Reward ALWAYS relative Low Probability Catastrophes

10. MPT: Why stock selection matters much less than you think

11. You invest like a girl (that’s good)

“Expert” Forecasting versus Ambiguous Uncertainty

Source: Ritholtz.com,

Bennett Goodspeed, The Tao Jones: “The articulate incompetents”

1.  The more confident an expert sounds, the more likely he is to be believed by TV viewers

2.  Experts who acknowledge that the future is unknowable, that they have no idea what the outcome of an election, or where the Dow will be in a year are perceived with uncertainty.

3.  Expert forecasters do about as well as the average public

4.  The more self-confident an expert is, the worse their track record.

5.  Forecasters who get a big outlier correct are more likely to underperform

Herding & Groupthink

Source: Ritholtz.com, Bloomberg

Lose the News: Beware the Recency Effect

Source: Ritholtz.com, WSJ

WSJ: 2007 WSJ: 2010

Source: Ritholtz.com, Bloomberg

Buy Buy Buy!  

1.  Only 5% of Wall Street Recommendations Are “SELLS” -NYT, May 15, 2008

2. Why Analysts Keep Telling Investors to Buy -NYT, February 8, 2009

3. Equity Analysts Too Bullish and Bearish at the Exact Wrong Times -McKinsey, June 2nd, 2010

Analysts (Still) Think Alike  

Source: Ritholtz.com, McKinsey

“Analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year, compared with actual earnings growth of 6 percent… On average, analysts’ forecasts have been almost 100 percent too high”

-McKinsey study

It is better for one's reputation to fail conventionally than to succeed unconventionally. -John Maynard Kyenes

Analysts Coverage: US Steel  

Your Brain Is Easily Fooled

Source: Ritholtz.com, The Star-Ledger

You Invest like a girl!

Source: Ritholtz.com, Hedge Fund Research

Invest like a girl!

Women:

Greater desire for financial discipline

Less Financially Literate

Trade less, return more

Men:

Tend to be overconfident

More aggressive risk-takers

Buy and sell often (churn to lower returns)

Only 3% hedge fund managers are women, on average they delivered nearly double the return on investment vs male counterparts, according to Hedge Fund Research, 2009

Source: Ritholtz.com BigCharts.com

These are poorly designed tax cuts - Stay Out of Markets!

2003: Politics and Asset Management Don’t Mix

2003: Politics and Asset Management Don’t Mix

Source: Ritholtz.com, BigCharts.com

2003 Tax Cuts > $1 Trillion

How did that political trade – up over 90% over 4 years – work out for you . . . ?

2009: Political Investing  

Source: Ritholtz.com, BigCharts.com

Obama is a Socialist! Stay Out of Markets!

2009: Politics and Asset Management Don’t Mix  

Source: Ritholtz.com, BigCharts.com

FASB 157, ZIRP, QE +VERY Oversold Markets

How did this political trade – up over 78% over 11 months – work out for you . . . ?

Source: Ritholtz.com,

What Drives Prices Higher?

Ask random people what drives stock prices, and you will receive a list of factors:

Economy Interest rates Taxes Psychology Inflation Analyst Ratings Government policies Consumer Spending Employment (NFP) Industry News

Blah blah blah ! Company Revenues Management teams CEO New Products War R&D Business Cycles Profits Services Wall Street Banks

Source: Ritholtz.com

Magnetic Attraction vs. Money over Time

QUANTITATIVE

QUA LI T ATI VE

Psychology Media Coverage Celebrity CEO Hot Product Momentum BUZZ

Revenue Cash Flow Earnings Dividends

ANALYTCIAL

EMOTIONAL

HOT

COOL

The exciting stock of the moment

Steady, boring firms that grow revenues, earnings, dividends

PRICE

GAINS

BUSINESS PERFORMANCE

Has Human Nature changed much between these two images?

Answer: Zero

Barry  L.  Ritholtz    

CEO,  Director  of  Equity  Research  

Fusion  IQ  535  Fi@h  Avenue  

New  York,  NY  10017  212-­‐661-­‐2022  516-­‐669-­‐0369  

The  Big  Picture  hQp://www.ritholtz.com/blog  

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