33
1
Are A & B Different Shades of Gray?
Source: Edward H. Adelson, 1995.
2
Are A & B Different Shades of Gray?
Source: Edward H. Adelson, 1995.
6
Prospect Theory & Framing
System 1 (fast thinking, taking short cuts)• “operates automatically”• “little or no effort”• “no sense of voluntary control”
7
Prospect Theory & Framing
System 2 (slow thinking)• “effortful mental activities”• “agency, choice and concentration”
Kahneman, Daniel. Thinking Fast and Slow. New York: Farrar, Straus and Giroux. 2013.
8
Prospect TheoryMental Value
Losses Gains
Fear = 2xGreed
Kahneman, Daniel. Thinking Fast and Slow. New York: Farrar, Straus and Giroux. 2013.
9
More News = More Information?
Get Rich.com– Time,
September 27, 1999
“Bubble Fears as U.S. Stocks Break Records”
– Financial Times, November 20, 2013
“Bailout Fails; Stocks Plunge.”
– The New York Times,September 29, 2008
“The Death of Equities”
– Business Week, August 13, 1979“The Rebirth of Equities.”
– Business Week, March 9, 1983
“Bear Trap: Will Tech Stocks Sink the Rest of the Market and the Economy?”
– U.S. News & World Report, March 26, 2001
10
In 1977, at the time of Elvis Presley’s death, there were 170 Elvis impersonators worldwide.
In 2000, there were 85,000 Elvis impersonators.
At this rate of growth, statisticians predicted that by 2019, Elvis impersonators would make up 1/3 of the world’s population.
Extrapolation
Source: http://www.murderousmaths.co.uk/elvis.htm; Freemovement.org, November 13, 2007
http://www.murderousmaths.co.uk/elvis.htm
11
Attention Response & FramingS&P 500 Annual Returns (1928-2015)
Source: Prof. Robert Shiller data. http://www.econ.yale.edu/~shiller/data.htm. Past performance is not a guarantee of future results. One cannot invest directly in an index.
11.4%
Average Annual Return
http://www.econ.yale.edu/%7Eshiller/data.htmChart1
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1931
0.4381115515
-0.0829794661
-0.2512363636
-0.4383754889
-0.0864236453
0.4998222543
-0.011885657
0.4674042105
0.3194341028
-0.3533672875
0.2928265403
-0.0109756469
-0.1067287319
-0.1277145558
0.1917376295
0.2506131013
0.1903067695
0.3582108434
-0.0842914747
0.052
0.0570457516
0.1830322368
0.3080553901
0.2367846304
0.1815098864
-0.0120820474
0.5256332124
0.3259733185
0.0743951187
-0.1045736019
0.4371995499
0.1205645716
0.0033653531
0.2663771296
-0.0881146052
0.226119271
0.1641545588
0.1239924248
-0.0997095424
0.2380296651
0.1081486265
-0.0824137108
0.0356114491
0.142211503
0.1875536292
-0.1430804744
-0.2590178575
0.3699513711
0.23830999
-0.0697970408
0.0650928391
0.1851949017
0.3173524551
-0.0470239025
0.2041905508
0.2233715586
0.06146142
0.3123514949
0.1849457876
0.0581272164
0.1653719281
0.3147518364
-0.0306445161
0.3023484313
0.0749372797
0.0996705148
0.0132592068
0.371951989
0.2268096602
0.331036531
0.2833795328
0.2088535099
-0.0903181896
-0.1184975914
-0.2196604796
0.2835580005
0.1074277594
0.0483447752
0.1561255798
0.0548473525
-0.3655234411
0.2593523388
0.1482109228
0.0209837473
0.1589058524
0.3214508586
0.1352442165
0.0135994949
Pct Declines
DateS&P 500100
192843.811%1923143.81115515291931-0.43837548891
1929-8.298%1924131.87778227632008-0.36552344112
1930-25.124%192598.74528781281937-0.35336728753
1931-43.838%192655.45777398951974-0.25901785754
1932-8.642%192750.6649111930-0.25123636365
193349.982%192875.98836103172002-0.21966047966
1934-1.189%192975.08518943871973-0.14308047447
193546.740%1930110.18032313051941-0.12771455588
193631.943%1931145.3756757912001-0.11849759149
1937-35.337%193294.00466756191940-0.106728731910
193829.283%1933121.53172913471957-0.104573601911
1939-1.098%1934120.1978397911966-0.0997095424
1940-10.673%1935107.36927676792000-0.0903181896
1941-12.771%193693.65665728261962-0.0881146052
194219.174%1937111.61416273311932-0.0864236453
194325.061%1938139.5861342081946-0.0842914747
194419.031%1939166.15032047531929-0.0829794661
194535.821%1940225.66716689961969-0.0824137108
1946-8.429%1941206.64534862051977-0.0697970408
19475.200%1942217.39090674881981-0.0470239025
19485.705%1943229.79213442271990-0.0306445161
194918.303%1944271.85150279481953-0.0120820474
195030.806%1945355.59682354111934-0.011885657
195123.678%1946439.79668599091939-0.0109756469
195218.151%1947519.624132509219600.0033653531
1953-1.208%1948513.346009098619940.0132592068
195452.563%1949783.177720941320150.0135994949
195532.597%19501038.472761619820110.0209837473
19567.440%19511115.73006602219700.0356114491
1957-10.457%1952999.054154286120050.0483447752
195843.720%19531435.840180853119470.052
195912.056%19541608.951637194820070.0548473525
19600.337%19551614.366327651119480.0570457516
196126.638%19562044.396596104419870.0581272164
1962-8.811%19571864.255397225319840.06146142
196322.612%19582285.799468600719780.0650928391
196416.415%19592661.023871838319560.0743951187
196512.399%19602990.970674101719920.0749372797
1966-9.971%19612692.742356985719930.0996705148
196723.803%19623333.69491850420040.1074277594Source: NYU Sternas of 12/31/15
196810.815%19633694.229445163619680.1081486265
1969-8.241%19643389.774288172219590.1205645716
19703.561%19653510.489062543319650.12399242481930-0.25123636361
197114.221%19664009.720988337420140.13524421651931-0.43837548892
197218.755%19674761.75871158219710.1422115031937-0.35336728753
1973-14.308%19684080.444016268320100.14821092281940-0.10672873194
1974-25.902%19693023.536149489220060.15612557981941-0.12771455585
197536.995%19704142.097493447820120.15890585241957-0.10457360196
197623.831%19715129.200705777619640.16415455881973-0.14308047447
1977-6.980%19724771.197675053519880.16537192811974-0.25901785758
19786.509%19735081.768477709919520.18150988642001-0.11849759149
197918.519%19746022.886091275319490.18303223682002-0.219660479610
198031.735%19757934.263778934219860.18494578762008-0.365523441111
1981-4.702%19767561.16373278319790.1851949017
198220.419%19779105.081920035619720.1875536292
198322.337%197811138.898259597319440.1903067695
19846.146%197911823.510763827219420.1917376295
198531.235%198015516.602025374619820.2041905508
198618.495%198118386.3322075319990.2088535099
19875.813%198219455.078518894419830.2233715586
198816.537%198322672.402365298719630.226119271
198931.475%198429808.582644967319960.2268096602
1990-3.064%198528895.1130533219510.2367846304
199130.235%198637631.505158637519670.2380296651
19927.494%198740451.507787137919760.23830999
19939.967%198844483.330392392519430.2506131013
19941.326%198945073.144068086920090.2593523388
199537.195%199061838.189655870119610.2663771296
199622.681%199175863.688438399819980.2833795328
199733.104%1992100977.34069068420030.2835580005
199828.338%1993129592.25231742519380.2928265403
199920.885%1994156658.04907246619910.3023484313
2000-9.032%1995142508.97770141619500.3080553901
2001-11.850%1996125622.00708807119850.3123514949
2002-21.966%199798027.81676541319890.3147518364
200328.356%1998125824.38848080419800.3173524551
200410.743%1999139341.42061832619360.3194341028
20054.834%2000146077.85027872220130.3214508586
200615.613%2001168884.33934842619550.3259733185
20075.485%2002178147.19823435519970.331036531
2008-36.552%2003113030.22131020719450.3582108434
200925.935%2004142344.8735594519750.3699513711
201014.821%2005163441.93862372219950.371951989
20112.098%2006166871.56296795419580.4371995499
201215.891%2007193388.43092558519280.4381115515
201332.145%2008255553.30808629619350.4674042105
201413.524%2009290115.41501103619330.4998222543
20151.360%2010294060.83811089919540.5256332124
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Pct Declines
% Return
S&P 500 Index (1928-2015) Annual % Declines in Excess of 10%
-25%
-44%
-35%
-11%
-13%
-10%
-14%
-26%
-12%
-22%
-37%
Scatter
DateS&P 500100
192843.811%1923143.81115515291931-0.43837548891
1929-8.298%1924131.87778227632008-0.36552344112
1930-25.124%192598.74528781281937-0.35336728753
1931-43.838%192655.45777398951974-0.25901785754
1932-8.642%192750.6649111930-0.25123636365
193349.982%192875.98836103172002-0.21966047966
1934-1.189%192975.08518943871973-0.14308047447
193546.740%1930110.18032313051941-0.12771455588
193631.943%1931145.3756757912001-0.11849759149
1937-35.337%193294.00466756191940-0.106728731910
193829.283%1933121.53172913471957-0.104573601911
1939-1.098%1934120.1978397911966-0.0997095424
1940-10.673%1935107.36927676792000-0.0903181896
1941-12.771%193693.65665728261962-0.0881146052
194219.174%1937111.61416273311932-0.0864236453
194325.061%1938139.5861342081946-0.0842914747
194419.031%1939166.15032047531929-0.0829794661
194535.821%1940225.66716689961969-0.0824137108
1946-8.429%1941206.64534862051977-0.0697970408
19475.200%1942217.39090674881981-0.0470239025
19485.705%1943229.79213442271990-0.0306445161
194918.303%1944271.85150279481953-0.0120820474
195030.806%1945355.59682354111934-0.011885657
195123.678%1946439.79668599091939-0.0109756469
195218.151%1947519.624132509219600.0033653531
1953-1.208%1948513.346009098619940.0132592068
195452.563%1949783.177720941320150.0135994949
195532.597%19501038.472761619820110.0209837473
19567.440%19511115.73006602219700.0356114491
1957-10.457%1952999.054154286120050.0483447752
195843.720%19531435.840180853119470.052
195912.056%19541608.951637194820070.0548473525
19600.337%19551614.366327651119480.0570457516
196126.638%19562044.396596104419870.0581272164
1962-8.811%19571864.255397225319840.06146142
196322.612%19582285.799468600719780.0650928391
196416.415%19592661.023871838319560.0743951187
196512.399%19602990.970674101719920.0749372797
1966-9.971%19612692.742356985719930.0996705148
196723.803%19623333.69491850420040.1074277594Source: NYU Stern
196810.815%19633694.229445163619680.1081486265
1969-8.241%19643389.774288172219590.1205645716
19703.561%19653510.489062543319650.12399242481930-0.25123636361
197114.221%19664009.720988337420140.13524421651931-0.43837548892
197218.755%19674761.75871158219710.1422115031937-0.35336728753
1973-14.308%19684080.444016268320100.14821092281940-0.10672873194
1974-25.902%19693023.536149489220060.15612557981941-0.12771455585
197536.995%19704142.097493447820120.15890585241957-0.10457360196
197623.831%19715129.200705777619640.16415455881973-0.14308047447
1977-6.980%19724771.197675053519880.16537192811974-0.25901785758
19786.509%19735081.768477709919520.18150988642001-0.11849759149
197918.519%19746022.886091275319490.18303223682002-0.219660479610
198031.735%19757934.263778934219860.18494578762008-0.365523441111
1981-4.702%19767561.16373278319790.1851949017
198220.419%19779105.081920035619720.1875536292
198322.337%197811138.898259597319440.1903067695
19846.146%197911823.510763827219420.1917376295
198531.235%198015516.602025374619820.2041905508
198618.495%198118386.3322075319990.2088535099
19875.813%198219455.078518894419830.2233715586
198816.537%198322672.402365298719630.226119271
198931.475%198429808.582644967319960.2268096602
1990-3.064%198528895.1130533219510.2367846304
199130.235%198637631.505158637519670.2380296651
19927.494%198740451.507787137919760.23830999
19939.967%198844483.330392392519430.2506131013
19941.326%198945073.144068086920090.2593523388
199537.195%199061838.189655870119610.2663771296
199622.681%199175863.688438399819980.2833795328
199733.104%1992100977.34069068420030.2835580005
199828.338%1993129592.25231742519380.2928265403
199920.885%1994156658.04907246619910.3023484313
2000-9.032%1995142508.97770141619500.3080553901
2001-11.850%1996125622.00708807119850.3123514949
2002-21.966%199798027.81676541319890.3147518364
200328.356%1998125824.38848080419800.3173524551
200410.743%1999139341.42061832619360.3194341028
20054.834%2000146077.85027872220130.3214508586
200615.613%2001168884.33934842619550.3259733185
20075.485%2002178147.19823435519970.331036531
2008-36.552%2003113030.22131020719450.3582108434
200925.935%2004142344.8735594519750.3699513711
201014.821%2005163441.93862372219950.371951989
20112.098%2006166871.56296795419580.4371995499
201215.891%2007193388.43092558519280.4381115515
201332.145%2008255553.30808629619350.4674042105
201413.524%2009290115.41501103619330.4998222543
20151.360%2010294060.83811089919540.5256332124
11.412%
Source: NYU Sternas of 12/31/15
&A
Page &P
Scatter
S&P 500 Annual Returns 1928 - 2015
1931
Sheet7
Avg
&A
Page &P
Sheet8
&A
Page &P
Sheet9
&A
Page &P
Sheet10
&A
Page &P
Sheet11
&A
Page &P
Sheet12
&A
Page &P
Sheet13
&A
Page &P
Sheet14
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Page &P
Sheet15
&A
Page &P
Sheet16
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Page &P
12
Attention Response & Framing
Source: Prof. Robert Shiller data. http://www.econ.yale.edu/~shiller/data.htm. Past performance is not a guarantee of future results. You may not invest directly in an index. Does not represent all market declines of 10% or more.
-25%
-44%-35% -11%
-13%
-10%
-14%-26%
-12%-22% -37%
10
100
1000
10000
100000
1000000
% R
etur
n
S&P 500 Index (1928-2015) Calendar Years With Declines in Excess of 10%
http://www.econ.yale.edu/%7Eshiller/data.htm
13
Meet Dr. Eben Otuteye and Mohammad Siddiquee
“Volatility is not a surprise. Volatility is neutral;
it is just part of what the asset is.
“Redefining Risk and Return”
Volatility ≠ Risk
But you can turn it into risk if you mishandle it.”
Source: Otuteye, Eben and Mohammad Siddiquee. “Redefining Risk and Return in Common Stock Investment from a Value Perspective.”https://www.brandes.com//docs/default-source/brandes-institute/2015/redefining-risk-and-return
https://www.brandes.com/docs/default-source/brandes-institute/2015/redefining-risk-and-return
14
Source: Inspired by Marks, Howard. The Most Important Thing: Uncommon Sense for the Thoughtful Investor. New York: Columbia University Press. 2011. Hypothetical illustration does not represent any particular investment. Actual results will vary.
Risk Perceptions
More Risk Doesn’t Necessarily Mean More Return
-100
-50
0
50
100
150
200
Low Low to Medium Medium Medium to High High
Pote
ntia
l Ret
urn
%
Risk Level
15
Risk Tends to Diminish Over Time…
Source: S&P Dow Jones Indices, as of 12/31/15. U.S. stocks represented by the S&P 500 Index. Rolling periods represent a series of overlapping, smaller time periods within a single, longer-term time period. For example, over a 20-year period, there is one 20-year rolling period, eleven 10-year rolling periods, sixteen 5-year rolling periods, and so forth. Past performance is not a guarantee of future results. One cannot invest directly in an index.
-60%
-40%
-20%
0%
20%
40%
60%
2 Yr 5 Yr 10 Yr 20 Yr 30 Yr
Ran
ge o
f Tot
al R
etur
ns (A
nn.)
%
Range of Total Returns for U.S. Stocks Over Various Rolling Periods (1926-2015)
16
Risk and Return: Ask Your Clients a Simple Question
“What do you expect returns to be next year for the stock market? Give me a range of outcomes.”
• Do they include a negative number in their range? • If not, have a conversation about expectations and short-term returns.
Source: Jay Mooreland, www.theemotionalinvestor.org
17
4.7
0
1
2
3
4
5
6
7
8
9
S&P 500 Avg. Investor
Extrapolation & the Impact of Emotions
Source: Dalbar QAIB, as of 12/31/15; http:www.talkmarkets.com/content/us-markets/dalbar-2016-yes-you-still-suck-at-investing-tips-for-advisors?post=96516.Reflects the 20-year period ended December 31, 2015. Past performance is not a guarantee of future results. One cannot invest directly in an index.
Investors don’t do as well as they should.Annualized Returns for S&P 500 Index and Average Equity Investor (12/31/1995 – 12/31/2015)
8.2
%
http://www.talkmarkets.com/content/us-markets/dalbar-2016-yes-you-still-suck-at-investing-tips-for-advisors?post=96516
18
Source: Carl Richards at www.behaviorgap.com
Avoid This Behavioral Pattern!
19
Investment Process: The Essentials
Source: CFA Institute report, “Manager Selection” by Scott D. Stewart, CFA. Dec. 2013.
IPS Features and Implications1. Client description (asset size, cash flow profile, liabilities) 2. Duties (asset class selection, manager selection, fee negotiation,
monitoring)3. Objectives (total vs. relative, real vs. nominal, risk objectives,
fees/expenses)4. Constraints (liquidity, horizon, taxes, legal, restrictions) 5. Asset allocation targets (asset class selection, acceptable styles,
number of classes)6. Rebalancing guidelines (frequency and rules) 7. Schedule for reviews (frequency and access)
Investment Policy Statement
Source: Jim Ware, CFA and Brian Singer, CFA. “Decision Making: A Process Check for Investment Firms.”
Decision Rights
How Do We Make Decisions?
22
Evaluating “Success”
Source: Russo, J. Edward and Paul J. H. Schoemaker. Winning Decisions: Getting It Right The First Time. 1st ed. New York: Random House. 2002.
23
Investor Stress Management Plan (ISMAP)
1. Positive activities they control
2. Investment plan
3. Sign it
Source: MarketPsych and Brandes Investment Partners
Hiring or firing managers
Adopting strategies/approaches that have had recent success—or abandoning strategies that have fared poorly recently
Confusing skill with luck when evaluating managers
Looking at high returns without considering risks
Recognizing Potential Biasesin Decision-Making
Source: Bob Maynard. “Behavioral Finance: Pitfalls and Prevention for Plan Sponsors.” Brandes Institute. 2004.
Evaluating the products without evaluating the firm
Avoiding “high-risk” investments because of perceived volatility
Relying on skill in selecting a “better-than-average” manager
Decisions where leverage is involved
Source: Bob Maynard. “Behavioral Finance: Pitfalls and Prevention for Plan Sponsors.” Brandes Institute. 2004.
Recognizing Potential Biasesin Decision-Making
Explanations in simple language
Appoint a devil’s advocate
Establish and perpetuate a culture of debate
Use quantitative evidence—wisely
Source: Bob Maynard. “Behavioral Finance: Pitfalls and Prevention for Plan Sponsors.” Brandes Institute. 2004.
Preventing Bias From Affecting Decisions
Create and follow a comprehensive investment policy
Focus on the long term
“Pre mortem”
Document successes and failures
Source: Bob Maynard. “Behavioral Finance: Pitfalls and Prevention for Plan Sponsors.” Brandes Institute. 2004.
Preventing Bias From Affecting Decisions
Review staff capabilities
Set clear objectives and short-term risk tolerances
Provide “stabilizing, rational consistency”
Maintain stable committee with terms of 5 to 6 years, renewable once
Achieve average manager tenure of 10 years or more
In What Areas Should Investment Committees Focus?
Source: CFA Institute report, “Manager Selection” by Scott D. Stewart, CFA. Dec. 2013.
CFA Institute Recommendations
Understand how we make decisions―and which system we use
Be aware of specific biases and use tools/tactics to help counter them
Think long term Seek additional resources if
needed
In Closing…
30
VALUE SPECIALISTS SINCE 1974 CALL BRANDES NOW 800.237.7119
BRANDES.COM11988 El Camino Real │ Suite 600 │ P.O. Box 919048 │ San Diego, CA 92191-9048
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Disclosures
Robert Maynard is a member of the Brandes Institute Advisory Board.
The S&P 500 Index with gross dividends measures equity performance of 500 leading companies in industries of the U.S. economy.
The information provided in this material should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. Portfolio holdings and allocations are subject to change at any time and should not be considered a recommendation to buy or sell particular securities. Strategies discussed herein are subject to change at any time by the investment manager in its discretion due to market conditions or opportunities. International and emerging markets investing is subject to certain risks such as currency fluctuation and social and political changes; such risks may result in greater share price volatility. Unlike bonds issued or guaranteed by the U.S. government or its agencies, stocks and other bonds are not backed by the full faith and credit of the United States. Stock and bond prices will experience market fluctuations. Please note that the value of government securities and bonds in general have an inverse relationship to interest rates. Indices are unmanaged and are not available for direct investment.
The foregoing reflects the thoughts and opinions of Brandes Investment Partners® exclusively and is subject to change without notice. Brandes Investment Partners® is a registered trademark of Brandes Investment Partners, L.P. in the United States and Canada.
Rolling periods represent a series of overlapping, smaller time periods within a single, longer-term time period. For example, over a 20-year period, there is one 20-year rolling period, eleven 10-year rolling periods, sixteen 5-year rolling periods, and so forth.
The recommended reading has been prepared by independent sources which are not affiliated with Brandes Investment Partners. Any securities mentioned reflect independent analysts’ opinions and are not recommendations of Brandes Investment Partners. These materials are recommended for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Past performance is not a guarantee of future results. No investment strategy can assure a profit or protect against loss.
Brandes Investment Partners does not guarantee that the information supplied is accurate, complete or timely, or make any warranties with regard to the results obtained from its use. Brandes Investment Partners does not guarantee the suitability or potential value of any particular investment or information source.
No investment strategy can assure a profit or protect against loss.
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