Archive for the ‘stock market’ Category

Your Money and Your Brain: Jason Zweig: Book Review

November 30, 2008

 

Your Money and Your Brain

Your Money and Your Brain

I have an interest in investing and psychology so this book was perfect! Jason Zweig’s Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich
is an excellent book if you are interested in why we behave in certain ways when it comes to money. Here are some of the sections I found interesting: 

 

  • We are human and the emotional parts of our brain cause us to do things that we even say we wouldn’t do. For example, you know you should buy low and sell high, so why do we bail out when the shares drop on a company we know is fundamentally good? why do we panic sell? why do we still think we can beat the market? The book focuses on educating us in the areas where our human brains focus on survival, reward and avoid risk. These are evolutional impulses we cannot just logically avoid. 
     
  • A monetary loss or gain actually has a physical effect on the body and brain. You are not just rational thought. 
     
  • The neural activity of someone whose investments are making money is indistinguishable from someone who is high on cocaine
     
  • After 2 repetitions of a stimulus e.g. a stock price rises twice, the human brain automatically expects a third repetition. 
     
  • Financial losses are processed in the same area of the brain that responds to mortal danger
     
  • Anticipating a gain and actually receiving it, are expressed in entirely different ways in the brain, helping to explain why money doesn’t buy happiness
     
  • Many investors fixate on the numbers that change the most i.e. daily fluctuations as opposed to the long term growth of their wealth which is where the significant gain may be
     
  • Zweig compares the market strategists, financial analysts and investment experts of today with the soothsayers of ancient history. They both claim to tell the future by “clear signs” – liver spots versus unemployment rates, new products, company launches. Randomness rules the markets and people cannot beat it consistently. 
     
  • So how do you react to this? Control the controllable i.e. your expectations, your exposure to risk, your readiness in the market, your expenses, your commissions, your behaviour…but don’t expect to control the market. Learn what works by tracking what doesn’t. Embrace your mistakes. Keep asking why and find out reasons why things are recommended. 
     
  • Positive thinking can be useful but over-optimism is dangerous. Don’t put too much trust in what is familiar e.g. putting all your super stocks into your own company. You might think it is safe, but so did the employees of Enron. We have an illusion of control if we are involved in something, but this is not true. Exposure makes something more attractive and easier to invest in, even if you have just heard the name and know nothing about the company. 
     
  • Risk tolerance is affected by  framing e.g. this stock has a 20% chance of falling will have less investment than one that has an 80% chance of rising. Beware of how investments are described and turn them on their heads before you make a decision. 
     
  • Keep an eye on your managed funds. You can move a percentage around to other asset classes. This may be your main future income so you should manage it actively. A study found 73% of people made zero changes in asset allocation over the life of a managed fund. 
     
  • Regression to the mean. Extreme growth carries the seed of its own destruction. Sooner or later, a stock or fund that performs much higher than average will crash or have a bad year. It will have to return to the mean.  
     
  • Top tips: Take the global view. Hope for the best, expect the worst. Investigate, then invest. Never say always. Know what you don’t know. The past is not prologue – don’t just buy because a stock has always gone up. Weigh what the experts say. If it sounds too good to be true, it probably is. Costs are killers – watch your fees/commissions. Eggs go splat so diversify. 

I recommend buying this book if only for the Appendixes which are packed with handy advice. This book could save you a LOT of money. You can buy it from Amazon Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich
and you can also find Jason at his website JasonZweig.com which has a huge resources page for investors, articles and information. Learn more and look after your money!
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The Stock Market from a New Player’s Perspective

October 24, 2008

Economic cycle

Economic cycle

Warren Buffett says “Buy” and one of my favourite bloggers, Tim Ferriss,  is blogging on investments… so here are some of my thoughts as a newbie to the stock market this year. There are many misconceptions, so hopefully this will dispel some of them. I am just off the starting line in this area, so forgive my simplistic approach!

  • You don’t have to be a day trader to be into the stock market. You can buy and hold for the long term, although at some point you will sell in order to realise the gain. Or you will sell when the stock is a loser. The point is that you don’t have to be frantically watching the stock market all the time, jumping in and out. It does not have to be that stressful. 
     
  • You can do it yourself with an online broker and you don’t have to be on the phone to someone shouting “Sell..Buy” etc. You can decide on a particular stock, research it, put in your order online for spot price (price at whatever they can get it at) or at a particular limit . The broker at the other end then buys the stock and you get an email with your new purchase. You will have set up an account for the funds to be taken from and the money goes out of your account. Dividends are also paid into this account (from income making shares where companies pay out dividends). 
     
  • You do not have to be leveraged i.e. you can just buy your stocks with cash you have in your bank account. Leveraged means you borrow in order to invest, then if (or when) your stock crashes, you may get a margin call which is for a particular amount to cover the outstanding debt. This is what has happened with the current markets where people have borrowed far more than they actually had in assets e.g. Lehman Brothers. I currently buy small packets of shares in companies with 100% of my own money that is saved for this purpose. Some would say this is silly and I could buy more if I borrowed. But I have friends who have done that and if the shares go down, then they are servicing debt on assets worth less than that debt. I don’t have to worry as I am investing for the longer term and am not servicing any debt. Of course, if the shares go up, then I don’t make as much money, but hey, I am just starting out! 
     
  • You do not have to know everything about the company, you can listen to experts. You may not be passionate about a particular industry, or have the time to spend (or the knowledge) to pore over their financial statements. But if you want to play the game, you can pay for advice and then take the information you want for your own investments. I belong to a couple of newsletters for Australian shares, I read them and then make investment decisions based on their articles. I find this a great way to get information and tips on companies I would never even have heard of. 
     
  • It is surprisingly fun! and you end up enjoying the financial press as you can actually understand some of it. Paying a percentage into a superannuation fund that someone else manages is no fun (but Australian legal requirement), but making my own decisions and buying into companies is brilliant! I was never one to read the business pages but now I am getting addicted to them. 

So have I made any money yet? 

Of course not! I jumped in just before the crash, but hey, I am at an age that will see the next boom (and maybe the next one). So I am doing what Warren Buffett says and getting into the market now, with my own savings, and we will see what happens. I am certainly getting an education!