Welcome to the end of the week and another edition of Happy Hour! Just sit back, relax, and enjoy your end of the week roundup of all things interesting in the land of money.
Poor Monkeys
Apparently, scientists are still trying to find evidence of a human, monkey evolutionary link. This time their using rational decision-making to find it. In the end,the scientists wanted to show whether monkeys shared our risk taking and financial rational. Somebody should tell the scientists that humans make very irrational financial decisions based on perceived rational reasons.
Anyways, the scientists used water as the currency and hydration levels as a sign of wealth. In the test, monkeys were given two choices: a small amount of guaranteed water or the chance at a larger amount of water. Most took the guarantee, showing that monkeys are more risk-averse. Somehow this risk aversion equates to us.
Of course, maybe some monkeys weren’t very thirsty and others had a drinking problem. Or maybe its just a lesson in the importance of water and the lengths some will go to get it or keep it.
Informative Pricing
I ran across an opinion piece in Bloomberg this week that pumped out how inefficient the market still is at pricing stocks despite the rise in cheaper information. Somehow this hasn’t changed much in the past 50 years.
It goes on to list a couple of reasons why and how indexing is the best route because of this. Index funds, of course, would ignore trying to predict the market and instead invest in the whole market (that same market that is so bad at accurately pricing stocks).
The author overlooks a few big reasons. There’s the increase in access, more people in the market (more people in the market that shouldn’t be in the market), more information, more misinformation, and a higher need for short-term wins. When you judge funds based on 1 year results, or worse, stocks on quarterly results you end up with a declining holding period, higher trading volume, higher volatility, and mispriced stocks.
In 1960, the average holding period for a stock was 8 years. Now it’s about 6 months or less. I’m not sure how anyone can get a sense of a company’s performance based on one quarters result. Or whether a fund fits your portfolio based on last years return. We invest in an era where the first sign of distress sends us out the door. At the same time we clamor for quick, easy wins.
In other words, long-term is out the window. Your left with two factions, indexing and active. One built around ignoring information, the other tries to harness it, and both over react to short-term events. Despite all this, people still question the validity of value investing.
Last Call
- The Error-Proof Portfolio: How Do Your Financial Priorities Stack Up With Our Pyramid? – a beginner/refresher guide on building a portfolio and the amount of time you should devote to each area.
- 15 Biases That Make You Do Dumb Things With Your Money – behaviors to watch out for when making investing decisions.
- New Fees For Some Index Funds – if you see a higher expense ratio on your ETFs, this is probably why.
- What’s up with Insurance Premiums under Obamacare? – nice explainer on health insurance changes for next year.
- Bronze May Be the Most Precious Metal Under Obamacare – nice breakdown of the different health plans offered with these changes next year.
