winnipeg cfa
TRANSCRIPT
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48th Annual CFA Society
Winnipeg Forecast Dinner
January 23, 2012
WinnipegConven+onCenter
375YorkAvenue
Winnipeg,ManitobaR3C3J3
What is Driving Todays
Investors?
Market Cycles, Behavioral
Economics & Post Credit-Crisis
Investor Psychology
Presentation by Barry Ritholtz
CEO, Fusion IQ
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Todays Powerpoint Presentation:
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10 Steps To a Financial Crisis
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Housing & Employment:Is the Recovery forReal?
Understanding Secular Market Cycles Behavioral Economics & Todays Investors The Coming Generational Bull Market 10 Key Trends to Watch
Agenda
Tonights Agenda
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Employment
Factors of Employment Overhang Structural Demographic Global Costs Skillsets
Employment
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Source:Ritholtz.com,TheChartStore.com
NonFarm Payrolls Post-Recessions (1948-2007)
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Source:Ritholtz.com,TheChartStore.com
NFP Post-Recessions (Composite versus 2007)
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Source:Ritholtz.com,CalculatedRisk
ostWW2JobLossesDuringRecessions
NFP Post-Recessions (Composite versus 2007)
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Source:Ritholtz.com,CalculatedRisk
ostWW2JobLossesDuringRecessions
NFP Post-Recessions (Composite versus 2007)
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Residential Real Estate
Drivers of HousingRecovery:
Huge Govt Support Affordability Credit Availability Underwater
Homeowners Cannot
Put houses up for Sale
Deleveraging ofHousehold Balance
Sheets
Constrained Supply Foreclosure Abatements
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Source:Ritholtz.com,McKinsey
Residential Real Estate Boom Was Global
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Source:Ritholtz.com,CalculatedRisk
Existing Home Sales
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Source:Ritholtz.com,DavidRosenberg,CalculatedRisk
New Home Sales
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Source:Ritholtz.com,RABCapital
1990: $6 trillion of housing collateral could support $2.5 trillion of mortgages
2006: $23 trillion of housing collateral could support $10 trillion of mortgages
2010: $16 trillion of housing collateral could support $6 trillion of mortgages.
Problem is, mortgage debt has remained at $10 trillion $4 trillion too high.
Excess Mortgage Debt
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Understanding the Drivers of Secular Cycles P/E Multiple Compression & Expansion 100 Year Floods Occur Every Decade Composite of 19 Secular Bear Markets The Bond Market as Safe Haven Sentiment Cycle The Upcoming Generational Bull Market
Part II: Long Term Market Cycles
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Source:Ritholtz.com,CrestmontResearch
100 Years of Secular Markets, P/E Expansion & Contraction
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Source:Ritholtz.com,Bloomberg
100 Year Dow Industrial Chart
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Source:Ritholtz.com,Bloomberg
1966-82 Cyclical Markets
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Source:Ritholtz.com,TheChartstore.com
100-Year Floods
seems to come along
far more often thantheir name implies
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Composite19SecularBearMarkets
Source:Ritholtz.com,MorganStanleyEurope
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US Bonds Are A Safe Haven During Crises
Source:Ritholtz.com
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Sentiment Cycle
Source:Ritholtz.com
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Herding, Groupthink Experts: Articulate Incompetents Optimism Bias Confirmation Bias Recency Effect Emotions change the way we perceive events
(e.g., Sports, Politics)
Part III: Behavioral & Cognitive Issues
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Thisis
your
brainon
stocks
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Source:Kal,Economist
Herding
Mutual of Omaha
Lone Gazelle
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Sources:Ritholtz.com,NYT,McKinsey,Marketwatch
Wall St. Groupthink: Buy Buy Buy!
1. Only 5% of Wall StreetRecommendations 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
4. None of the S&P 1500 have a Wall St.
Consensus Sell on them-Robert Powell, Editor, Retirement Weekly, August
2011
It is better for one's reputation to fail
conventionally than to succeed
unconventionally.-John Maynard Kyenes
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Optimism Bias
Dunning Kruger Effect: DK is a cognitive bias in which unskilled people make poor decisions and reach erroneous
conclusions, but their incompetence denies them the metacognitive ability to recognize these mistakes.
Metacognition: The less competent you are at a task, the more likely you are to over-estimate your ability to accomplish it
well. Competence in a given field actually weakensself-confidence.
This has devastating consequences in the investment world.
Here, Kitty, Kitty, Kitty
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Expert Forecasting versus Ambiguous Uncertainty
Source:Zweig,YourMoney&YourBrain;GrantsInterestRateObserver,
Bennett Goodspeed, The Tao Jones (1984)discussed
The articulate incompetents:
Expert forecasters do no better than the average
member of the public;
The more confident an expert sounds, the more likely
he is to be believed by TV viewers
Experts who acknowledge that the future is inherently
unknowable are perceived as being uncertain and
therefore less trustworthy. (Isaiah Berlin: Hedgehog vs
Fox)
The more self-confident an expert appears, the worsetheir track record is likely to be.
Forecasters who get a single big outlier correct are
more likely to underperform the rest of the time.
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Analysts: Over-Optimistic GroupThink
Source:Ritholtz.com,McKinsey
Analysts have been persistently overoptimistic for the past
25 years, with [earnings] 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
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Confirmation Bias
1. We tend to read that which we
agree with; We avoid that which
disagrees with our preconceived
biases, notions or ideologies;
2. Our biases change the way we
perceive objects literally, the way
we see the world.
3. The same biases affect ourmemories we retain less of what
we disagree with . . .
4.Expectations Affect Perception
Selective Perception & Retention
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Beware the Recency Effect
Source:Ritholtz.com,WSJ
WSJ:2007 WSJ:2010
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What Just Happened vs. What is Going to Happen
Source:Ritholtz.com,Fortune,Time
Time, June 2005 Fortune, June 2005
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Source:Ritholtz.comBigCharts.com
These are poorly designed tax cuts - Stay Out of Markets!
2003: Politics and Asset Management Dont Mix
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2003: Politics and Asset Management Dont 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 . . . ?
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2009: Political Investing
Source:Ritholtz.com,BigCharts.com
Obama is a Socialist! Stay Out of Markets!
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2009: Politics and Asset Management Dont Mix
Source:Ritholtz.com,BigCharts.com
FASB 157, ZIRP, QE +VERY Oversold Markets
The political trader missed the best rally in a generation
Up 108% over 36 months
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A brief intro toNeuro
Finance
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If u cn rd ths
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This animation . . .
. . . is not an animation
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When it absolutely positively
has to deceive your eyes overnight
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A Species of Dopamine Addicts
What does this mean for investors/traders?
We have an Optimism bias (helps our survival).
Our brains are better at processing good news about the future than bad.
Anticipation of financial reward> than actual benefits (Buy Rumor, Sell News)
Gamblers, Alcoholics, Sex Addicts, Junkies, OA, Hyper-Traders =Dopamine High.
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We prefer stories to data
Pre-writing, story-telling is howHumans evolved to share information
We are vulnerable to anecdotes that
mislead or present false conclusions
unsupported by data
Monkeys Love a Narrative
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We have met the
enemy, and he is us.
-Walt Kelly, Pogo, 1971
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Drivers of Long Cycles Factors Key Areas
The Upcoming Generational Bull Market
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WhatDrivestheLongCycle?
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Drivers of Long Cycles Major Societal Shifts Technology Public Works Innovation Sociology & Lifestyle
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ComingGenera>onalBullMarket
Factors Creative destruction wrought by Youth Post Gen-Y think of themselves as their own brand Expanding beyond traditional technology regions Every generation seeks to bypass their elders No longer a Left vs Right debate, but small & nimble
mammals versus slow-witted Dinosaurs
Attracting skilled immigrants to North America will remainkey competitive advantage
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ComingGenera>onalBullMarket
Key Areas Mobile Cloud, Software, Social Web 3.0 Cheap energy driving US manufacturing renaissance Nano technology, Materials Science Biotech, Genome Design, 3D Printing
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WAR & PEACE + INFLATION + SECULAR BULL = + 500%
Source:Ritholtz.com,StockTradersAlmanac
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10 Finance Trends to Watch
1. ETFs are eating everything.
2. The financial sector continues to shrink; advisers continue to leave
large firms for independents.
3. Increased pressure on fees and commissions.
4. Hedge fund troubles.
5. Dispersal of financial news.
6. Demographics are a huge driver.
7. The death of buy-and-hold has been greatly exaggerated.
8. What hyperinflation?
9. The bond bull market has ended/interest rates are spiking.
10. Central Bankers are still holding the system together.
Source:WashingtonPost,January12,2013
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Barry L. RitholtzCEO, Director of Equity Research
Fusion IQ
535 Fifth AvenueNew York, NY 10017
212-661-2022 x7104
516-669-0369
The Big Picture
http://www.ritholtz.com/blog
for more information, contact