Thinking Fast & Slow
THINKING FAST & SLOW Understanding Behavioral Tendencies When Investing Robert Schmidt Manager, Brandes Institute
Scripps Pier, La Jolla
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 2
System 1 and System 2 System 1 “operates automatically and quickly” “little or no effort” “no sense of voluntary control” System 2 “effortful mental activities” “agency, choice and concentration”
Kahneman, Daniel. Thinking Fast and Slow. New York: Farrar, Straus and Giroux. 2013. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 3
Are A & B the Same Shade of Gray?
Source: Edward H. Adelson, 1995. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 4
How About Now? Still the Same Shades?
Source: Edward H. Adelson, 1995. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 5
Goals for Today
1.
Raise awareness of decision making traps and share tactics for making better judgments
2.
Provide examples of potential System 1 and System 2 conclusions in Brandes Institute research
3.
Encourage rational decision making and enhance potential for long-term investment success
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 6
The Brain’s Structure Explains What Distorts Judgment Thinking Brain ~ Pre-frontal Cortex Executive function Judgment
Feeling Brain ~ Subcortex
Thinking Brain
Emotions Drives Desires
Feeling Brain
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 7
Behavioral Biases When Investing
GLAMOUR STOCKS
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
VALUE STOCKS
Page 8
Value vs. Glamour
GLAMOUR STOCKS
Experiencing fast growth Operating in dynamic industries Generally en vogue Relatively High P/B, P/CF, P/E ratios
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
VALUE STOCKS
Experiencing hard times Operating in mature industries Typically unpopular Relatively Low P/B, P/CF, P/E ratios
Page 9
Lakonishok, Shleifer and Vishny (LSV): “Contrarian Investment, Extrapolation and Risk”* Studied U.S. stocks from 1968 through 1994 Distinguished between “value” and “glamour” using metrics such as P/B, P/E, and sales growth Conclusion: value stocks consistently outperformed glamour stocks by wide margins
*Josef Lakonishok, Andrei Shleifer, and Robert Vishny. 1994. “Contrarian Investment, Extrapolation, and Risk.” Journal of Finance 49 (December): page 1541-1578. Past performance is not a guarantee of future results. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 10
LSV Methodology
A.
Sample on 4/30/68 10 deciles
B. 1 2 3 4 5 6 7 8 9 10 Glamour (Hi P/B) Value (Lo P/B)
C.
Performance tracked
for 5 years D. Process repeated for every 4/30 through 1989 FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 11
LSV Results (U.S.)
Annualized Average 5-Year Returns
Average Annualized 5-Year Performance 1968 –1994; Price-to-Book (P/B) Deciles 22% 20% 18% 16%
14% LSV Results 12%
Brandes Institute Results
10% 8%
1 2 3 4 5 6 7 8 9 10 Glamour (High P/B)...…………………..………………………......…...……..………..Value (Low P/B)
Source: Josef Lakonishok, Andrei Shleifer, and Robert Vishny. 1994. “Contrarian Investment, Extrapolation, and Risk.” Journal of Finance 49 (December): page 1541-1578. Past performance is not a guarantee of future results. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 12
Value vs. Glamour in Global Markets The Brandes Institute examined 23 developed markets and 21 emerging markets worldwide: All firms in the Worldscope database traded from 1980 to 2014 Excluded smallest 50% of universe Segmented by large and small cap: Large caps were top 30% Small caps were the balance of remaining stocks Developed non-U.S. market analysis: 23 countries in aggregate Country analysis on 16 individual countries with robust data Emerging market analysis: 21 countries in aggregate
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 13
Value vs. Glamour: Non-U.S. Results Annualized Average 5-Year Returns Segmented by Company Size; (P/B Deciles, June 30, 1980 – June 30, 2014) 17% 16%
Avg. Ann. 5-Yr. Return
15% 14% 13% 12% 11% 10% 9% All Cap
8% 7% 1
2
3
4
5
6
7
8
9
10
Glamour Deciles ----------------------------------------------------------------------------------- Value Deciles
Source: Worldscope, the Brandes Institute, as of 6/30/14. Past performance is not a guarantee of future results. Value vs. Glamour: A Global Phenomenon study examines the performance of large cap global stocks from June 30, 1980 through June 30, 2014. The smallest 50% of all companies in developed countries in the Worldscope database were excluded—yielding a sample more representative of a typical investor’s investable universe. Remaining stocks were divided into deciles based on their price-to-book (P/B); the decile with the lowest P/B representing value stocks and the decile with the highest P/B representing glamour stocks. Aggregate performance of each decile was tracked over the next five years. New deciles were formed and the process repeated each year. Annualized returns were then averaged to compare value and glamour stocks over the entire study. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 14
Value vs. Glamour: Emerging Markets Average Annualized 5-Year Performance of Value vs. Glamour; June 30, 1980 –June 30, 2014; Price-to-Book (P/B) Deciles
Avg. Ann. 5-Yr. Return
20% 18% 16% 14% 12% 10% 8%
All Cap 6%
4% 1
2
3
4
5
6
7
8
9
10
Glamour Deciles ---------------------------------------------------------------------------- Value Deciles Useful data not available for years prior to 1980. Source: The Brandes Institute; Worldscope via FactSet, as of 6/30/14. Using the Worldscope database, we defined emerging markets as any country in the MSCI Emerging Markets Index. We excluded the smallest 50% of companies in this index to create a more “investable” universe. Value vs. Glamour: A Global Phenomenon study examines the performance of large cap global stocks from June 30, 1980 through June 30, 2014. The smallest 50% of all companies in developed countries in the Worldscope database were excluded— yielding a sample more representative of a typical investor’s investable universe. Remaining stocks were divided into deciles based on their price-to-book (P/B); the decile with the lowest P/B representing value stocks and the decile with the highest P/B representing glamour stocks. Aggregate performance of each decile was tracked over the next five years. New deciles were formed and the process repeated each year. Annualized returns were then averaged to compare value and glamour stocks over the entire study. Past performance is not a guarantee of future results. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 15
Prospect Theory: The Fear Factor
fear >
greed
F=2G FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 16
The Impact of Emotions . . . Annualized, 20-Year Returns, as of Dec. 31, 2014
12 9.9
10 8
6
Avg. Investor S&P 500 Inflation
5.2
4 2.3 2 0
Source: Dalbar Quantitative Analysis of Investor Behavior, 2015. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 17
Prospect Theory and Its Effects . . . The hypothetical portfolio Grows at 15% annually for 20 years Returns vary 10% (plus or minus)
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 18
How Emotional “Deficits” Get Created Paper Gains = 1 positive emotional unit (E.U.) Paper Losses = 2 negative emotional units (E.U.)
How often Chance of seeing do you look? a “Paper Gain” Once a year
93%
Every quarter
77%
Every month
67%
Every day
54%
Every hour
51.3%
Every minute
50.17%
Every second
50.02%
Source: “Fooled by Randomness: The Hidden Role of Chance in Life and the Markets, by Nassim Nicholas Taleb.” This hypothetical example is intended for illustrative purposes only. It does not reflect the performance of any specific investment vehicle. Actual results will vary. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 19
The “Wheel of Emotion”
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 20
Risk Perceptions More Risk Doesn’t Necessarily Mean More Return— Or It Wouldn’t Be Risky! 200
Potential Return %
150
100
50
0
-50
-100 Low
Low to Medium
Medium
Medium to High
Risk Level Source: Inspired by Marks, Howard. The Most Important Thing: Uncommon Sense for the Thoughtful Investor. New York: Columbia University Press. 2011. Hypothetical illustration. Past performance is not a guarantee of future returns. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 21
High
Risk Tends to Diminish Over Time . . . Range of Price Returns for U.S. Stocks Over Various Rolling Periods (1926–2012) 50% 40%
Annualized Return
30% 20% 10% 0% -10% -20% -30% -40% -50% 2-Year
5-Year
10-Year
20-Year
30-Year
Source: Prof. Robert Shiller’s website, http://www.econ.yale.edu/~shiller/data.htm. This data set consists of monthly stock price, dividends, and earnings data and the consumer price index (to allow conversion to real values), all starting January 1871. The price, dividend, and earnings series are from the same sources as described in Chapter 26 of his book Market Volatility, published by Cambridge, MA: MIT Press, 1989. Author’s note: Shiller now posts monthly data at his site, rather than annual data. Monthly dividend and earnings data are computed from the Standard & Poor’s four-quarter totals for the quarter since 1926, with linear interpolation to monthly figures. 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 FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 22
50-Year
Managing Our Emotions: ISMAP
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 23
Create it Ahead of Time―and Sign It Increases likelihood of compliance Innate human instinct to make actions match words
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 24
In Closing . . . Raise awareness of decisions―and which System we use to make those decisions. Use tools/tactics to help counter our short-term, emotional reactions― especially when investing. Think long term.
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 25
Thank You Very Much.
ANY QUESTIONS?
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
This material was prepared by the Brandes Institute, a division of Brandes Investment Partners®. It is intended for informational purposes only. It is not meant to be an offer, solicitation, or recommendation for any products or services. 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. Stocks of small companies usually experience more volatility than mid and large sized companies. 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. No investment strategy can assure a profit or protect against loss. Actual results will vary. Please note that all indices are unmanaged and are not available for direct investment. The MSCI EAFE (Europe, Australasia, Far East) Index with net dividends is an unmanaged, free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of 22 developed market country indices. This index often is used as a benchmark for international equity portfolios and includes dividends and distributions net of withholding taxes, but does not reflect fees, brokerage commissions, or other expenses of investing.
The MSCI Emerging Markets Index with gross dividends is an unmanaged, free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of 21 emerging market country indices. This index includes dividends and distributions, but does not reflect fees, brokerage commissions, withholding taxes, or other expenses of investing. Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com) The S&P 500 Index with gross dividends is an unmanaged, market capitalization weighted index that measures the equity performance of 500 leading companies in leading industries of the U.S. economy. The index includes 500 leading companies in leading industries of the U.S. economy, capturing 80% coverage of U.S. equities. This index includes dividends and distributions, but does not reflect fees, brokerage commissions, withholding taxes, or other expenses of investing. The foregoing reflects the thoughts and opinions of the Brandes Institute. Brandes Investment Partners ® is a registered trademark of Brandes Investment Partners, L.P. in the United States and Canada. FOR FINANCIAL PROFESSIONAL USE ONLY—NOT FOR PUBLIC DISTRIBUTION OAM091415MC5i
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 27
Scripps Pier, La Jolla
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 2
System 1 and System 2 System 1 “operates automatically and quickly” “little or no effort” “no sense of voluntary control” System 2 “effortful mental activities” “agency, choice and concentration”
Kahneman, Daniel. Thinking Fast and Slow. New York: Farrar, Straus and Giroux. 2013. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 3
Are A & B the Same Shade of Gray?
Source: Edward H. Adelson, 1995. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 4
How About Now? Still the Same Shades?
Source: Edward H. Adelson, 1995. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 5
Goals for Today
1.
Raise awareness of decision making traps and share tactics for making better judgments
2.
Provide examples of potential System 1 and System 2 conclusions in Brandes Institute research
3.
Encourage rational decision making and enhance potential for long-term investment success
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 6
The Brain’s Structure Explains What Distorts Judgment Thinking Brain ~ Pre-frontal Cortex Executive function Judgment
Feeling Brain ~ Subcortex
Thinking Brain
Emotions Drives Desires
Feeling Brain
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 7
Behavioral Biases When Investing
GLAMOUR STOCKS
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
VALUE STOCKS
Page 8
Value vs. Glamour
GLAMOUR STOCKS
Experiencing fast growth Operating in dynamic industries Generally en vogue Relatively High P/B, P/CF, P/E ratios
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
VALUE STOCKS
Experiencing hard times Operating in mature industries Typically unpopular Relatively Low P/B, P/CF, P/E ratios
Page 9
Lakonishok, Shleifer and Vishny (LSV): “Contrarian Investment, Extrapolation and Risk”* Studied U.S. stocks from 1968 through 1994 Distinguished between “value” and “glamour” using metrics such as P/B, P/E, and sales growth Conclusion: value stocks consistently outperformed glamour stocks by wide margins
*Josef Lakonishok, Andrei Shleifer, and Robert Vishny. 1994. “Contrarian Investment, Extrapolation, and Risk.” Journal of Finance 49 (December): page 1541-1578. Past performance is not a guarantee of future results. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 10
LSV Methodology
A.
Sample on 4/30/68 10 deciles
B. 1 2 3 4 5 6 7 8 9 10 Glamour (Hi P/B) Value (Lo P/B)
C.
Performance tracked
for 5 years D. Process repeated for every 4/30 through 1989 FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 11
LSV Results (U.S.)
Annualized Average 5-Year Returns
Average Annualized 5-Year Performance 1968 –1994; Price-to-Book (P/B) Deciles 22% 20% 18% 16%
14% LSV Results 12%
Brandes Institute Results
10% 8%
1 2 3 4 5 6 7 8 9 10 Glamour (High P/B)...…………………..………………………......…...……..………..Value (Low P/B)
Source: Josef Lakonishok, Andrei Shleifer, and Robert Vishny. 1994. “Contrarian Investment, Extrapolation, and Risk.” Journal of Finance 49 (December): page 1541-1578. Past performance is not a guarantee of future results. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 12
Value vs. Glamour in Global Markets The Brandes Institute examined 23 developed markets and 21 emerging markets worldwide: All firms in the Worldscope database traded from 1980 to 2014 Excluded smallest 50% of universe Segmented by large and small cap: Large caps were top 30% Small caps were the balance of remaining stocks Developed non-U.S. market analysis: 23 countries in aggregate Country analysis on 16 individual countries with robust data Emerging market analysis: 21 countries in aggregate
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 13
Value vs. Glamour: Non-U.S. Results Annualized Average 5-Year Returns Segmented by Company Size; (P/B Deciles, June 30, 1980 – June 30, 2014) 17% 16%
Avg. Ann. 5-Yr. Return
15% 14% 13% 12% 11% 10% 9% All Cap
8% 7% 1
2
3
4
5
6
7
8
9
10
Glamour Deciles ----------------------------------------------------------------------------------- Value Deciles
Source: Worldscope, the Brandes Institute, as of 6/30/14. Past performance is not a guarantee of future results. Value vs. Glamour: A Global Phenomenon study examines the performance of large cap global stocks from June 30, 1980 through June 30, 2014. The smallest 50% of all companies in developed countries in the Worldscope database were excluded—yielding a sample more representative of a typical investor’s investable universe. Remaining stocks were divided into deciles based on their price-to-book (P/B); the decile with the lowest P/B representing value stocks and the decile with the highest P/B representing glamour stocks. Aggregate performance of each decile was tracked over the next five years. New deciles were formed and the process repeated each year. Annualized returns were then averaged to compare value and glamour stocks over the entire study. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 14
Value vs. Glamour: Emerging Markets Average Annualized 5-Year Performance of Value vs. Glamour; June 30, 1980 –June 30, 2014; Price-to-Book (P/B) Deciles
Avg. Ann. 5-Yr. Return
20% 18% 16% 14% 12% 10% 8%
All Cap 6%
4% 1
2
3
4
5
6
7
8
9
10
Glamour Deciles ---------------------------------------------------------------------------- Value Deciles Useful data not available for years prior to 1980. Source: The Brandes Institute; Worldscope via FactSet, as of 6/30/14. Using the Worldscope database, we defined emerging markets as any country in the MSCI Emerging Markets Index. We excluded the smallest 50% of companies in this index to create a more “investable” universe. Value vs. Glamour: A Global Phenomenon study examines the performance of large cap global stocks from June 30, 1980 through June 30, 2014. The smallest 50% of all companies in developed countries in the Worldscope database were excluded— yielding a sample more representative of a typical investor’s investable universe. Remaining stocks were divided into deciles based on their price-to-book (P/B); the decile with the lowest P/B representing value stocks and the decile with the highest P/B representing glamour stocks. Aggregate performance of each decile was tracked over the next five years. New deciles were formed and the process repeated each year. Annualized returns were then averaged to compare value and glamour stocks over the entire study. Past performance is not a guarantee of future results. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 15
Prospect Theory: The Fear Factor
fear >
greed
F=2G FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 16
The Impact of Emotions . . . Annualized, 20-Year Returns, as of Dec. 31, 2014
12 9.9
10 8
6
Avg. Investor S&P 500 Inflation
5.2
4 2.3 2 0
Source: Dalbar Quantitative Analysis of Investor Behavior, 2015. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 17
Prospect Theory and Its Effects . . . The hypothetical portfolio Grows at 15% annually for 20 years Returns vary 10% (plus or minus)
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 18
How Emotional “Deficits” Get Created Paper Gains = 1 positive emotional unit (E.U.) Paper Losses = 2 negative emotional units (E.U.)
How often Chance of seeing do you look? a “Paper Gain” Once a year
93%
Every quarter
77%
Every month
67%
Every day
54%
Every hour
51.3%
Every minute
50.17%
Every second
50.02%
Source: “Fooled by Randomness: The Hidden Role of Chance in Life and the Markets, by Nassim Nicholas Taleb.” This hypothetical example is intended for illustrative purposes only. It does not reflect the performance of any specific investment vehicle. Actual results will vary. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 19
The “Wheel of Emotion”
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 20
Risk Perceptions More Risk Doesn’t Necessarily Mean More Return— Or It Wouldn’t Be Risky! 200
Potential Return %
150
100
50
0
-50
-100 Low
Low to Medium
Medium
Medium to High
Risk Level Source: Inspired by Marks, Howard. The Most Important Thing: Uncommon Sense for the Thoughtful Investor. New York: Columbia University Press. 2011. Hypothetical illustration. Past performance is not a guarantee of future returns. FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 21
High
Risk Tends to Diminish Over Time . . . Range of Price Returns for U.S. Stocks Over Various Rolling Periods (1926–2012) 50% 40%
Annualized Return
30% 20% 10% 0% -10% -20% -30% -40% -50% 2-Year
5-Year
10-Year
20-Year
30-Year
Source: Prof. Robert Shiller’s website, http://www.econ.yale.edu/~shiller/data.htm. This data set consists of monthly stock price, dividends, and earnings data and the consumer price index (to allow conversion to real values), all starting January 1871. The price, dividend, and earnings series are from the same sources as described in Chapter 26 of his book Market Volatility, published by Cambridge, MA: MIT Press, 1989. Author’s note: Shiller now posts monthly data at his site, rather than annual data. Monthly dividend and earnings data are computed from the Standard & Poor’s four-quarter totals for the quarter since 1926, with linear interpolation to monthly figures. 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 FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 22
50-Year
Managing Our Emotions: ISMAP
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 23
Create it Ahead of Time―and Sign It Increases likelihood of compliance Innate human instinct to make actions match words
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 24
In Closing . . . Raise awareness of decisions―and which System we use to make those decisions. Use tools/tactics to help counter our short-term, emotional reactions― especially when investing. Think long term.
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 25
Thank You Very Much.
ANY QUESTIONS?
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
This material was prepared by the Brandes Institute, a division of Brandes Investment Partners®. It is intended for informational purposes only. It is not meant to be an offer, solicitation, or recommendation for any products or services. 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. Stocks of small companies usually experience more volatility than mid and large sized companies. 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. No investment strategy can assure a profit or protect against loss. Actual results will vary. Please note that all indices are unmanaged and are not available for direct investment. The MSCI EAFE (Europe, Australasia, Far East) Index with net dividends is an unmanaged, free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of 22 developed market country indices. This index often is used as a benchmark for international equity portfolios and includes dividends and distributions net of withholding taxes, but does not reflect fees, brokerage commissions, or other expenses of investing.
The MSCI Emerging Markets Index with gross dividends is an unmanaged, free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of 21 emerging market country indices. This index includes dividends and distributions, but does not reflect fees, brokerage commissions, withholding taxes, or other expenses of investing. Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com) The S&P 500 Index with gross dividends is an unmanaged, market capitalization weighted index that measures the equity performance of 500 leading companies in leading industries of the U.S. economy. The index includes 500 leading companies in leading industries of the U.S. economy, capturing 80% coverage of U.S. equities. This index includes dividends and distributions, but does not reflect fees, brokerage commissions, withholding taxes, or other expenses of investing. The foregoing reflects the thoughts and opinions of the Brandes Institute. Brandes Investment Partners ® is a registered trademark of Brandes Investment Partners, L.P. in the United States and Canada. FOR FINANCIAL PROFESSIONAL USE ONLY—NOT FOR PUBLIC DISTRIBUTION OAM091415MC5i
FOR INVESTMENT PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION
Page 27
