At the start of 2018, optimism was plentiful and the expectations for continued global growth had many pundits believing that 2018 could be a repeat of 2017. As a quick refresher, returns in 2017 were stellar across the board with all major asset classes earning double digit returns. The first few weeks of 2018 looked like a seamless continuation of the prior year, but something got in the way towards the end of January. That something was US interest rates.
When was the last time you picked up your cell phone? There is a good chance it has been in the last hour. The answer to the question may seem inconsequential, but it can tell us a lot about how behavioral biases can directly affect your decision making process, both in investing and in life.Some recent research has suggested that being on our devices (phones, computers, and tablets) can be bad for our health in the long run. However, our brains are hardwired to discount that information and satisfy the need for instant gratification, whether that is checking email, opening an app or just seeing if anything has happened in the world over the last 10 minutes. The behavioral finance term for this concept is hyperbolic discounting. It is defined as the need for people to choose smaller, immediate rewards rather than larger, later rewards.
In the early 1900’s, Swiss psychologist Hermann Rorschach developed a test to help determine a subject’s personality characteristics and emotional functioning. The test involved showing patients cards with symmetrical inkblots on them, then asking the patient to describe their perception of what the figure represented. While the mainstream has come to portray these “Rorschach Tests” as a simple, straightforward way to gain an insight in to one’s mind, the reality is the testing and interpretation is a complex process...
There is a behavioral finance concept in the investing world called “recency bias”. This emotional bias manifests itself as a belief that whatever the markets have been doing recently, will continue indefinitely into the future. It can cast doubts onto the long-term benefits of well-documented practices.
According to the FactSet Earnings Insight report, Q2 earnings per share for companies in the S&P 500 have grown a remarkable 24.6%. Even with approximately 9% of companies yet to report, this number would easily be the 2nd best quarter in terms of growth since 2010. When thinking of ways to continue a bull market that has been going on for almost 9 years, this would be a decent place to start. But while the overall performance of S&P 500 companies has been solid this year, we are still seeing some significant deviations taking place.
Last Wednesday, July 25th, tech giant Facebook(FB) reported 2Q earnings after the close of trading. On the surface, Facebook’s numbers looked fine with earnings coming in ahead of analysts’ expectations. However, after lowering forward looking revenue guidance, the company was punished with a 22% selloff. This resulted in losing over $120 billion in market capitalization in a little over an hour. To give you an idea how much value that is, it represents more than the bottom 21 companies in the S&P 500………COMBINED!
Even though only 5% of companies in the S&P 500 have reported actual results for Q2 2018, the expectations for all companies from the market are clear: growth….and a lot of it. According to FactSet Earnings Insight report, analysts are expecting year-over-year earnings growth of 20% for 2Q 2018. If that number holds, it would be the highest earnings growth rate since 3Q 2010 (34.1%)...
Yogi Berra, while being known primarily as a great catcher, is also known for his collection of funny and oftentimes nonsensical quips. In fact, Yogi’s malapropisms became so popular that they eventually received special recognition as “Yogiisms.” One of my favorites is this: “When you come to a fork in the road, take it.” The market has certainly done its fair share of forking recently.