Booster Client Update - The Irrational Investor

1 October by Booster in Booster, Investments

Booster Client Update - The Irrational Investor

Booster Client Update - The Irrational Investor

Humans are irrational by nature – we’re afraid of mice, we play the lottery, and we perceive things to be superior if they have a higher price. For years both economic and finance theory ignored this fact and instead assumed everyone acted rationally when making financial decisions. But recently there has been a new train of thought – human emotion can have an impact on financial markets as much as any other aspect of life.

Be fearful when others are greedy, and greedy when others are fearful.

- Warren Buffet

One of the most common examples of irrational financial decisions is a principle called mental accounting. That’s when people separate their money into different buckets based on different, subjective criteria. For example, people are more likely to spend a bonus on luxury goods whereas their regular salary is carefully budgeted. To avoid this irrational behaviour, the key thing is to remember money is fungible (or interchangeable). It has the same value no matter how it is earned, and it’s intended use should be considered irrelevant of where it came from.

It’s not just individual financial decisions that are prone to irrational behaviour, financial markets are affected as well. Herd behaviour is one example of this. That’s when people follow others just simply because they don’t want to miss out. It’s the kind of behaviour that leads to bubbles occasionally forming in certain assets and is the principle behind Warren Buffet’s famous quote “be fearful when others are greedy and greedy only when others are fearful”. This is also one of our key philosophies at Booster – when too many people are either overly optimistic or overly pessimistic, we are more inclined to look for opportunities to go against the herd. Subject to a careful assessment of the right timing for any changes, this philosophy can not only have a positive impact on returns but it can also add to the consistency of returns over time.

 

Summary of Key Portfolio Changes

Global Shares – Increased Allocation

  • During October, we made another measured increase to global shares allocations.  The main story driving this allocation is the world economy’s outlook for expansion picking up solidly across most global markets. This economic performance is being coupled with corporate earnings showing robust growth, and continued high business and consumer confidence.
  •  While risks are ever-present and will return at some point, these pillars are supporting global equity markets performance and support global shares outperforming their long run averages over the medium term.

Fisher Investment’s Global Focused Strategy

  • During the month Fisher Investments continued their reduction to US holdings while increasing exposure to other countries, mainly Europe and Japan.  The most material change was the addition of Japanese robotics business FANUC Corporation.
  • FANUC is the world’s leading manufacturer of industrial robots and should benefit from growing robotics and automation demand resulting from better than expected economic expansion. Its diverse geographical revenue streams, history as a proven innovator, high margins and relatively high barriers to entry should continue to provide a platform for the company to outperform.

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by Lifetime in Investments, Psychology

A few curious professors decided to run an experiment. The fact that two of them later became Nobel Prize winners… well, that probably has a bit to do with the outcome. 

Share markets across the world continued to recover solidly during May, looking ahead to a gradual loosening of restrictions, and have now recovered much of the March sell-off.