The Age Of Behavioural Finance

The Age Of Behavioural Finance
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While behavioural finance is a relatively new field of study, it is one that has a profound effect on the fiscal marketplace. In simple terms, of course, behavioural finance dictates that the world and the majority of its inhabitants can be described as wealth maximizers, but there are numerous instances in which emotion and psychology can influence fiscal decision making and challenge existing priorities.

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With these nuances in mind, the introduction of behavioural finance has helped investors and business-owners to understand the ways in which psychology influences our ability to build wealth (for good or for bad and across multiple marketplaces).

It has also opened our minds to the methods that can be used to avoid irrational financial decisions, particularly in the volatile and constantly changing worlds of investment and trading.

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Why Wealth Management Services Have Become Increasingly Popular in the Age of Behavioural Finance

On a fundamental level, behavioural finance and its associated studies leverage cognitive psychological theory to determine why we take specific decisions when managing our money. This, in turn, either provides a lesson for others to follow or highlights the negative impact of emotion and indecision.

As a result of this and the inherent weaknesses that behavioural psychology exposes, investors have also sought out ways to minimize the risks associated with financial management. This outlook has helped to popularize the online trading and wealth management platforms, which have gradually made the financial markets more accessible while enabling investors to manage risk, automate trades and eliminate emotion from their decision-making processes.

This is particularly the case with online trading platforms, which have ushered in an age of automated trading and largely negated the risk of human error in the fast and furious financial marketplace.

From a business perspective, we have seen a similar trend with the emergence of wealth management services. Offering both on and offline assistance, service providers such as WH Ireland have a relatively long history of working alongside corporate institutions, while they also deliver a client-centric focus that tailors strategies in line with an existing investment philosophy. With strategies that combine both core investment services and tax efficient portfolio options, modern wealth management firms deliver viable solutions that leverage relevant industry expertise.

As we can see, wealth management firms enable investors to access a host of unique and profitable asset classes, which ensures that they are able to diversify their portfolios without increasing their risk profile. There is also no requirement for them to gain any specific knowledge of new markets or industries before making a commitment, as service providers use experts from a range of sector to help drive informed decisions. This means that corporations are not put in a position where they are required to make ill-informed decisions, or become vulnerable to ill-judged and knee-jerk reactions to market shifts.

The Bottom Line: The Sustained Evolution of Behavioural Finance

When the burgeoning science of behavioural finance first emerged, it provided a fascinating insight into the triggers that impacted on the decisions made by individual and corporate investors. It also showed how emotion and ill-informed decision making can derail even the best laid investment plans, particularly when dealing with volatile derivatives such as currency.

The evolution of this science has since continued at pace, helping investors to understand the psychological risks associated with managing wealth and identifying viable ways of negating these.

This has created a climate in which today’s corporations are increasingly likely to leverage expert wealth management services, in a bid to eliminate human error, minimize emotion and get the absolute maximum from their finances over a sustained period of time.

Article by Vintage Value Investing

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Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…
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