Wealth Eroding Companies
The Conscious Investor® selection process starts by eliminating risky stocks. Stocks that have high levels of debt, poor cash flow and unpredictable earnings growth. For example, consider the earnings history below of the two companies, the Celadon Group (low stability stock ) and Bed bath and Beyond Inc (high stability stock ).
Example of a High Stability Stock
Example of a Low Stability Stock
One of the primary things that Conscious Investor does is to identify companies with growth and stability like Bed bath and Beyond on the right and avoid companies like Celadon on the left.
Many high profile companies – that you may be investing in now – are potentially wealth eroding! The Demo Videos will show you the high price you pay for being a part of the “crowd”.
The demonstration will show you how you can avoid “cash-poor” and wealth eroding companies, including those that are promoted heavily by brokers and the media.
You will also learn simple, common sense tests to determine the financial health of thousands USA, Canadian and Australian listed companies.
Most significantly, you will learn how proprietary intellectual property within Conscious Investor® allows our clients to forecast earnings growth (and therefore future stock prices). Conscious Investor allows you to forecast earnings with five times the accuracy of Analysts Forecasts ... [ more details ].
By avoiding wealth destroying companies, $10,000 invested in the USA Conscious Investor Model Portfolio in March 2003 would have would now have a value of $16,940.81 as of August 2005.. The same investment in the Australian portfolio would have a value of $15,991.
Something that is perhaps even more important. Just imagine how much enjoyable your life would be if you didn’t have to be continually worrying whether you have been landed with a stock that is gong to turn out to be a series of disasters.
How Do You Select Your Stocks?
Recent research by Brad Barber and Terrence Odean of the University of California shows that individual investors tend to purchase stocks on the days after there is some sort of attention-grabbing activity. Specifically, they tend to purchase stocks on the days after there was high trading volume, when there were extreme movements in the price whether up or down, and when the stocks were in the news.
Earlier studies by Barber and Odean showed that investors were systematically reluctant to sell their stocks for a loss. We hate to have to admit that we have made a mistake. So we hang on to losers even though from a tax perspective it is better to declare our losses as soon as possible. Even more significant is the fact that by hanging on to their losers, investors were hurting their overall performance.
In this recent study the authors set out to look at the other side. Why do investors choose to buy particular stocks? This is a formidable problem for investors. In the USA there are over 10,000 stocks to choose from. In Australia, over 1,500.
They looked at the trading accounts of over 700,000 individual investors and 43 professional money managers. The results show that there is a difference between methods used by individual investors and professional investors. It seems that professional investors are less likely to invest in attention-grabbing stocks. Possibly this is because they have more time and resources, including computer programs such as Conscious Investor, for monitoring a larger range of companies.
In contrast, individual investors with limited resources are more likely to purchase stocks that capture their attention in the ways mentioned above such as stocks that are in the news.
Of course, there is nothing wrong with this approach if their choices turn out to be profitable. Alas, on average this does not turn out to be the case. Consider momentum investors who believe that if a stock rises in price, it is likely to keep rising. The researchers found that more people bought a stock when there was an abnormally high return on the previous day. Yet this resulted in underperformance over the next month against the stocks that were sold and against the overall market.
A similar result held for contrarian investors who believe that if there is an abnormal dip in price, then there will be a profitable rebound. Once again the outcome was underperformance over the following month.
You can see the details in the following chart for the four attention-grabbing categories: high volume, abnormally high return, abnormally low return and news releases.
BETTING ON THE WRONG HORSE
Underperformance Over the Following Year
Share Category: High Volume / High Return / Low Return / News
Underperformance: -4.27% / -6.10% / -7.77% / -2.82%
Source: Brad Barber and Terrance Odean. We assume the strategy is rolled over each month.
When these results are looked at in the context of research by Daniel Kahneman, the 2002 Nobel Prize winner in economic sciences, we shouldn’t be surprised. Kahneman showed that we make evaluations of an extended experience based on the most extreme component of the experience and by the most recent component. Everything else is given less importance. He refers to it as the peak/end rule.
An extremely painful surgical procedure will be reported as less severe if a less painful period is added at the end. The painful period can even be extended by the medical practitioner so long as the end is less painful.
In the case of the stock market, suppose we are thinking of making a purchase. The peak/end rule would bias us towards those stocks that have drawn our attention most strongly or about which we have the most recent news. And if these happen to be the same event such as recent high volume, then the relevant stock will be even more dominant in our mind as a stock to buy.
Not everyone believes that investors can be so easily influenced or that share prices are so rubbery. One of these is Myron Scholes, the Nobel Prize-winning economist, a supporter of the school that teaches that the share price always describes the true value of the company.
When he expressed this opinion to Bill George, the former CEO of the billion dollar company Medtronic, George replied, “Myron, I sit in the CEO’s chair, and I can tell you how easy it is to raise our stock price in the short term… We can go out and hype the stock.” The story goes that Scholes flung his pencil down on the table.
The point is that whatever the short-term effect, Barber and Odean’s research shows that any resulting price rises are not likely to stay for long. All in all, investors would be well to take heed of the saying known to the old prospectors—all that glitters is not gold.
http://www.conscious-investor.com/whatis/eroding.asp
The Conscious Investor® selection process starts by eliminating risky stocks. Stocks that have high levels of debt, poor cash flow and unpredictable earnings growth. For example, consider the earnings history below of the two companies, the Celadon Group (low stability stock ) and Bed bath and Beyond Inc (high stability stock ).
Example of a High Stability Stock
Example of a Low Stability Stock
One of the primary things that Conscious Investor does is to identify companies with growth and stability like Bed bath and Beyond on the right and avoid companies like Celadon on the left.
Many high profile companies – that you may be investing in now – are potentially wealth eroding! The Demo Videos will show you the high price you pay for being a part of the “crowd”.
The demonstration will show you how you can avoid “cash-poor” and wealth eroding companies, including those that are promoted heavily by brokers and the media.
You will also learn simple, common sense tests to determine the financial health of thousands USA, Canadian and Australian listed companies.
Most significantly, you will learn how proprietary intellectual property within Conscious Investor® allows our clients to forecast earnings growth (and therefore future stock prices). Conscious Investor allows you to forecast earnings with five times the accuracy of Analysts Forecasts ... [ more details ].
By avoiding wealth destroying companies, $10,000 invested in the USA Conscious Investor Model Portfolio in March 2003 would have would now have a value of $16,940.81 as of August 2005.. The same investment in the Australian portfolio would have a value of $15,991.
Something that is perhaps even more important. Just imagine how much enjoyable your life would be if you didn’t have to be continually worrying whether you have been landed with a stock that is gong to turn out to be a series of disasters.
How Do You Select Your Stocks?
“Neon stocks not the best buys”
[Australian Financial Review, 3/10/2003. Author: John Price, Executive Chairman, Conscious Investing Pty Ltd]
"How do Mr and Mrs Average Investor choose their stocks? Careful analysis of reports from stockbrokers? No time. Interviewing members of the board and senior management of the company? It's unlikely their calls would be returned.
How about looking at stocks with extreme price changes? Now you're getting closer.
If you add the "glitter" stocks that are in the news or have abnormally high trading volume, you'll have the bases well covered." [read the entire article]
[Australian Financial Review, 3/10/2003. Author: John Price, Executive Chairman, Conscious Investing Pty Ltd]
"How do Mr and Mrs Average Investor choose their stocks? Careful analysis of reports from stockbrokers? No time. Interviewing members of the board and senior management of the company? It's unlikely their calls would be returned.
How about looking at stocks with extreme price changes? Now you're getting closer.
If you add the "glitter" stocks that are in the news or have abnormally high trading volume, you'll have the bases well covered." [read the entire article]
Recent research by Brad Barber and Terrence Odean of the University of California shows that individual investors tend to purchase stocks on the days after there is some sort of attention-grabbing activity. Specifically, they tend to purchase stocks on the days after there was high trading volume, when there were extreme movements in the price whether up or down, and when the stocks were in the news.
Earlier studies by Barber and Odean showed that investors were systematically reluctant to sell their stocks for a loss. We hate to have to admit that we have made a mistake. So we hang on to losers even though from a tax perspective it is better to declare our losses as soon as possible. Even more significant is the fact that by hanging on to their losers, investors were hurting their overall performance.
In this recent study the authors set out to look at the other side. Why do investors choose to buy particular stocks? This is a formidable problem for investors. In the USA there are over 10,000 stocks to choose from. In Australia, over 1,500.
They looked at the trading accounts of over 700,000 individual investors and 43 professional money managers. The results show that there is a difference between methods used by individual investors and professional investors. It seems that professional investors are less likely to invest in attention-grabbing stocks. Possibly this is because they have more time and resources, including computer programs such as Conscious Investor, for monitoring a larger range of companies.
In contrast, individual investors with limited resources are more likely to purchase stocks that capture their attention in the ways mentioned above such as stocks that are in the news.
Of course, there is nothing wrong with this approach if their choices turn out to be profitable. Alas, on average this does not turn out to be the case. Consider momentum investors who believe that if a stock rises in price, it is likely to keep rising. The researchers found that more people bought a stock when there was an abnormally high return on the previous day. Yet this resulted in underperformance over the next month against the stocks that were sold and against the overall market.
A similar result held for contrarian investors who believe that if there is an abnormal dip in price, then there will be a profitable rebound. Once again the outcome was underperformance over the following month.
You can see the details in the following chart for the four attention-grabbing categories: high volume, abnormally high return, abnormally low return and news releases.
BETTING ON THE WRONG HORSE
Underperformance Over the Following Year
Share Category: High Volume / High Return / Low Return / News
Underperformance: -4.27% / -6.10% / -7.77% / -2.82%
Source: Brad Barber and Terrance Odean. We assume the strategy is rolled over each month.
When these results are looked at in the context of research by Daniel Kahneman, the 2002 Nobel Prize winner in economic sciences, we shouldn’t be surprised. Kahneman showed that we make evaluations of an extended experience based on the most extreme component of the experience and by the most recent component. Everything else is given less importance. He refers to it as the peak/end rule.
An extremely painful surgical procedure will be reported as less severe if a less painful period is added at the end. The painful period can even be extended by the medical practitioner so long as the end is less painful.
In the case of the stock market, suppose we are thinking of making a purchase. The peak/end rule would bias us towards those stocks that have drawn our attention most strongly or about which we have the most recent news. And if these happen to be the same event such as recent high volume, then the relevant stock will be even more dominant in our mind as a stock to buy.
Not everyone believes that investors can be so easily influenced or that share prices are so rubbery. One of these is Myron Scholes, the Nobel Prize-winning economist, a supporter of the school that teaches that the share price always describes the true value of the company.
When he expressed this opinion to Bill George, the former CEO of the billion dollar company Medtronic, George replied, “Myron, I sit in the CEO’s chair, and I can tell you how easy it is to raise our stock price in the short term… We can go out and hype the stock.” The story goes that Scholes flung his pencil down on the table.
The point is that whatever the short-term effect, Barber and Odean’s research shows that any resulting price rises are not likely to stay for long. All in all, investors would be well to take heed of the saying known to the old prospectors—all that glitters is not gold.
http://www.conscious-investor.com/whatis/eroding.asp
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