Major Delusions
By TALI SHAROT
Published: May 14, 2011
THIS month American college seniors will don caps and gowns. As they await receipt of their diplomas, they will absorb lessons handed to them by the accomplished men and women who deliver commencement speeches. More often than not the speakers will be outliers: rare individuals who made it against all odds. More often than not their message will be “dreams come true ... take chances ... if you try hard enough you will succeed.”
“Don’t know that you can’t fly, and you will soar like an eagle,” Earl E. Bakken, founder of the medical technology company Medtronic, told the University of Hawaii’s class of 2004. “You have to trust that the dots will somehow connect in your future,” Steven P. Jobs told Stanford’s 2005 graduates.
But in an era of unemployment, financial meltdowns, political unrest and natural disasters, is this message of optimism helpful?
By and large, the answer is yes. Although the graduates are unlikely to be as fortunate as their commencement speakers, evidence from the science of optimism indicates that believing in their optimistic message will nonetheless be a good thing.
We now know that underestimating the obstacles life has in store lowers stress and anxiety, leading to better health and well-being. This is one reason optimists recover faster from illnesses and live longer. Believing a goal is attainable motivates us to get closer to our dreams. Because of the power of optimism, enhancing graduates’ faith in the American dream by presenting them with rare examples as proof may be just what the doctor ordered. Their hopes may not be fully realized, but they will be more successful, healthier and happier if they hold on to positively biased expectations.
Surveys show that students expect to receive more job offers and higher salaries upon graduation than they wind up getting. They anticipate being married till death do them part, though they are acutely aware that statistics say there’s a good chance they won’t be. They underestimate their likelihood of suffering from cancer, heart attack and other misfortunes and overestimate their likelihood of acquiring wealth and professional success. The list goes on and on.
It’s not just the young who embrace positive delusions. Whether you are 9 or 90, male or female, of African or European descent, you are likely to have an optimism bias. In fact, 80 percent of the world does. (Many believe optimism is unique to Americans; studies show the rest of the world is just as optimistic.)
In fact, the people who accurately predict the likelihood of coming events tend to be mildly depressed. The rest of us systematically fail when interpreting the crystal ball.
For many years, scientists were puzzled by the existence of this unshakable optimism. It did not make sense. How is it that people remain optimistic even though information challenging those predictions is abundantly available? It turns out it is not commencement speeches or self-help books that make us hopeful. Recently, with the development of non-invasive brain imaging techniques, we have gathered evidence that suggests our brains are hard-wired to be unrealistically optimistic. When we learn what the future may hold, our neurons efficiently encode unexpectedly good information, but fail to incorporate information that is unexpectedly bad.
That’s why when we listen to Oprah Winfrey’s rags-to-riches story our brain takes note and concludes that we too may become immensely rich and powerful one day; but when told the likelihood of being unemployed is almost 1 in 10 or of suffering from cancer is over 1 in 3 we take no notice.
Such optimistic illusions, with all of their advantages, unfortunately come at a price. Underestimating risk makes us less likely to practice safe sex, save for retirement, buy insurance or undergo medical screenings.
In some cases relatively minor biases can even lead to global disaster. Take the financial crisis of 2008. Each investor, homeowner, banker or economic regulator expected slightly better profits than were realistically warranted. On its own, each bias would not have created huge losses. Yet when combined in one market they produced a giant financial bubble that did just that.
As the Duke economists Manju Puri and David T. Robinson suggest, optimism is like red wine: a glass a day is good for you, but a bottle a day can be hazardous. The optimal solution then? Believe you will live a long healthy life, but go for frequent medical screenings. Aspire to write the next “Harry Potter” series, but have a safety net in place too.
At a time when the economic crisis is deepened by revolutions and tsunamis, cautious optimism may be the most useful message to communicate to graduates — believe you can fly, with a parachute attached, and you will soar like an eagle.
Tali Sharot, a research fellow at the Wellcome Trust Center for Neuroimaging at University College London, is the author of “The Optimism Bias: A Tour of the Irrationally Positive Brain.”
http://www.nytimes.com/2011/05/15/opinion/15Sharot.html?_r=1&hp
Monday 16 May 2011
Sunday 15 May 2011
1929 Wall Street Stock Market Crash
The most devastating stock market crash in the history of the United States;
Its from my favorite documentary by PBS - New York.
This particular part about Wall Street crash of 1929 is from episode 5 of the series with title: Cosmopolis
There are lots of archive photos, footages and drawings throughout the series and in my opinion it was great work done with finding them.
Its from my favorite documentary by PBS - New York.
This particular part about Wall Street crash of 1929 is from episode 5 of the series with title: Cosmopolis
There are lots of archive photos, footages and drawings throughout the series and in my opinion it was great work done with finding them.
Stock Investing for beginners
Here you will find free stock information,and how to buy stocks also and how to day trade.
www.StockInvestingProfits.com
www.StockInvestingProfits.com
Jim Rogers Bares the Secrets of Investing - Bloomberg
Rogers Writes Letter to His Two Young Daughters - Investing Secrets:
1. Question Everything,
2. Never Follow the Crowd, and
3. Beware of Boys
1. Question Everything,
2. Never Follow the Crowd, and
3. Beware of Boys
Value Investing: Buy Cheap, Obscure and Out of Fashion
Value Investing Process
Search
- Cheap
- Ugly
- Obscure
- Otherwise ignored
Valuation
- Asset
- Earnings Power
- Franchise
Review
- Key Issues
- Collateral Evidence
- Personal Biases
Risk Management
- Margin of Safety
- Some Diversification
- Patience - Default Strategy
Important Points
- Market Irrationality Creates Opportunity
- Know what you know: Inherent Quality of Information & Circle of Competence
- Look for Margin of Safety
Professor Bruce C. Greenwald discusses his executive education course in value investing and what differentiates the practice from other investment strategies. "Most investors are constitutionally oriented to buying lottery tickets," he says. "And that's what creates the value opportunities for the plodding, careful investors."
For more programs from the Columbia Business School: http://fora.tv/partner/Columbia_Business_School
Search
- Cheap
- Ugly
- Obscure
- Otherwise ignored
Valuation
- Asset
- Earnings Power
- Franchise
Review
- Key Issues
- Collateral Evidence
- Personal Biases
Risk Management
- Margin of Safety
- Some Diversification
- Patience - Default Strategy
Important Points
- Market Irrationality Creates Opportunity
- Know what you know: Inherent Quality of Information & Circle of Competence
- Look for Margin of Safety
Professor Bruce C. Greenwald discusses his executive education course in value investing and what differentiates the practice from other investment strategies. "Most investors are constitutionally oriented to buying lottery tickets," he says. "And that's what creates the value opportunities for the plodding, careful investors."
For more programs from the Columbia Business School: http://fora.tv/partner/Columbia_Business_School
Saturday 14 May 2011
Warren Buffett's Secret "Value" Formula
Warren Buffett Value Formula separates weak industries from strong ones.
Warren Buffett's Secret "Value" Formula
Which Industries Does Warren Buffett Avoid?
Warren Buffett's Secret "Value" Formula
Which Industries Does Warren Buffett Avoid?
Is Warren Buffett Really A Value Investor?
Posted: May 6, 2011 11:46AM by Ryan C. Fuhrmann, CFA
TUTORIAL: P/E Ratio
He's one of the most famous investors of all time and has certainly earned his nickname of "The Oracle of Omaha". Warren Buffett has long been hailed as avalue investor. But is that statement still accurate?
What Is Value Investing?
Value investing can mean a number of different things, but is generally meant to refer to a class of investors who look for investments trading at a price below where certain valuation fundamentals suggest they should be trading at. For example, a stock can trade at a price-to-earnings (P/E) or price-to-book (P/B) value below its peers or the market average in general. Overall, value investing is an investment philosophy of finding undervalued securities that should eventually increase in value to be closer in line with (or above) the metrics of rivals or stock market averages.
Value investing can mean a number of different things, but is generally meant to refer to a class of investors who look for investments trading at a price below where certain valuation fundamentals suggest they should be trading at. For example, a stock can trade at a price-to-earnings (P/E) or price-to-book (P/B) value below its peers or the market average in general. Overall, value investing is an investment philosophy of finding undervalued securities that should eventually increase in value to be closer in line with (or above) the metrics of rivals or stock market averages.
On the flip side, growth investors are said to be more interested in the growth potential of a security whose underlying company has above-average sales or profit expansion prospects. Given this higher growth potential, a growth investor may be willing to pay above-average P/E, P/B or other valuationmetrics compared to rivals or the market in general.
The value investing crowd has its origins in the 1934 text "Security Analysis" by Benjamin Graham and David Dodd and has been further developed by Warren Buffett, a past student of Graham who has also preached that a security eventually trades up to its intrinsic value. Buffett championed Graham's approach to buy a security with a satisfactory margin of safety, or, in Graham's words, "a favorable difference between price on the one hand and indicated or appraised value on the other." (This simple measure can help investors determine whether a stock is a good deal. For more, see Value Investing Using The Enterprise Multiple.)
Where Does Buffett Fit?
In this context, Buffett is considered a value investor. More specifically, he relies on estimating a firm's future cash flows and discounting them back to the present to get an estimated intrinsic value for a company when it comes to investing in its stock. Intrinsic value is a theoretical value assuming one could know a firm's future cash flows with certainty, so the reality is that it is a very subjective measure and investors may come to widely varying estimations of intrinsic value, even when looking at the same set of data, valuation metrics, etc.
In this context, Buffett is considered a value investor. More specifically, he relies on estimating a firm's future cash flows and discounting them back to the present to get an estimated intrinsic value for a company when it comes to investing in its stock. Intrinsic value is a theoretical value assuming one could know a firm's future cash flows with certainty, so the reality is that it is a very subjective measure and investors may come to widely varying estimations of intrinsic value, even when looking at the same set of data, valuation metrics, etc.
But in the context of value versus growth investing, Buffett is actually a bit of both. In his words, "growth and value investing are joined at the hip" and that understanding is required to find a company and underlying stock with solid growth prospects and a market value well below intrinsic value. The best illustration of this is the growth of Berkshire Hathaway's non-insurance businesses over the past four decades. Below is a chart that Buffett provided in Berkshire's 2010 shareholder letter:
| Period | Annual Earnings Growth |
| 1970-1980 | 20.8% |
| 1980-1990 | 18.4% |
| 1990-2000 | 24.5% |
| 2000-2010 | 20.5% |
Over this time period, earnings growth averaged 21% annually while Berkshire's stock price grew at an annual compounded rate of 22.1%, almost completely mirroring the growth in earnings. In this respect, Buffett is the ultimate growth investor because earnings grew about twice the level of the stock market during this period. In Buffett's words from this year's shareholder letter, "market prices and intrinsic value often follow very different paths - sometimes for extended periods - but eventually they meet." (Find out how Mr. Market's mood swings can mean great opportunities for you. See Take On Risk With A Margin of Safety.)
TUTORIAL: DCF Analysis
The Bottom Line
Again, perhaps the most appropriate conclusion to make is that Buffett is both a value and growth investor. At the outset of making an investment, it is reasonable to conclude that he uses a margin of safety by purchasing a stock with valuation metrics that are well below average. But overall, growth has to be there so that the firm can eventually trade up closer to its intrinsic value and growth potential must be well above average to double the market's return over the long haul.
Again, perhaps the most appropriate conclusion to make is that Buffett is both a value and growth investor. At the outset of making an investment, it is reasonable to conclude that he uses a margin of safety by purchasing a stock with valuation metrics that are well below average. But overall, growth has to be there so that the firm can eventually trade up closer to its intrinsic value and growth potential must be well above average to double the market's return over the long haul.
To be a truly successful investor, individuals must take both a value and growth perspective when it comes to spotting undervalued investments andoutperforming the market over time. Valuation multiples including P/E and P/B ratios are a good starting point, but at the end of the day it is also necessary to estimate a firm's growth prospects and cash flows going forward, and come to an independent determination of intrinsic value. (For more, see The 3 Most Timeless Investment Principles.)
Disclosure: At the time of writing Ryan C. Fuhrmann did not own shares in any company mentioned in this article.
Interview Warren Buffet in Switzerland: Buying a Business
Invest in what you understand and in business that is easy to evaluate.
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