Meir Statman of Santa Clara University is a professor of behavioural finance. Behavioural studies in finance have become a rage over the past few years-behavioural finance, in brief, tells us that market participants are not always rational!
Professor Statman says that ‘index funds are fabulous’ in a recent interview with Morningstar, titled, Knowing Others’ Mistakes Won’t Make You Rich.
In the interview, he also gives a few examples of cognitive errors that people tend to make, some excerpts,
“...there is a range of cognitive errors that people commit, and it's important for people to know that. For example, mutual fund companies tend to advertise their most successful funds, the ones that have five stars from Morningstar.
Well, investors are left thinking that it's very easy to get a very successful fund. They never advertise their one star funds, and so you have to be aware that because mutual fund companies do that it tilts your view as to the likelihood of success. And so you should tilt it back, and say wait a minute, this cannot happen.
Hindsight is another one that is very important to guard the gains. It is very easy for all of us to say that in 2007 we knew for sure that the market is going to be terrible in 2008.
If you actually had people write down in pen what they thought in 2007 at the time you would find that they said maybe it will go down, but then maybe it will not go down until 2009 and so on.
But now when we get to be in 2010 they remember only that they knew that the market is going to go down, and that really is hindsight that is speaking. So these are two of more cognitive errors that get in the way.”
Link to the interview,
I believe, Indian markets are getting increasingly competitive with an ever increasing number of professional participants-a short list-would include active investors such as: MF managers, PMS managers, Insurance scheme managers, FII and hedge fund managers, treasury managers, other institutional investors, analysts, stock-pickers and so on and so forth.
With the presence of numerous brilliant, competitive and highly motivated participants-it is not easy, for individual professionals to find and exploit mistakes / pricing anomalies-i.e. consistently.
Asset allocation to passive indexes (ETFs / funds) is important as markets become more competitive & efficient thus resulting in a reduction of pricing mistakes and anomalies!
No comments:
Post a Comment