Princeton University psychology professor Daniel Kahneman was awarded the Nobel Memorial Prize in Economic Sciences in 2002 for a series of studies popularized in his book “Thinking, Fast and Slow.” Mr. Kahenman’s work showed that the human brain has two separate systems for thinking and problem solving, and this has profound implications for investors.
Most of the time, we are ‘thinking fast,’ using what Mr. Kahneman called heuristics – rules of thumb that simplify problems allowing for quick reactions. The brain does not like using the process, ‘thinking slow’ – higher analytical functions like mathematic or accounting skills – because it takes a lot more effort, both in terms of intelligence and concentration.
The applications of this thesis to investing are too numerous to count. Investors that are chasing rallies, for instance, are thinking fast, using a psychological heuristic that makes people feel safer in groups. Deep value investors that go through every footnote in 10 years of a company’s financial reports, on the other hand, are thinking slow.
There are more dangers for investors in thinking fast – almost by definition the process involves the over-simplification of market risks – but both can be effective. As a personal example, I successfully used a heuristic in recommending investors add U.S. dollar assets in 2013. The S&P/TSX composite index had outperformed the S&P 500 (in Canadian dollar terms) for the longest period in history. Once metals and mining stocks started wobbling, it was easy to apply the ‘what goes up must come down’ rule of thumb in terms of the domestic market’s outperformance.
The investing benefits of thinking slow are relatively obvious. Careful analysis of the economic, financial, and corporate factors that drive equity terms is the best way to manage risk and generate returns.
The important thing for investors is to recognize when they are thinking fast, and what heuristic they are using to make decisions. Some psychological rules of thumb – like the adrenaline surge of a ‘fight or flight reaction – are much better suited to an evolutionary past hundreds of thousands of years ago and result in decisions that increase portfolio risk. When to allocate brain power to thinking slow is also important, and a vital component of successful investing.
– Scott Barlow
Three big numbers to note
31 years The number of years since the British pound, also known as Sterling, traded at $1.2739 (U.S.). Sterling hit its weakest since 1985 Tuesday, pressured by a growing sense that Britain may be heading for a “hard” exit from the European Union.
$43 (U.S.) The dollar-figure decline in gold in trading Tuesday. The price of gold dropped 3.3 per cent to $1,269.70 an ounce -- below the $1,300 mark -- as investors anticipated that interest rates would keep rising. That's the biggest decline for a most-active contract since December, 2013.
63% The chance traders have priced in of the U.S. Federal Reserve raising interest rates in December, according to the CME Group’s FedWatch tool.
Stocks to ponder
Canopy Growth Corp. Canopy Growth is a marijuana producer with a focus on growth and expanding its production capacity. Stocks in this industry have continued to soar, writes Jennifer Dowty. Canopy doesn't have a dividend but has four "buy" recommendations from the firms that cover it. The average one-year target price is $5.39, suggesting there is 27 per cent upside potential over the next 12 months.
BRP Inc. This stock is up 29 per cent this year with a further 17 per cent upside forecast, writes Jennifer Dowty. BRP manufactures and markets powersports vehicles and propulsion systems and gave a strong outlook for the coming quarters when it released results last month. It does not pay a dividend. there are 11 ‘buy’ recommendations and two ‘hold’ recommendations on the stock and the average one-year target price is $30, suggesting there is 17 per cent upside potential over the next 12 months.
This chart shows us why we should prepare for a 70-cent loonie
Canaccord Genuity strategist Martin Roberge warned Canadians to prepare for a loonie at 70 cents (U.S.), writes Scott Barlow. Mr. Roberge’s methodology is based on economic surprise indexes, which measure economic data reports relative to consensus expectations. A rising line on a surprise index, for instance, means that the most important economic data releases feature results that are ahead of expectations.
Gordon Pape's High-Yield Portfolio has gained almost 12% in the last six months
In March, 2012, Gordon Pape created a High-Yield Portfolio for investors seeking above-average cash flow and who were willing to live with a higher level of risk. It's a stock-based portfolio and its had strong gains in the past six months.
Why this U.S. election could roil markets again
Global markets always pay close attention to U.S. presidential elections for hints about possible shifts in key policies or the public mood. But few contests have mattered so much to so many as the battle between free-swinging Republican candidate Donald Trump and Hillary Clinton, his more temperate Democratic opponent, writes Brian Milner. That’s mainly because Mr. Trump’s populist diatribes against the North American free-trade agreement (NAFTA) and other international trade deals, China’s trade and currency practices, illegal immigrants and the flight of manufacturing jobs appear to be resonating with a surprisingly large number of American voters.
Why this high-net-worth fund manager is buying Fortis, Enbridge and Canadian banks
The main question Christine Poole gets from investors these days is when – or if – the Canadian economy will start to recover. Ms. Poole, chief executive officer and managing director at Toronto-based GlobeInvest Capital Management, says there’s also the underlying concern about another global financial crisis similar to 2008-09. Her bet is that the Canadian economy will begin to rebound later this year, partially on the back of a steadily growing U.S. economy. As for a recession? Unlikely. She explains her investment strategy and who she's buying now.
Where can I find out how much I've made or lost in my investment account?
In this video, Rob Carrick talks with Denise Morris of the Ontario Securities Commission about how you can find out the status of your investment account as new investment disclosure rules come into place.
Use the Canada Child Benefit to invest in your children’s education
There are lots of ways to benefit from the Canada Child Benefit, Rob Carrick writes. You can use it to fund your child's registered education savings plan, or you can use it to build additional savings for your child later in life. You can help get your child started in investing, and he spells out a few exchange-traded funds that work when you want to keep fees low and don't have a ton of dough to start out with.
Why small dividend payers can be big winners
John Heinzl says many people dismiss companies with a small yield, but he says that's the wrong approach. In this video, he gives the example of two companies with a small dividend whose stock has been on the rise -- Alimentation Couche-Tard and CCL Industries.
Cyclical stocks are on this dividend investor’s watch list
This investor profiled in our Me and My Money column, has learned to research the companies he buys and has an investment plan that guides him toward stocks that match his risk tolerance and investment goals.
Don’t let the OPEC news fool you – TSX oil stocks are not yet buys
The dirty little secret in the money game is that nobody can forecast consistently with any precision. And that’s especially the case when there are supply and demand dynamics at play, writes Larry Berman. The strategic investor should accumulate when oil prices dip next to the $35 to $40 range in the coming months. Chasing this week’s OPEC news is probably a losing strategy, save for the savviest of day traders out there.
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What’s up in the days ahead
John Heinzl explains why he's buying even more shares of Fortis in his Strategy Lab portfolio; Gordon Pape explains why he likes a particular monthly income mutual fund, and Norman Rothery looks at why you want to buy a company that loves stock buybacks.
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