Investments with people problems Metis Life Investment Seminar Gary Connolly, MD iCubed September 20141

Is this you?  The great back-handed compliment September

“We have met the enemy and he is us.” Pogo September

Investments With People Problems September

5 Performance Chasing September 2014

Agenda September Investment With People Problems 3 Metis Approach 2 Emotional Risks: Fear, Greed & Temptation

7 Investments with people problems  “Here’s your ideal portfolio; it’s mathematically optimal for your level of long-term risk tolerance and financially efficient. Now it’s your problem!”  Places huge emotional burden on investors.  Ignore the problem…Financial Services Industry has a lot to answer for.  We don’t live in the future.  Following the optimal prescription for long-term performance tremendously difficult from an emotional perspective. September 2014

8 Investments with people problems  How much are you willing to pay to sleep at night?  No room in classical finance theory for such sentimentality.  Traditional finance says “zero”.  A moderate-risk investor missing out on c 4–5% per year. September 2014

9 Investments with people problems  It’s not rational to aim for an “optimal” solution but also not rational to not participate at all for reasons of emotional comfort.  Clients need to:  Be coached about short term v long term.  Returns and return patterns - expectations matter.  The value in committing to a plan.  Advice!! September 2014 Casual commitments invite casual reversals

Agenda September Emotional Risks: Fear, Greed & Temptation

Fear, Greed, Temptation  Fear lies at the heart of the psychology of bear markets.  Emotion has primacy over cognitive functions. September

Would you accept this bet?  Imagine being offered the following bet:  Bet €1 on a flip of a coin with payouts:  €2.50 for win (€1 stake + €1.50 profit)  Lose the €1 otherwise.  Would you invest? September

Psychology of Bear markets September

Implications for Investors  When taking risk is rewarded over LT, players who can’t feel fear perform better  Fear drives people to ignore bargains if they have experienced previous loss September

September Greed...

September Greed...

September Greed...

September Greed...

September

20 Temptation... Engagement Ring 16 Bagger Bought Shares September 2014

Investing & Emotions  Investment should be influenced by  Current situation, i.e. degree of value on offer  Not governed by our prior experiences  Blank slate – mentally very difficult.  Plan… September

Agenda September Metis Approach

23 A Sound Framework September 2014 “A sound intellectual framework for making (investment) decisions, and the ability to keep emotions from corroding that framework”  Buffett c. 1998

24 Should I go to the gym more often?  Non-members  No-strings fee of $10 per visit.  People preferred $70 per month for unlimited access.  BUT members only attended 4.3 times a month on average  $17 per visit!  The authors concluded “clear evidence of overconfidence about future self control.” September 2014

25 Casual commitments invite casual reversals September 2014  Need a proper investment plan.  Successful investment not about IQ, connections, or social status.  Psychological restraint/ self control.

Short Termisim “You can’t produce a baby in one month by getting nine women pregnant” Multiple Choice Question…Who Said The Following: September

Short Termism September

28 Investing should be  Like watching paint dry...  It’s serious and should not be driven by excitement  When treated that way invariably ends badly. September 2014

Average Holding Period for Stocks September

30 Monitoring Performance…  Compel clients to read (& sign) a document called Monitoring Portfolio Performance September 2014 Casual commitments invite casual reversals

31 Return Expectations September 2014

32 Summary  No easy answers, but some simple concepts.  Regularly rebalance.  Don’t over-monitor your portfolio; focus on the big, long-term picture, not on the details.  Make fewer changes to your portfolio than you are tempted to.  Plan – know where you are going.  You need someone unemotionally connected.  Karl & Carl! September 2014

33September 2014 Disclosure iCubed is an investment training, research and consulting company for financial advisers. This document is intended for professional investors and should not be distributed to retail investors. iCubed has based this document on information obtained from sources it believes are reliable but which have not been independently verified. The opinions contained in this document are based upon publicly available information at the time of publication and are subject to change without notice. Thank You