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

2. Is this you?  The great back-handed compliment September 2014 2

3. “We have met the enemy and he is us.” Pogo September 2014 3

4. Investments With People Problems September 2014 4

5. 5 Performance Chasing September 2014

6. Agenda September 2014 6 1 Investment With People Problems 3 Metis Approach 2 Emotional Risks: Fear, Greed & Temptation

7. 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. 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. 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

10. Agenda September 2014 10 2 Emotional Risks: Fear, Greed & Temptation

11. Fear, Greed, Temptation  Fear lies at the heart of the psychology of bear markets.  Emotion has primacy over cognitive functions. September 2014 11

12. 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 2014 12

13. Psychology of Bear markets September 2014 13

14. 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 2014 14

15. September 2014 15 Greed...

16. September 2014 16 Greed...

17. September 2014 17 Greed...

18. September 2014 18 Greed...

19. September 2014 19

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

21. 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 2014 21

22. Agenda September 2014 22 3 Metis Approach

23. 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. 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. 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.

26. Short Termisim “You can’t produce a baby in one month by getting nine women pregnant” Multiple Choice Question…Who Said The Following: September 2014 26

27. Short Termism September 2014 27

28. 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

29. Average Holding Period for Stocks September 2014 29

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

31. 31 Return Expectations September 2014

32. 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

33. 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