Behavioural Finance, Indexing and the Value Strategy : An Analysis on Market Behaviour and Approaches to Investing
Kunnas, Kasimir (2017)
Kunnas, Kasimir
Metropolia Ammattikorkeakoulu
2017
All rights reserved
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-201705036178
https://urn.fi/URN:NBN:fi:amk-201705036178
Tiivistelmä
Research suggests that in the long run, stocks have provided a better return than real estate, gold, bonds, treasury notes or other forms of investments. Many, however, see stocks as risky, and assume that in order to generate higher returns, more risk has to be taken. Some people feel that the market is just a “play field” of the wealthy and the greed of a few can cause great harm to many. This might be true to a certain extent, but the author believes it is more complicated than that.
The purpose of this thesis is to examine how human behaviour affects the market, how over enthusiasm leads to bubbles and bursts and how individuals can participate in the market without the fear of permanent loss of capital. There are two methods to individual investing that are up for analysis: Indexing and Value Investing. To put it simply, Indexing only refers to “owning the entire market” and the returns it generates are usually held as comparison benchmarks to other forms of securities investments.
The author believes that Indexing is the wisest path for the absolute majority of individuals. It is a simple way to participate in the market without having to give it much thought. For those who are enthusiastic about finance and specifically, security analysis, the author examines Value Investing. Strong evidence suggests that in the long run this contrarian strategy has provided returns that are, to quote its founder Benjamin Graham: “Quite Satisfactory”. Value Investing does not require a tremendous IQ or anything linked to this type of intelligence, but rather emotional stability (in times of strong market turbulence), patience, fundamental analysis and the willingness to “look foolish at times”.
Whether one believes in the Efficient Market Hypothesis (EMH) or not is irrelevant. Both believers and non-believers alike can participate in the market and receive their share of it. The author believes that what matters is not trying to predict the future, but rather focus on “securing the downside” first. Psychological studies indicate that it is emotionally a much stronger sensation in losing money than any possible gain. The question of participating in the market is not so much about having the brains for it, but rather, having the stomach for it.
The purpose of this thesis is to examine how human behaviour affects the market, how over enthusiasm leads to bubbles and bursts and how individuals can participate in the market without the fear of permanent loss of capital. There are two methods to individual investing that are up for analysis: Indexing and Value Investing. To put it simply, Indexing only refers to “owning the entire market” and the returns it generates are usually held as comparison benchmarks to other forms of securities investments.
The author believes that Indexing is the wisest path for the absolute majority of individuals. It is a simple way to participate in the market without having to give it much thought. For those who are enthusiastic about finance and specifically, security analysis, the author examines Value Investing. Strong evidence suggests that in the long run this contrarian strategy has provided returns that are, to quote its founder Benjamin Graham: “Quite Satisfactory”. Value Investing does not require a tremendous IQ or anything linked to this type of intelligence, but rather emotional stability (in times of strong market turbulence), patience, fundamental analysis and the willingness to “look foolish at times”.
Whether one believes in the Efficient Market Hypothesis (EMH) or not is irrelevant. Both believers and non-believers alike can participate in the market and receive their share of it. The author believes that what matters is not trying to predict the future, but rather focus on “securing the downside” first. Psychological studies indicate that it is emotionally a much stronger sensation in losing money than any possible gain. The question of participating in the market is not so much about having the brains for it, but rather, having the stomach for it.