Behavioral finance combines the study of human behavior and cognitive psychology with traditional economic and financial theory to explain why people make irrational decisions that can lead to investment mistakes, including the mispricing of assets (which are called anomalies). The field has gained an increasing amount of attention in academia over the past 15 years…
Ken Griffin is a hedge fund manager with an enviable net worth of $7 billion. According to published reports, he recently settled a contentious divorce dispute with his wife, Anne Dias Griffin, shortly before it was scheduled to go to trial. There was a lot at stake. His wife claimed Griffin earned an unbelievable $100…
Last week, I wrote about an experience I had with a broker who took offense at the use of the term “broker” in a talk I gave to a group of investors. I found that odd because he is employed by a large brokerage firm. So I asked what he wanted to be called, and…
If a financial adviser doesn’t know what’s going on in a client’s life, the advice will suffer. Here’s one easy way to fix that. True story: Many years ago, I was meeting with a married couple for an initial data-gathering session. Halfway through the three-hour meeting — the first stage in developing a comprehensive financial…
Anna Cieslak and Pavol Povala—authors of the paper “Expected Returns in Treasury Bonds,” which was published in the September 2015 issue of The Review of Financial Studies—examined the time variation in the risk premium that investors require for holding Treasury bonds. While most of the authors’ analysis relies on data starting in 1971 (when data…
In personal finance, almost all of the advice we come across seems to focus on playing defense. We’re always looking for ways to build bigger and better walls to protect ourselves from bad behavior: Cut up the credit cards. Pay only with cash. Stick to a budget. Hide the passwords. It’s all good advice, but…
On paper, your investments in stocks, real estate or even cash may look like your greatest assets. While all those things are superimportant, you have something else that’s even more valuable. It’s the investment called you. Finding ways to increase your value while doing the things you love may be the most important thing you…
For many market observers and participants, billionaire Seth Klarman resides in the same “ZIP code” that Warren Buffett once called the home of superstar investors: “Graham and Doddsville.” Klarman is the well-regarded founder and CEO of the Baupost Group, a Boston-based private investment partnership with nearly $30 billion in assets under management. He has also…
In a series of previous articles on Seth Klarman’s book, “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor,” I showed how his statement that indexing assures mediocre returns was very clearly incorrect. I demonstrated as well that many of his additional contentions about indexing and market efficiency were also false. Today I’ll…
Professors Eugene Fama and Kenneth French have a new paper, “Incremental Variables and the Investment Opportunity Set,” that provides some important insights for investors considering funds designed to supply exposure to multiple factors, or styles, of investing. In their study, they note: “Much asset pricing research is a search for variables that improve understanding of…
This document covers several key issues as you plan for retirement and is divided into four sections: Section 1: Determining How Much to Save and Spend Section 2: Portfolio Management Section 3: Risk Management Section 4: Maximizing Social Security Benefits Section 1: Determining How Much to Save and Spend Estimating a Retirement Spending Amount If…
In a podcast interview posted last week, Tim O’Neill, global co-head of Goldman Sachs’ investment management division, warned investors that if passive investing gets too big, the market won’t work. He then added: “So in terms of the size, a market needs both active and passive investing, because if everybody’s a passive investor, there’s no…
Every January, I put together a list of predictions that financial “gurus” have made for the upcoming year, especially the ones that gain consensus as “sure things.” I then keep track of whether these “sure thing” forecasts actually came to pass, through a series of periodic updates. The inevitable turn of the calendar into October…
My book, “Investment Mistakes Even Smart Investors Make and How to Avoid Them,” covered 77 common errors I believe investors commit all too often. I know today there’s at least one more I should have included: discussing individual stock buys or sells at the water cooler. Evidence from the field of psychology emphasizes the strength…
Imagine a hypothetical guy who lives a responsible financial life. He’s focused on meeting his obligations, even though he doesn’t have a big cushion when it comes to his take-home pay. Things are tight. He’s not quite living paycheck-to-paycheck, but it’s close. Then one day, an external shock completely outside his control occurs, and it…