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Wednesday, January 4, 2017

Top 9 Biased (And Bearish) Investment Picks For 2017

Top 9 Biased (And Bearish) Investment Picks For 2017
Seeking Alpha

Behavioral investment biases have led to excesses in history and our learning curve is not steep.

The top 9 stocks that are subject to distinct behavioral investment biases, presenting opportunity in 2017.

Tesla is subject to multiple biases, in my biased opinion.

It is the new year and it is the time for resolutions and forecasting lists. I do not know what it is about lists, but for some reason my likelihood of reading something drastically increases if it is presented in list form! Information presented in a list instantly becomes more interesting and credible.

Now admit it, you are subject to it too. You know that "the 10 facts about Trump he does not want you to know" article suckered you into reading it! Only to find out it did not contain commentary on the picture that compelled you to start clicking on it in the first place. That is ok, you are in good company because we all do it from time to time.

There are actually a number of psychological reasons that compel you to read it. List-style headlines often provide that optimal balance of information and ambivalence, intriguing you just enough to click, on the chance that you will come across something particularly relevant or exciting, according to physiologist Maria Konnikova.

Do not stop reading, though, the list in this article is different!

Behavioral biases in investment decision-making

Our investment success is undermined by biases to a much larger extent than we probably recognize, let alone are willing to admit. For most money managers there are strict guidelines and investment criteria that place guardrails around how the money is invested. An investment mandate, as it usually is called, is commonplace in virtually all funds and investment houses. Even proprietary traders at banks have restrictions put upon them. An investment mandate is supposed to prevent us from doing stupid things and to keep biases from creeping in and wreaking havoc. Having those constraints is what is attributed to traders having success, where they tend to fail when they trade privately in the absence of defined restrictions. Mandates or no, biases invariably creep in, and in the best case you lose a little money, at worst you lose your livelihood or life in the case of famous speculator Jesse Livermore

One of the best books on the subject is "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay. It describes some of the most staggering examples that have occurred in history, and it illustrates that the learning curve for human behavior is not very steep. Examples date back to the 1600s when the Tulip mania in Holland reached its peak during the winter of 1636, when some bulbs were reportedly changing hands ten times in a day for prices of over 10 times the equivalent of an artisan's annual wage. No deliveries were ever made to fulfil any of these contracts because the tulip bulb contract prices collapsed abruptly and trade came to a halt. The collapse was reportedly triggered when a sailor at a tavern - oblivious to the fact that it was a tulip trading hub - cut into a priceless tulip mistaking it for an onion. It was the unpredictable ah-ha moment that burst the bubble. Just imagine that mania, a tulip trading at the equivalent of 4 Tesla model S cars (assuming average skilled worker of $36k and $90k model S)