Psychology of Investing

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• Psychology of Investing

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• Goal Setting

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Life calm and serene..one minute
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Attitude Knowledge Confidence

• Having the right mental approach is as important
  with investment as it is for business.
• If we understand the fundamentals we wont panic
  in the cycles this is where most novices
  fail..!

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Goal setting is a powerful process for thinking
about your ideal future, and for motivating
yourself to turn that vision of the future into
reality.   The process of setting goals helps you
choose where you want to go in life. By knowing
precisely what you want to achieve, you know
where you have to concentrate your efforts.
You'll also quickly spot the distractions that
would otherwise distract you from your course.  
Goal Setting
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Goal Setting

• More than this, properly-set goals can be
  incredibly motivating, and as you get into the
  habit of setting and achieving goals, you'll find
  that your self-confidence builds quickly.

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Focus

• Goal setting techniques are used by top-level
  athletes, successful business-people and
  achievers in all fields.
• They give you long-term vision and short-term
  motivation.
• They focus your acquisition of knowledge and
  help you to organize your time and your resources
  so that you can make the very most of your life.

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Goal Setting

• By setting sharp, clearly defined goals, you can
  measure and take pride in the achievement of
  those goals.
• You can see forward progress in what might
  previously have seemed a long pointless grind.
• By setting goals, you will also raise your
  self-confidence, as you recognize your ability
  and competence in achieving the goals that you
  have set. 

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Getting Started

• Goals are set on a number of different levels
• First you create your "big picture" of what you
  want to achieve with your life - style and what
  large-scale goals you want to achieve.
• Next , you break these down into the smaller and
  smaller targets that you must hit so that you
  reach your lifetime goals.
• Finally, once you have your plan, you start
  working to achieve it.

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Put up the Goal Posts

• The first step in setting personal goals is to
  consider what you want to achieve in your
  immediate future (or at least, in a particular
  time-frame, say, 10 years into the future).
• Setting Lifetime Goals gives you the overall
  perspective that will shape the other aspects of
  your decision making.
• Establish a number of goals across a broad,
  balanced range of the important areas in your
  life, try to set 10 year goals in some of the
  following categories

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Your income will grow as you do.

• AttitudeIs any part of your mindset holding
  you back? Is the glass half full or half empty?
  Set goals to improve your approach to new
  challenges.EducationIs there any knowledge
  you want to acquire in particular? What
  information and skills will you need to achieve
  some of your other goals?BusinessWhat level
  of success do you want to reach with your
  business?FinancialHow much do you want to
  earn by what stage?

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Link them together

• Once you have set your lifetime goals, set a 10
  year plan of smaller goals that you need to
  complete if you are to reach your overall
  objective. Then set a 5 year plan, 1 year plan, 6
  month plan, and 1 month plan of progressively
  smaller goals that you should reach to achieve
  your lifetime goals. Each of these need to be
  linked with the next

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Re-visit your goals regularly

• Create a daily to-do list of things that you
  need to do today to work towards your lifetime
  goals. At an early stage these goals may be
  research or education based to give you the
  confidence to believe that your goals are
  achievable. This will help you to improve the
  quality and realism of your goal
  setting.Finally review your plans, and make
  sure that they fit with the way in which you want
  to live your life.

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Goal Setting Tips

• State each goal as a positive statement
• Be precise and specific
• Set priorities
• Write goals down
• Keep operational goals small, one at a time
• Set performance goals, not outcome goals
• Set realistic goals

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Smart Goals

• S - Specific
• M - Measurable
• A - Attainable
• R - Relevant
• T - Timely

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Dont fear change embrace new technologies

• Remember - for things to change, you have to
  change. For things to be different, you have to
  be different.
• Before financial success can occur, personal
  growth must occur.

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Yesterday is history tomorrow is a mystery

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• Don't wait until everything is just right. It
  will never be perfect. There will always be
  challenges, obstacles and less than perfect
  conditions. So what. Get started now.
• With each step you take, you will grow stronger
  and stronger, more and more skilled, more and
  more self-confident and more and more
  successful.

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Age, education or gender are no longer barriers
to creating wealth.
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Psychology of Investing
People have been acting the same for hundreds of
years. Not much has changed since Isaac Newton
lost a fortune in the South Sea Trading Companys
fiasco of 1720. This trading company had all
the characteristics of a contemporary "hot
stock," with investors creating a mania over the
company's prospects for success. Investors
dreaming that the company would gain trade
monopolies in the South Seas sent the company's
price into the stratosphere! And, as we've seen
in the more recent past, the story ended the way
it had to ... badly! The majority of the
investors were wiped out!
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Saving Versus Investing

• In simple economies, there is little distinction
  between savings and investments.
• You save by reducing present consumption, and
  invest in the hope of increasing future
  consumption.
• Therefore, a fisherman who spares a fish for the
  next catch reduces his present consumption in the
  hope of increasing it in the future.

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• Most people have savings accounts with ATMs to
  access their hard-earned cash and be able to
  store away any extra cash in a place a little
  safer than under their mattress. A few may have
  some stocks or bonds.
• Whilst a savings account in the bank may seem
  like a safer place than the mattress to store
  your money, in the long-term it is a losing
  proposition!
• If you open a savings account at the bank, they
  will pay you interest on your savings. So you
  feel that your savings are guaranteed to grow and
  that makes you feel extremely good..

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Inflation

• However the effects of inflation will ravage
  your investment in the long-term!
• The bank may pay you 5 percent interest a year
  on your money, but if inflation is at 4 percent,
  your investment is only growing at a mere 1
  percent annually.
• Saving and investing are often used
  interchangeably, but they are really quite
  different!

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Saving

• Is storing money safely, such as in a bank or
  money market account, for short-term needs such
  as upcoming expenses or emergencies.
• Typically, you earn a low, fixed rate of return
  and can withdraw your money easily.

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Investing

• Is taking a risk with a portion of your savings
  such as by buying stocks or property, in hope of
  realizing higher long-term returns.
• Unlike bank savings, stocks and property over the
  long term have returned enough to outpace
  inflation, but they also decline in value from
  time to time.
• The rate of returns and risk for savings are
  often lower than for other forms of investment.
• Return is the income from an investment.

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Risk

• Risk is the uncertainty that you will receive an
  expected return and a return of your capital.
• Savings are also usually more liquid. That is,
  you may quickly and easily convert your
  investment to cash.
• The decision about which investment to choose is
  influenced by factors such as yield, risk, and
  liquidity. Investments may produce current income
  while you own the investment through the payment
  of interest, dividends or rent payments. When you
  sell an investment for more than its purchase
  price, the profit is known as a capital gain,
  also called growth or capital appreciation.

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Compounding interest

• Adding interest to your interest
• The shorter the payment period the more
  effective the strategy
• 2,000 _at_ 12 p.a 2,240
• 2,000 _at_ 12 p.a paid ¼ly 2,254 (12.70 )

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Dollar Cost Averaging

• Investing the same amount at regular periods
• Carefully monitor the investment
• Works best in a volatile market
• Take profits regularly
• Can produce positive results in the long term

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Dollar Cost Averaging
Yr1 Yr2 Yr3 Yr4
Yr5 Investment 2,000 2,000
2,000 2,000 2,000 Unit
Price Paid 10 4 2 6
10 Units bought 200 500 1,000
333 200 Total outlay was
10,000 for 2,233 units at 10 each with a total
value of 22,330.Investment has appreciated by
122 at a time when the market has been in a
slump.
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Margin Lending

• Same principle as a lump sum investment but using
  borrowed funds
• Monitor the Loan to Valuation Ratio
• Understand the Margin Call obligations
• The loan still as to be repaid

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Margin Call

• Three Choices
• Reduce loan by cash deposit
• Reduce loan by selling investments
• Lodge additional security
• within 24 hours.

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"Only two things are infinite, the universe and
human stupidity, and I'm not sure about the
former." Albert Einstein
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Much of economic and financial theory is based on
the notion that individuals act rationally and
consider all available information in the
decision-making process. However, researchers
have uncovered a surprisingly large amount of
evidence that this is frequently not the
case! Dozens of examples of irrational behavior
and repeated errors in judgment have been
documented in academic studies.
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• There's an interesting analogy between the way
  people drive and the way they invest money.
• Good driving schools teach "defensive driving"
  techniques. If you know what to look out for on
  the highway, you greatly improve your chances for
  reaching your destination in one piece.
• Likewise, investment advisers should educate
  their clients about defensive investing
  techniques. If you know the pitfalls, you can
  guard against some of the speed bumps that
  de-rail most investors.

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• Impatient drivers in traffic jams often pay lots
  of attention to what lane they are in and how the
  other traffic lanes are doing compared to theirs.
• If the other lane looks like it is moving
  faster, they will often swerve over in front of
  somebody else.
• Some people do this repeatedly, taking every
  opening they can find to get a slight advantage
  for themselves.
• These drivers may gain a few seconds but in the
  process, they escalate the levels of danger and
  annoyance to themselves and everybody around
  them. In investment terms, they take on much more
  risk in return for uncertain gains.

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• One of the greatest roadblocks to successful
  long-term investing is impatience, this applies
  equally to buy-and-hold investors as well as
  those who use market timing. Impatient investors
  watch the market from day to day like a hawk.
  Impatient investors are easy prey. They can be
  lured to change lanes, and change lanes again. In
  their zeal to always be "on top," these people
  rarely give any investment or strategy enough
  time to perform adequately.

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• They end up as road kill, often retreating to
  the sidelines with cash management accounts or
  bank bills while their more patient counterparts
  build their wealth in the slower lanes. Patient
  investors who make investments and stick with
  them for years or decades, with or without market
  timing, aren't likely to have exciting stories to
  share at BBQs. However, they are more likely to
  retire comfortably and more likely to sleep well
  along the way and be able to devote their
  attention to other things in life. These people
  may seem unexciting, but they are true "Road
  Warriors

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WHAT'S YOUR STYLE?

• Whether you realize it or not, whenever you take
  the wheel of your car, you have a driving style
  that's all your own. There's a certain amount of
  risk you are willing to tolerate and a certain
  amount of frustration that you are also willing
  to tolerate..

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• Likewise, you have your own style of investing.
  You can tolerate some level of risk, but you
  probably get quite nervous once you get past the
  boundaries of your personal comfort zone. How
  well do you handle mistakes? Do you welcome them
  as an opportunity to learn more about yourself
  and about investing? Or, do you feel compelled to
  find somebody or something else to blame when
  something goes wrong?
• How quickly will you abandon the route you have
  chosen in search of something better? Some
  drivers will leave a clogged freeway in the hope
  they can find any alternative with less
  frustration, even if they can't actually see such
  an alternative route.

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Cut Dried

• Investing is a rational, mechanical process that
  starts with some basic decisions such as
• How much time do I have to achieve my investment
  goals ?
• What is my forecast rate of return and my level
  of commitment to it ?
• How much money do I have now, and how much will I
  need to have at retirement ?
• What assumptions do I make about the rate of
  inflation ?
• From these, I can figure out the rate of return I
  will need to get from where I am to where I'm
  going. Then I can determine what type of asset
  will produce the return I need. All of this is
  pretty cut and dried. The calculations could be
  made by a computer.

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However its really quite emotional

• The next logical question is psychological Can
  I tolerate the risks involved in the asset class
  that will take me to where I want to go ?
• If the only way to achieve your goals is to
  speculate on commodities or "bet the farm" on
  your ability to sell stocks short just before the
  market goes down, you'd better have an awfully
  strong stomach and probably a Plan B for your
  retirement.

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Investment Roadblocks

• Focusing on hope (and sometimes hype) while
  ignoring risks. Managing risk is at the heart of
  successful investing
• Making emotional decisions instead of disciplined
  decisions.
• Being unclear about what you believe and how you
  intend to invest in the face of uncertainty.
• Focusing excessively on individual components of
  your portfolio instead of the whole.
• Taking too much risk. People with relatively
  small amounts of money tend to take too much
  risk, while those with large amounts take too
  little risk
• Being unwilling to take a loss.
• Failing to manage your expectations.

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Summary

• When it's your money at stake, you should be the
  one in the driver's seat, even if you take
  directions from someone else. The best way to
  keep your hands on the wheel is to have a plan
  that will work for you, then stick to it. Do that
  by understanding the difference between your
  financial needs and your emotional needs. A good
  investment plan will help you achieve the total
  return you need to meet your own personal
  financial goals and time-table

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• One of the biggest mistakes that investors make
  is to chase performance. Whether it be changing
  investment advisors, switching newsletters,
  transferring between funds, or purchasing a new
  fund, the common goal for the investor is to be
  in the hottest fund. Unfortunately, they're often
  in the wrong place at the wrong time.

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Year 2000 Hot Funds

• Warburg Pincus Japan Small Company Up 328.7 in
  1999
• MAS Small Cap Growth Up 313.9 in 1999
• Japan Growth Up 279.9 in 1999
• Monument Internet Up 273.1 in 1999
• Amerindo Technology Up 248.9 in 1999

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Fast forward to Jan 2001

• "What goes up, must come down"
• Warburg Pincus Japan Small Company was down 71.8
  
• MAS Small Cap Growth dropped 23.1
• Credit Suisse Inst. Japan Growth shut down and
  returned assets to investors, but not before it
  lost almost 60 of its value
• Monument Internet tumbled 56.4
• Amerindo Technology fell 63.9

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Business Cost 500,000, Return 250,000 Yield
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• Residential Property

• Commercial property

(Risk)

• Cost - 500,000
• Rent - 25,000
• Yield - 5

• Cost - 500,000
• Rent - 50,000
• Yield - 10

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• Property versus Shares

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• Objectives

• Identify the fundamental differences between an
  investment in residential property and an
  investment in ASX listed company shares.
• Give you an understanding of the various options
  available for investment in both sectors
• Understand the essential differences when
  leveraging into these asset classes
• To provide you with information with which you
  can make informed decisions

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Over 300 years of booms and busts
demonstrate that human nature changes very
little, if, at all. The inescapable lesson of
history however, is that wealth building takes
time, work, good savings habits and very
importantly the emotional discipline to shy away
from get rich quick schemes and investment fads

• Nothing Changes

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In all investment segments there is no substitute
for experience and, for most people this doesnt
come until late in life. In fact experience
should be measured in terms of decades rather
than years
We also need to understand that government
regulation and licensing provides no guarantees
against incompetence or malpractice and that even
the biggest institutions and their expert
analysts make mistakes.
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Investors should seek a thorough, research driven
selection process which is combined with active
and disciplined capital management. The aim is
to capture trends in industry sectors through
processes which have been both mathematically and
empirically tested. This methodology if applied
to property or share investment will deliver
consistent, positive returns in all market
conditions.
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Subjective views and gut-feel should not cloud
investment decisions. Discipline should be
fundamental to all portfolio structuring. By
using methodology to minimize the risks inherent
in traditional investment styles you can insulate
investment decisions from the emotional biases
that exist in traditional analysis.
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Investment Outcomes
Property
Shares
Growth Income Tax Benefits Risk Liquidity
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Performance Drivers - Shares
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Performance Drivers - Property
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Property Investment Options
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A Protective Shield
Investing successfully requires long term focus
and commitment. Whether the asset class be
property or shares a clearly defined risk
management system will allow you to monitor your
portfolio to ensure that your investment risk
will remain within expectations.
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Emotional Check-list

• If you don't invest ...You will lose.
• If you don't manage risks ...You will lose.
• If you follow tips ...You will lose.
• If you don't investigate before you invest You
  will lose.
• If you panic ...You will lose.
• If you want to speculate ...You will lose.
• If you don't understand your finances You will
  lose.

• If you don't use dollar cost averaging .You will
  lose.
• If you want to play ...You will lose.
• If you are greedy ...You will lose.
• If you place all your eggs in the same basket You
  will lose.
• If you don't know when not to invest You will
  lose.
• If you can't afford to lose ...You can't afford
  to make a profit.

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• A stockbroker is someone who invests your money
  till it's all gone!

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• Stockbroker What is a million years like to
  you?God Like one second.
• Stockbroker What is a million dollars like to
  you?God Like one penny.
• Stockbroker Can I have a penny?God Just
  a second

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• The safest way to double your money is to fold
  it and put it in your pocket.

Homer Asian Pacific Forest Lake
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Calm seas dont make good sailors

• Twenty years from now you will be more
  disappointed by the things that you didn't do
  than by the ones you did do.
• Ric Hayter

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• Psychology of Investing