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"Trees do not grow to the sky. The Exchange is made of the same tree " Investing July 31, 2004 No. 1595. In exchange, he is still naive to think that actions can beat records on records without ever losing momentum. No technical revolution, also important as it was, has managed to make linear economic development and its corollary, that of the markets. At best, the upward movements may conclude with a soft landing, usually by a sharp correction. We must therefore resist the temptation to know, very strong, while seeing pink when the economic environment appears to be excellent and that the scenario of a continued rise is a consensus. This requires going against a type of reasoning largely intuitive.
Confirmation bias
Similarly, it is natural to think that what happened yesterday was very likely to recur today, even more so than to think that today will completely overturn yesterday. This reasoning more analog logic affects all investors, individuals and more professional. Researchers in finance have shown that such financial analysts tend to extrapolate the evolution of future performance of the past performance and does not perceive the delays with inflections or reversals of trend. This behavior is often considered as to the origin of the phenomenon of overshooting market. 
"Buy to the sound of cannon, the sound of violins sell"
Invest 14 August 2004 No. 1597. is when everything goes wrong that the best deals are. Conversely, when everything goes well, it's often time to sell and realize its gains.
markets, far from being efficient, in fact suffer from a chronic ailment that may make them diverge significantly from the fair valuation: the overshooting. Specifically, markets overreact to increase when the news is favorable and overreact to the decline when it is bad.
The herd behavior
At the base of these movements are exaggerated by a confirmation bias, presented in the first article of the series (Invest, 31 July), and other behaviors groups called herd. A herd behavior occurs when an investor makes a decision not because his analysis suggests that it will prove profitable, but to mimic the behavior of other investors. He may use this facility if it has lost confidence in him or if he has the visibility of the market is low. Bear markets, where accumulating capital losses, and chaotic markets, for example in times of political turmoil, are propitious to mimicry. More generally, herd behavior are fueled by the fear of everyone making less than others and having to admit mistakes and personal boundaries. This tendency to always compare themselves to others leads to standardization of views and decisions. It explains the temptation to participate in the markets means even when considered unreasonable. It also reflects the propensity to buy in markets overbought and oversold market sale.
Taken together, the herd behavior of investors are fueling a change in spurts. Rather than follow economic developments, the markets progress through phases of excessive rise and then drop excessively. The titles alone are experiencing a similar fate. The finance professors Richard Thaler and De Bondt Warner revealed a phenomenon of overshooting action. How
consider
When a title is sanctioned (and vice versa acclaimed) by the market, it is sustainable - for several years - to experience a correction phase as long. So that actions that most sousperforment over three to five years are generally those that outperform the next period and vice versa.
Excess volatility is an intrinsic component of the Exchange, to do with it. In the short term, it is possible to profit by buying securities whose prices climbing sharply and selling those whose prices are falling. It is the management of his violin, known as "momentum." In the medium term, however, it is appropriate to adopt a management "contrarian" who is to capitalize on titles that have long been massacred by the market (the sound of cannon).
In both cases, the analysis point in time the market can not overshadow fundamental analysis without which investment becomes excessively risky.
"We're not trying to catch a falling knife"
Investing August 7, 2004 No. 1596. Although that this is risky, it is tempting to buy a stock now "undo", especially when it is that a large company in the listing, we know enough to know it is not used to be severely punished by the market.
The opportunity seemed too good to not enjoy it. It seems so obvious that it must act quickly before the track returns to a normal course, so that the reflections on the causes of the fall is postponed. How to explain that in these moments, one is sure to be right and that the market is wrong?Overconfidence
On basis of such behaviors, there is the tendency of everyone to overestimate their abilities. This distorting prism with which we look is believed to control events at a level well above that which they actually control. In exchange, it leads to underuse and misuse of information available and by excessive transactions. Investors believe too often understand the market and anticipating their short-term fluctuations. So, they buy and sell very often to take advantage of "bargains".
The finance professors Brad Barber and Terrence Odean, for example, analyzed the records transactions of customers of a broker between February 1991 and December 1996. They found that the average turnover rate portfolios (that is to say, the total sales divided by the value of the portfolio) reached the incredible level of 75% per year. They also showed that it was the most active investors in the end that show the worst performance. Comparable raw data from one class to another investor, performance is markedly different once brokerage fees deducted. Finally, there is evidence that men suffer more overconfidence than women. They spend more money and time in personal analysis actions, have less confidence in their advisers, are more active and take more risky positions. If overconfidence is a structural psychological bias, however its magnitude depends on the context. It is never as important as when the investor accumulates capital gains, for example in a bull market.
Recipes for correct
Overconfidence feeds asymmetrical accounting of its successes and its failures. The investor keeps in mind that his successes, he does credit to his personal ability. The losses, they are forgotten or placed on on account of bad luck. A rigorous accounting of its operations on the stock market can therefore correct this distorted view of reality. Similarly, the accurate monitoring of its performance and comparison with those of reference (benchmarks in Anglo-Saxon parlance) that are the stock indices and portfolios of writing indicate the cost (or profit) associated with continued management of any personally.
"It is better to cut the hand arm"
Investing August 21, 2004 No. 1598. What investor
Presented this way, the case seems grotesque: nothing seems simpler than selling such "losers" to buy other titles, more promising. And yet ... If there is such a gap between the theoretical behavior and rational behavior observed is that the recommendation is not so easy to follow.
The loss aversion
The psychological bias that best explains the investors' decisions ... and their errors is probably the risk aversion. Discovered in 1979 by Nobel Laureate Daniel Kahneman and Amos Tversky, this bias reflects the human tendency to feel a loss (or lack-of-winning) twice as painful as gains are nice. The consequences are immediate exchange: the investor is doing all it can to not sell a line loss, relative to the purchase price or another reference price. It thus takes practice to sell winning stocks - so you do not regret it if the price were to fall - and keep losers in the portfolio securities.
The loss aversion is proven by multiple studies, the most famous is the one conducted by Terrence Odean, a professor at the University of Berkeley (California), over 10,000 individual securities accounts in the period 1987-1993. Odean shows that loss aversion is both frequent and very costly because the securities sold (which were winners) fared better than the securities held in portfolio by 3.4% per year on average! Other studies have also demonstrated that loss aversion also affects professionals although there are less sensitive than specific.
Underlying this bias is, as was already the case for herding behavior, the tendency of men to seek in their decisions of personal pride and above all to avoid regret and self-questioning.
Recipes to correct this bias
Researchers have indeed proven that this is not a naive application of a "precautionary principle" (never realized its losses and all realized gains , so small they are, to be sure of making money), noting that investors sell their winning stocks when their growth is individual, so they keep them when prices go up with the market. In one case, investors may consider that he had the hollow nose, not the other.
The loss aversion can be corrected only through a radical change in the way of understanding its portfolio. A control line at past performance must be replaced by an overall portfolio management to maximize future performance. To facilitate this, we can keep in mind what it costs to stay glued to a title (Eurotunnel. ..). Or repeated proverb that other fellow: "You can not make a beautiful garden by cutting the flowers and watering the weeds."
Investing August 28, 2004 No. 1599.
Unlike the first four proverbs in our series, the latter proverb does not denounce a psychological error, but rather, supports it. By suggesting different treatment losses realized and losses "paper", it reinforces the tendency of investors to know tough decisions.
status quo bias
The researchers found that economic behavior is often guided by an aversion to change. The individual generally seems to regard the status quo as a legitimate benchmark against which performance must be calculated. Given the aversion to losses, any decision involving a change from the current situation poses a risk that individuals are often refuses to take. However, maintaining this status quo is a decision in itself, which also may result in loss or regret.
In exchange, the status quo bias explains why investors are often reluctant to part with titles just because they are already in its portfolio when it considers them more as good investments. Samuelson and Zeckhauser, of Boston University and Harvard, for example, shown in a laboratory experiment in which an investor receiving an inheritance saw his decision to allocate funds largely influenced by the initial composition of the legacy. More generally, this means that the investor gives assets worth more than their true value ... and request a premium "psychological" to sell them. This premium status quo in some cases may be matched by a premium "emotional", which makes it more difficult to sell.
is particularly the case when a title has garnered comfortable gains before then lower or when it is held long in the portfolio, making traveling companion figure to the investor.
At purchase, the status quo bias can lead to paralysis true when choosing securities. If multiple values meet the criteria specified by the investor, it may well not select any if it fails to prioritize. He would rather wait to have new elements that will facilitate their choice. The wait can be long and make the hypothetical transaction.
Recipes for correct
To evacuate through the status quo the investor must constantly put in the position of someone who builds a portfolio and then searching for the best titles for the new portfolio. Past performance no longer exist, only future ones are watched. If in this period, sales of existing lines is too difficult, the investor must be convinced that there is a lack important to win to keep its old titles rather than exchanging them with other cons of proven potential.
This reasoning is also where the purchase is a problem. When multiple securities are considered promising, it is best to choose one, even arbitrarily, rather than to let him sleep in cash from his account.
Anthony Zaccaria, RMM Distribution, GH, Mickaël Mangot, doctoral student in economics, author of The Stock Exchange Behaviors - 6 psychological mistakes that are costly, Gualino editor.
Beware payments of stock dividends
choice on a case by case basis.
Due to the recent decline of the market, opt for a payment of stock dividends is not clear this year. Automatic enrollment is not recommended.
Tis the season of general meetings (AG), following the payment of dividends for fiscal 2009. Most companies prefer payment in cash, but some suggest the possibility for shareholders to elect payment in shares. Generally attractive, this option is not always this year given the recent fall in markets. It remains valid for some values. We identified all companies that have already organized their AG and for which the choice of subscription is still possible for a few days. Opt for payment in shares would gain a little more than 1 € for
BNP Paribas,
Rally
and
Societe Generale. The profit is nearly 3 € for Mersen (ex Carbone Lorraine
)
Michelin
allowing optimum operation. Conversely, it is preferable, based on the course of Thursday evening, opt for a cash payment to the Credit Agricole
,
Eramet, Ingenico, Scor,
Vinci
and Veolia Environnement . In any because, given the current market volatility, it is best to wait until the last moment to decide. This is an opportunity to review the matter.
The price of shares delivered in payment of a dividend is generally calculated as follows: the average of the last 20 trading days preceding the general meeting shall be calculated, then a 10% discount is applied. To this amount is then removed the value of the dividend in cash. The share price is lower more than 10% to the average share price the previous month. This discount is the maximum allowed by law, although some, like the UMP Louis Giscard d'Estaing, wish to bring the legal limit to 18%. The shareholder has one week to one month - depending on the case - to play its option, otherwise it will be paid in cash. Investors are well advised to accept payment in shares as the stock price exceeds the price of the stock dividend. What is often the case in calmer times. But if at the time of the decision, the share price is lower than the price the stock dividend, shareholders prefer to receive their dividend in cash. That is what is happening in a number of cases.
period fluctuating selection
Cooling-off periods vary from one company to another for several reasons. If the shareholding is dispersed abroad, postal delivery times bulletins option prolong the reflection period. A company may also wish to follow a predefined schedule. Rally, for instance, is paying its shareholders around May 20, where a relatively short period of reflection. one hand, companies want to leave sufficient time for shareholders to enable them to receive newsletters, fill out and return them. On the other hand, the period must be short enough to pay as soon as possible those who have chosen a payment in cash. If these deadlines are at the discretion of the companies, the payment of stock dividends must be implemented no more than three months after the holding of the meeting. Last year, one third of the largest French companies had proposed a dividend payment in shares and shareholders had used their options in the vast majority of cases. The scrip had permitted the payment of dividends despite the crisis and the financial difficulties experienced by businesses. Indeed, the impact on cash is zero. Distinct in lean times. Johann Corric
A variable schedule. Cooling-off periods for payment of the dividend in shares vary by company. The differences are nevertheless limited schedules and relatively close.
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