In this post, I continue the discussion of behavioral finance with examples of some of the key behavioral biases and where they can be seen in recent market behavior. The specific focus of this post is those biases that drive investment fads and bubbles.
It is almost invariably the risk that we ignore that really hurts us. The market today is, for the most part, discounting inflation risk. Historically, inflation has been a major threat, especially to bond investors. Today, with yields at historic lows, the implied inflation expectations are exceedingly low. The process by which the market comes up with rationales as to why a risk, that has historically done major damage, no longer matters is at the heart of every bubble. We have had the housing bubble (in which investors became convinced that houses were an infinite source of capital appreciation), the Tech bubble (in which investors decided that valuations based on earnings were irrelevant) and now the government debt bubble (in which investors are implicitly assuming that inflation risk is no concern). The bubbles get out of control largely because people assume that what has worked recently will continue to work. Continue reading →
Facebook recently filed for an initial public offering (IPO) to raise $5 billion in its IPO, putting its total valuation at $100 billion. Many investors, both institutional and individual, are drooling over the prospects of buying into the hottest company on the block – for now.
I say for now, because other investors are questioning how profitable the social network is, how fast revenues are growing, and whether the company is worth a $5 billion valuation. (It will be three times more expensive than Google was at its IPO).
Thus the question: should the typical Joe Investor consider investing in Facebook or any other hot company? Continue reading →
The article suggests that the traditional process of seeking employment or demonstrating your work history and capabilities, (a.k.a. the résumé), is becoming far less relevant. Now anyone who cares about your work experience or professional accomplishments, can simply Google your name and find out for themselves. Continue reading →