Whether it’s the Dutch tulip craze of the 17th century or the dot-com mania of the late 1990s, there’s no shortage of examples of investors behaving irrationally.
In the world of traditional economists and finance professors, though, that’s not supposed to happen. If investors are rational decision-makers, then emotion-driven bubbles shouldn’t be possible. Yet human weaknesses can limit our ability to think clearly. Many studies of investor behavior have shown us to be too willing to extrapolate recent trends far into the future, too confident in our abilities, and too quick (or not quick enough) to react to new information. These tendencies often lead investors to make decisions that run counter to their own best interests.
The idea that investor psychology can result in poor investment decisions is a key insight of an increasingly influential field of study called behavioral finance. Behavioral-finance theorists blend finance and psychology to identify deep-seated human traits that get in the way of investment success. Behavioral finance isn’t just an interesting academic diversion, however. Its findings can help you identify–and correct–behaviors that cost you money.
What commonplace mistakes should investors avoid? Here are a few key behavioral-finance lessons worth heeding.
Don’t Read Too Much into the Recent Past
When faced with lots of information, most people come up with easy rules of thumb to help them cope. While useful in some situations, these shortcuts can lead to biases that cause investors to make bad decisions. One example is “extrapolation bias,” the overreliance on the past to assess the future. Instead of doing all the necessary and possibly tedious homework in researching a potential investment, investors instead “anchor” their expectations for the future in the recent past.
The problem, of course, is that yesterday doesn’t always tell you what tomorrow will bring. If you don’t believe us, just ask investors who swarmed red-hot technology- and Internet-focused stocks in 1999 and 2000 expecting the good times to continue. They didn’t, and most folks ended up suffering huge losses.
That’s worth keeping in mind if you’re drawn to the strong performers of recent years, whether it’s real estate, natural-resources, emerging-markets, or even small-value stocks. While these areas might not be primed for a mighty fall, investors shouldn’t expect them to post the torrid gains they’ve enjoyed more recently.
Unpredictable events, such as illness, loss of livestock, death or accidental disability, bring devastating consequences to poor households, particularly in developing countries. Worse, entire communities face upheaval from droughts, hurricanes, and earthquakes. Such risks call for some kind of safety net or other social protection mechanism. While public funds will always be necessary to help the most indigent, market-based solutions are an efficient and fiscally attractive option to meet the risk management demands of poor households and small enterprises.
Microinsurance is one such instrument for social protection. Of the estimated four billion people worldwide who live on less than $2 a day, fewer than 10 million currently have access to formal insurance from a regulated financial institution. Current work in the area of microinsurance is largely focused on delivering insurance to the poor by partnering with microfinance institutions. This approach is not sufficient, as millions of poor people in rural and other areas live far from a microfinance institution. Formal financial institutions, such as commercial banks and insurance companies, and other institutions, like community-based organizations, can also deliver and service insurance products effectively and profitably.
Microinsurance-style products have a long history of providing social insurance in industrial countries, but their reach in the developing world remains limited. This reading list explores the challenges of providing microinsurance to all the world’s poor.
This collection of resources covers the following areas in microinsurance:
Category: Uncategorized – Author: admin – 12:36 am
nvestment in Indian market
India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. No company, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies.
Success in India
Success in India will depend on the correct estimation of the country’s potential, underestimation of its complexity or overestimation of its possibilities can lead to failure. While calculating, due consideration should be given to the factor of the inherent difficulties and uncertainties of functioning in the Indian system.Entering India’s marketplace requires a well-designed plan backed by serious thought and careful research. For those who take the time and look to India as an opportunity for long-term growth, not short-term profit- the trip will be well worth the effort.
Market potential
India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is also the second largest among emerging nations. (These indicators are based on purchasing power parity.) India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business.Yet, despite the practically unlimited possibilities in India for overseas businesses, the world’s most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China.
Keiron Root looks over the details of Gordon Brown’s final Budget and discusses what it could mean for your taxes and investments. 8 May 2007 So, after much speculation, Gordon Brown delivered what is almost certain to be his final Budget speech on 21 March with his customary mixture of earnest economic theory and theatrical political showmanship. And while the headlines were dominated by the announcement that the basic rate of income tax was going to be cut to 20 per cent (albeit not until next financial year and accompanied by the abolition of the ten per cent starting rate), the devil was, as usual, in the detail.
But once the dust had settled on the forward setting of tax bands and the increases in the prices of petrol, alcohol and tobacco, what were the specific implications of the Budget for investors? Although areas such as VCTs or the taxation of investment gains could not compete for space on the front pages with the 20p tax rate, there are a number of areas within the Budget statement that will affect the way in which we invest.
Inheritance tax
The Chancellor made much of his commitment to increasing the threshold at which inheritance tax (IHT) is paid to £350,000 for the tax year 2010/11, claiming that this would help keep the vast majority of people outside the IHT net. Apart from being one of a number of long-term commitments on taxation that will seriously reduce his successor’s – whoever he or she may be – room for manoeuvre, this well-publicised development is less generous than the Chancellor seems to think.
The main reason that increasing numbers of estates are burdened with IHT is the dramatic rise in property values in many parts of the country, which has occurred over the past 20 years. Brown argues that by increasing the threshold at which IHT becomes payable from the £285,000 that applied in the 2006/07 tax year to £350,000 in four years’ time (an increase of some 22.8 per cent) he is taking more estates out of IHT.
But while this increase may be well ahead of anticipated inflation (even as measured by the Retail Prices Index), it is unlikely to be anywhere near enough to cope with house price inflation. Future movement of house prices is notoriously difficult to predict, and there are a number of different measures of the rate at which house prices have actually risen, but one of the most widely used house price indicators recently has been the monthly index produced by Halifax.
Moreover, in the period before the Budget, the Halifax index was showing one of the more conservative rises, with average house prices increasing at 9.9 per cent per annum for each of the previous three months. Taking this as a basis for future projections – and it doesn’t seem an unreasonable rate of growth for this purpose – the IHT threshold would have to increase to £415,000 in 2010/11 just to keep pace with where it is now, as the table below indicates. It looks like Mr Brown has not been quite so generous after all.
Also, the day after the Budget statement, HMRC confirmed that gifts by parents and grandparents to children under 18 would not be subject to a new IHT charge under the provisions affecting trusts introduced in the 2006 Budget, but would be treated in the same way as gifts to adults.
Provided the gift is outright and not subject to any form of contingency or trust, there is no tax payable if the donor survives seven years from the gift. If the donor dies within seven years, there will still be a charge, as with adults. Emma Chamberlain, chairman of the Chartered Institute of Taxation’s Capital Taxes Sub-Committee, comments, ‘HM Revenue & Customs (HMRC) has given a clear response to the questions that have been raised, and so those who are happy to make outright gifts to children can do so without incurring any extra IHT penalty. The gifted property will, however, be part of the child’s estate, so he or she will be able to take over the property at 18, and if he or she dies the property will pass according to his will or intestacy.’
However, she adds, ‘Parents may of course decide to be careful before allowing a large sum to be held by young children in such an unrestricted way and may prefer to impose some controls so that the child cannot obtain unrestricted access at 18, even if this involves paying more IHT.’
Total revenues reached US$24 million, with a strong and diverse mix of operating income. Net profit for the quarter was US$4.3 million. Underlying operating expenses remained firmly under control and non-staff costs were 8% lower than the first quarter of 2006. There was a significant increase in staff costs due to higher performance-related incentive payments (part of which reflected prior year ‘top-up’ payments to reflect Unicorn’s strong performance in 2006), ‘one-off’ payments and increased headcount.
The Bank achieved a series of notable business ‘firsts’ during the first quarter of 2007. In February, Unicorn closed the first Sukuk issued by a Saudi corporate in the international capital markets. The issue was launched at US$425 million but closed at US$600 million, having raised almost US$800 million. There was a strong global take-up for the Sukuk, with 29% of the amount raised coming from Europe and 7% coming from Asia.
In January, Unicorn successfully exited from its first Private Equity transaction when it sold The Gardens assisted living property in California. The Gardens was acquired in November 2004 and the sale realised an overall Internal Rate of Return (IRR) of 21%. In March, Unicorn distributed the final proceeds from its first real estate fund (KSA Real Estate Fund 1), generating a final IRR of 15.5% (significantly better than the original 10% target). The successful exits from these two early transactions demonstrate Unicorn’s ability to source and structure competitive investment opportunities and successfully exit providing strong returns to investors.
# It is advisable to do enough research to determine which providers of venture capital are appropriate candidates for possibly financing an enterprise.
# A traditional - and often reliable - means of locating sources of VC is by word-of-mouth. Check out the Who’s Who of key players, suppliers and distributors in your industry, past and current business contacts, monied contacts in the professional world (doctors, dentists, lawyers, etc.) An additional source is qualified referrals based on experience of third parties.
# Directories of venture capital investors:
The Canadian Venture Capital Association publishes an annual directory of its members; this information is also accessible on the CVCA website (see lists of links at end of this document).
There are a number of other directories of VC published in-print or online, such as The Money Book, published by Venture Alberta Magazine (see lists of links at end of this document),or Pratt’s Guide to Venture Capital Sources.
The Business Link Library has several directories of venture capital sources.
# There are a variety of online “matchmaking” services currently on the Internet which attempt to connect VC investors with suitable investment opportunities, usually for a fee. Critical judgement should be exercised in using such services, whose quality may vary. Online “matchmaking” generally has a much lower success rate than most people looking for VC would wish.
Links to websites and directories for sources of venture capital:
Links to websites with more detailed information or additional resources on the subject of venture capital:
* Ventures West Inc.
Several VC business plan guides available to download here.
* vFinance.com
U.S. website for VC resources: directory of sources, downloadable business plans, and more.
Additional sources of information about venture capital:
* The Business Link Library has a number of books available on the subjects of venture capital, business financing in general, and related topics.
* The following links to documents on The Business Link website provide information on venture capital services from other organizations:
o Alberta Deal Generator
o Venture Capital
