A quick note on investor psychology and emotion
"Investors have emotional responses to securities and their issuers, and that is a permanent feature of the market that can be exploited. Emotions can have an effect on the value of securities, and that creates opportunities," says Paul Kaplan, a panellist at a recent forum in Toronto, Canada, and director of research at Morningstar Canada.
"Over time, you realise that a lot of mistakes that investors make are not errors based on factual information – as there's a fairly level playing field when it comes to access to information," says co-panellist David Wong, from another Canadian fund manager, CIBC Asset Management.
If you look at unloved companies with no buy rating, once they are upgraded from a sell or a hold there can be a reversion to the mean and the stock performs well," Basinger says.
He believes it is problematic that many investors are more comfortable buying a stock with 10 buy recommendations than one with three. "There is safety in following the herd and sticking with consensus. But the best returns in the market are not made by people who stick with the herd."
He sees investor behaviour as a key cause for mispricing among investable assets. "Emotions get the better of people. If you realise how the market is impacted by these behaviours, you can make money off those emotional mistakes."
"Fear manifests in a practical way on Main Street. People 'buy high' due to a fear of missing out, and 'sell low' due to fear of loss, and their individual investment returns are typically lower than the long-term returns of the funds," Wong says, with this behaviour applying equally to equities, fixed income and managed funds.