Golf And Investing

A recent article discusses how golf and investing may be related, but also talks about several behavioral biases that can affect investors. For example, loss aversion shows up in golf as golfers are more likely to make a putt of the same difficulty for par than they are to make the putt for birdie (one under par). Another behavioral bias discussed is probability neglect, that is, people tend to worry about bad outcomes that have a very low probability, such as a plane crash or losing 40 percent of their investment. By overweighting events with a low probability, investors can incur large opportunity costs. Finally, an informational cascade occurs when investors believe the signals from other investors, even if they do not agree. For example, if a stock you view positively begins to drop, you may sell based off what other investors are doing, rather than what your research has revealed to you. As the article notes, smart investors aren't loss averse, they don't neglect probability, and believe in their own analysis. 

Star Fund Managers Stumble

There is much disagreement over whether the stock market is efficient and what level of efficiency exists. Even if it is argued that the market is inefficient, it is still very difficult to identify those who can consistently beat the market as the recent performance of several well-known star mutual fund managers shows. For example, Bill Miller showed holes in his performance in 2008 when the Legg Mason Capital Value Trust fell 55 percent. Even worse, as the S&P 500 has fallen about 9.2 percent this year, the Legg Mason Opportunity fund, which he currently manages, is already down about 28 percent. Similarly, the Baron Partners fund is down about 24 percent for the year, the Federated Kaufman fund is down about 21 percent, and the Jacob Small Cap Growth fund is down about 27 percent. Each of the managers of these funds has been touted as a star manager during their career, but it appears none will be a star this year.

Future Interest Rates

We are often asked where to find the market expectations for stock returns. While there is no easy answer to that question, the market expectations on future interest rates are much easier to find. Recent comments by Janet Yellen indicated that there was a low probability of an increase in the Fed Funds rate. As the article indicates, the probability that interest rates will increase can be can be seen by Fed Funds futures, If you are not familiar with futures contracts, they are contracts traded and priced today that will be executed at some point in the future. Although there is more that goes into futures prices, futures prices can be used, in part, as the market expectation of the future price. And to show you how quickly markets can adapt, when the original Yahoo! Finance article was written, the probability that the Fed would raise interest rates by February 2017 was about 27 percent. As this is written, one day later, the probability has dropped to 6 percent.

Oil Prices Hurt Capex

Capital expenditures are affected by many factors, including corporate profits and sales. The recent drop in oil prices has caused a sharp drop in capital expenditures by oil companies. For example, BP dropped its capital expenditures for 2015 to $18.7 billion, significantly below its planned capex of $24-$26 billion. ExxonMobil dropped its 2015 capex by 25 percent to $23.2 billion, and Anadarko plans to drop its capex for 2016 to one-half of its initial budget. 

Hedging Exchange Rate Risk

As we mentioned in the textbook, companies often want and need to hedge exchange rate risk. A recent article in Treasury and Risk gives a good primer on methods to hedge exchange rates. First, a company must have an accurate forecast of foreign cash flows. With any forecast, GIGO (garbage in, garbage out) applies to hedging exchange rates. If the forecast is inaccurate, the company will over hedge or under hedge its exchange rate risk. Another suggestion made in the article is a layered hedge, which may help to reduce volatility. This means that a company does not hedge all of its exchange rate risk at a particular point in time, but rather hedges part of the expected exchange rate risk, then adds to the hedge over time as the date of the currency exchange approaches. If you are interested in hedging exchange rates, we suggest you read further. 

Timing The Stock Market

Students (and a lot of investment professionals) think that timing that market, that is leaving the stock market before it goes down, is a good strategy. And while we would like to sell our stocks before a price drop, it is easier said than done. A recent article highlights the danger of missing the good days in the stock market. Fidelity Investments calculated the return from investing $10,000 in the S&P 500 from January 1, 1980 through March 31, 2015. If you were invested every day, your portfolio balance would have grown to $503,741. However, if you missed the five best days in the market, your balance would have been about $309,431, a 40 percent decrease! Missing the 50 best days would have dropped your portfolio balance to $41,803, or about eight percent of the value of being invested every day. There are about 252 trading days per year, so missing 5 days (or 50 days) out of about 8,800 days can have a serious impact on the value of your investments.

Divestitures Expected To Increase

A recent survey by EY indicates that corporate divestitures are expected to increase in the next two years. Forty nine percent of the companies surveyed indicated possible divestitures in 2016, and only five percent of companies did not plan a divestiture over the next two years. Seventy percent of the companies that are planning a divestiture expect to reinvest in core businesses, invest in new products and markets, or make an acquisition. Divestitures have proven to be a method to increase shareholder wealth in recent years as companies that have divested more than 10 percent of their value have outperformed the stock market by more than six percent.