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Psychology of Investing

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Title: Psychology of Investing


1
  • Psychology of Investing

2
The information contained in this presentation is
of general nature only. The information and any
assumptions contained within are provided in good
faith. The content of this presentation are not
to be relied upon as a substitute for financial,
taxation, investment or other professional
advice.Whilst the sources for the material
illustrated within this presentation are
considered reliable, responsibility is not
accepted for any inaccuracies, errors or
omissions. As such, Asian Pacific Forest Lake Pty
Limited or any related bodies corporate are in no
way liable for any loss, damage or expense
connected to the use of or reliance upon
information, opinions, recommendations, views or
comments contained within this presentation.Exce
ptions of liability exist only in respect of any
liability required to be assumed under
Corporations Law.Information on specific
investment options or products is neither
directly nor implicitly recommended and advice
should always be sought before deciding on the
best investment for you based on individual
circumstances.Asian Pacific Forest Lake Pty
Limited reserve the right to add to and modify
the information contained within the presentation
without notice. We are not liable however if the
information contained in this presentation is not
up-to-date at any given time.
3
  • Goal Setting

4
Life calm and serene..one minute
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Attitude Knowledge Confidence
  • Having the right mental approach is as important
    with investment as it is for business.
  • If we understand the fundamentals we wont panic
    in the cycles this is where most novices
    fail..!

20
Goal setting is a powerful process for thinking
about your ideal future, and for motivating
yourself to turn that vision of the future into
reality.   The process of setting goals helps you
choose where you want to go in life. By knowing
precisely what you want to achieve, you know
where you have to concentrate your efforts.
You'll also quickly spot the distractions that
would otherwise distract you from your course.  
Goal Setting
21
Goal Setting
  • More than this, properly-set goals can be
    incredibly motivating, and as you get into the
    habit of setting and achieving goals, you'll find
    that your self-confidence builds quickly.

22
Focus
  • Goal setting techniques are used by top-level
    athletes, successful business-people and
    achievers in all fields.
  • They give you long-term vision and short-term
    motivation.
  • They focus your acquisition of knowledge and
    help you to organize your time and your resources
    so that you can make the very most of your life.

23
Goal Setting
  • By setting sharp, clearly defined goals, you can
    measure and take pride in the achievement of
    those goals.
  • You can see forward progress in what might
    previously have seemed a long pointless grind.
  • By setting goals, you will also raise your
    self-confidence, as you recognize your ability
    and competence in achieving the goals that you
    have set. 

24
Getting Started
  • Goals are set on a number of different levels
  • First you create your "big picture" of what you
    want to achieve with your life - style and what
    large-scale goals you want to achieve.
  • Next , you break these down into the smaller and
    smaller targets that you must hit so that you
    reach your lifetime goals.
  • Finally, once you have your plan, you start
    working to achieve it.

25
Put up the Goal Posts
  • The first step in setting personal goals is to
    consider what you want to achieve in your
    immediate future (or at least, in a particular
    time-frame, say, 10 years into the future).
  • Setting Lifetime Goals gives you the overall
    perspective that will shape the other aspects of
    your decision making.
  • Establish a number of goals across a broad,
    balanced range of the important areas in your
    life, try to set 10 year goals in some of the
    following categories

26
Your income will grow as you do.
  • AttitudeIs any part of your mindset holding
    you back? Is the glass half full or half empty?
    Set goals to improve your approach to new
    challenges.EducationIs there any knowledge
    you want to acquire in particular? What
    information and skills will you need to achieve
    some of your other goals?BusinessWhat level
    of success do you want to reach with your
    business?FinancialHow much do you want to
    earn by what stage?

27
Link them together
  • Once you have set your lifetime goals, set a 10
    year plan of smaller goals that you need to
    complete if you are to reach your overall
    objective. Then set a 5 year plan, 1 year plan, 6
    month plan, and 1 month plan of progressively
    smaller goals that you should reach to achieve
    your lifetime goals. Each of these need to be
    linked with the next

28
Re-visit your goals regularly
  • Create a daily to-do list of things that you
    need to do today to work towards your lifetime
    goals. At an early stage these goals may be
    research or education based to give you the
    confidence to believe that your goals are
    achievable. This will help you to improve the
    quality and realism of your goal
    setting.Finally review your plans, and make
    sure that they fit with the way in which you want
    to live your life.

29
Goal Setting Tips
  • State each goal as a positive statement
  • Be precise and specific
  • Set priorities
  • Write goals down
  • Keep operational goals small, one at a time
  • Set performance goals, not outcome goals
  • Set realistic goals

30
Smart Goals
  • S - Specific
  • M - Measurable
  • A - Attainable
  • R - Relevant
  • T - Timely

31
Dont fear change embrace new technologies
  • Remember - for things to change, you have to
    change. For things to be different, you have to
    be different.
  • Before financial success can occur, personal
    growth must occur.

32
Yesterday is history tomorrow is a mystery
  •      
  • Don't wait until everything is just right. It
    will never be perfect. There will always be
    challenges, obstacles and less than perfect
    conditions. So what. Get started now.
  • With each step you take, you will grow stronger
    and stronger, more and more skilled, more and
    more self-confident and more and more
    successful.

33
Age, education or gender are no longer barriers
to creating wealth.
34
Psychology of Investing
People have been acting the same for hundreds of
years. Not much has changed since Isaac Newton
lost a fortune in the South Sea Trading Companys
fiasco of 1720. This trading company had all
the characteristics of a contemporary "hot
stock," with investors creating a mania over the
company's prospects for success. Investors
dreaming that the company would gain trade
monopolies in the South Seas sent the company's
price into the stratosphere! And, as we've seen
in the more recent past, the story ended the way
it had to ... badly! The majority of the
investors were wiped out!
35
Saving Versus Investing
  • In simple economies, there is little distinction
    between savings and investments.
  • You save by reducing present consumption, and
    invest in the hope of increasing future
    consumption.
  • Therefore, a fisherman who spares a fish for the
    next catch reduces his present consumption in the
    hope of increasing it in the future.

36
  • Most people have savings accounts with ATMs to
    access their hard-earned cash and be able to
    store away any extra cash in a place a little
    safer than under their mattress. A few may have
    some stocks or bonds.
  • Whilst a savings account in the bank may seem
    like a safer place than the mattress to store
    your money, in the long-term it is a losing
    proposition!
  • If you open a savings account at the bank, they
    will pay you interest on your savings. So you
    feel that your savings are guaranteed to grow and
    that makes you feel extremely good..

37
Inflation
  • However the effects of inflation will ravage
    your investment in the long-term!
  • The bank may pay you 5 percent interest a year
    on your money, but if inflation is at 4 percent,
    your investment is only growing at a mere 1
    percent annually.
  • Saving and investing are often used
    interchangeably, but they are really quite
    different!

38
Saving
  • Is storing money safely, such as in a bank or
    money market account, for short-term needs such
    as upcoming expenses or emergencies.
  • Typically, you earn a low, fixed rate of return
    and can withdraw your money easily.

39
Investing
  • Is taking a risk with a portion of your savings
    such as by buying stocks or property, in hope of
    realizing higher long-term returns.
  • Unlike bank savings, stocks and property over the
    long term have returned enough to outpace
    inflation, but they also decline in value from
    time to time.
  • The rate of returns and risk for savings are
    often lower than for other forms of investment.
  • Return is the income from an investment.

40
Risk
  • Risk is the uncertainty that you will receive an
    expected return and a return of your capital.
  • Savings are also usually more liquid. That is,
    you may quickly and easily convert your
    investment to cash.
  • The decision about which investment to choose is
    influenced by factors such as yield, risk, and
    liquidity. Investments may produce current income
    while you own the investment through the payment
    of interest, dividends or rent payments. When you
    sell an investment for more than its purchase
    price, the profit is known as a capital gain,
    also called growth or capital appreciation.

41
Compounding interest
  • Adding interest to your interest
  • The shorter the payment period the more
    effective the strategy
  • 2,000 _at_ 12 p.a 2,240
  • 2,000 _at_ 12 p.a paid ¼ly 2,254 (12.70 )

42
Dollar Cost Averaging
  • Investing the same amount at regular periods
  • Carefully monitor the investment
  • Works best in a volatile market
  • Take profits regularly
  • Can produce positive results in the long term

43
Dollar Cost Averaging
Yr1 Yr2 Yr3 Yr4
Yr5 Investment 2,000 2,000
2,000 2,000 2,000 Unit
Price Paid 10 4 2 6
10 Units bought 200 500 1,000
333 200 Total outlay was
10,000 for 2,233 units at 10 each with a total
value of 22,330.Investment has appreciated by
122 at a time when the market has been in a
slump.
44
Margin Lending
  • Same principle as a lump sum investment but using
    borrowed funds
  • Monitor the Loan to Valuation Ratio
  • Understand the Margin Call obligations
  • The loan still as to be repaid

45
Margin Call
  • Three Choices
  • Reduce loan by cash deposit
  • Reduce loan by selling investments
  • Lodge additional security
  • within 24 hours.

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47

"Only two things are infinite, the universe and
human stupidity, and I'm not sure about the
former." Albert Einstein
48

Much of economic and financial theory is based on
the notion that individuals act rationally and
consider all available information in the
decision-making process. However, researchers
have uncovered a surprisingly large amount of
evidence that this is frequently not the
case! Dozens of examples of irrational behavior
and repeated errors in judgment have been
documented in academic studies.
49
  • There's an interesting analogy between the way
    people drive and the way they invest money.
  • Good driving schools teach "defensive driving"
    techniques. If you know what to look out for on
    the highway, you greatly improve your chances for
    reaching your destination in one piece.
  • Likewise, investment advisers should educate
    their clients about defensive investing
    techniques. If you know the pitfalls, you can
    guard against some of the speed bumps that
    de-rail most investors.

50
  • Impatient drivers in traffic jams often pay lots
    of attention to what lane they are in and how the
    other traffic lanes are doing compared to theirs.
  • If the other lane looks like it is moving
    faster, they will often swerve over in front of
    somebody else.
  • Some people do this repeatedly, taking every
    opening they can find to get a slight advantage
    for themselves.
  • These drivers may gain a few seconds but in the
    process, they escalate the levels of danger and
    annoyance to themselves and everybody around
    them. In investment terms, they take on much more
    risk in return for uncertain gains.

51
  • One of the greatest roadblocks to successful
    long-term investing is impatience, this applies
    equally to buy-and-hold investors as well as
    those who use market timing. Impatient investors
    watch the market from day to day like a hawk.
    Impatient investors are easy prey. They can be
    lured to change lanes, and change lanes again. In
    their zeal to always be "on top," these people
    rarely give any investment or strategy enough
    time to perform adequately.

52
  • They end up as road kill, often retreating to
    the sidelines with cash management accounts or
    bank bills while their more patient counterparts
    build their wealth in the slower lanes. Patient
    investors who make investments and stick with
    them for years or decades, with or without market
    timing, aren't likely to have exciting stories to
    share at BBQs. However, they are more likely to
    retire comfortably and more likely to sleep well
    along the way and be able to devote their
    attention to other things in life. These people
    may seem unexciting, but they are true "Road
    Warriors

53
WHAT'S YOUR STYLE?
  • Whether you realize it or not, whenever you take
    the wheel of your car, you have a driving style
    that's all your own. There's a certain amount of
    risk you are willing to tolerate and a certain
    amount of frustration that you are also willing
    to tolerate..

54
  • Likewise, you have your own style of investing.
    You can tolerate some level of risk, but you
    probably get quite nervous once you get past the
    boundaries of your personal comfort zone. How
    well do you handle mistakes? Do you welcome them
    as an opportunity to learn more about yourself
    and about investing? Or, do you feel compelled to
    find somebody or something else to blame when
    something goes wrong?
  • How quickly will you abandon the route you have
    chosen in search of something better? Some
    drivers will leave a clogged freeway in the hope
    they can find any alternative with less
    frustration, even if they can't actually see such
    an alternative route.

55
Cut Dried
  • Investing is a rational, mechanical process that
    starts with some basic decisions such as
  • How much time do I have to achieve my investment
    goals ?
  • What is my forecast rate of return and my level
    of commitment to it ?
  • How much money do I have now, and how much will I
    need to have at retirement ?
  • What assumptions do I make about the rate of
    inflation ?
  • From these, I can figure out the rate of return I
    will need to get from where I am to where I'm
    going. Then I can determine what type of asset
    will produce the return I need. All of this is
    pretty cut and dried. The calculations could be
    made by a computer.

56
However its really quite emotional
  • The next logical question is psychological Can
    I tolerate the risks involved in the asset class
    that will take me to where I want to go ?
  • If the only way to achieve your goals is to
    speculate on commodities or "bet the farm" on
    your ability to sell stocks short just before the
    market goes down, you'd better have an awfully
    strong stomach and probably a Plan B for your
    retirement.

57
Investment Roadblocks
  • Focusing on hope (and sometimes hype) while
    ignoring risks. Managing risk is at the heart of
    successful investing
  • Making emotional decisions instead of disciplined
    decisions.
  • Being unclear about what you believe and how you
    intend to invest in the face of uncertainty.
  • Focusing excessively on individual components of
    your portfolio instead of the whole.
  • Taking too much risk. People with relatively
    small amounts of money tend to take too much
    risk, while those with large amounts take too
    little risk
  • Being unwilling to take a loss.
  • Failing to manage your expectations.

58
Summary
  • When it's your money at stake, you should be the
    one in the driver's seat, even if you take
    directions from someone else. The best way to
    keep your hands on the wheel is to have a plan
    that will work for you, then stick to it. Do that
    by understanding the difference between your
    financial needs and your emotional needs. A good
    investment plan will help you achieve the total
    return you need to meet your own personal
    financial goals and time-table

59
  • One of the biggest mistakes that investors make
    is to chase performance. Whether it be changing
    investment advisors, switching newsletters,
    transferring between funds, or purchasing a new
    fund, the common goal for the investor is to be
    in the hottest fund. Unfortunately, they're often
    in the wrong place at the wrong time.

60
Year 2000 Hot Funds
  • Warburg Pincus Japan Small Company Up 328.7 in
    1999
  • MAS Small Cap Growth Up 313.9 in 1999
  • Japan Growth Up 279.9 in 1999
  • Monument Internet Up 273.1 in 1999
  • Amerindo Technology Up 248.9 in 1999

61
Fast forward to Jan 2001
  • "What goes up, must come down"
  • Warburg Pincus Japan Small Company was down 71.8
  • MAS Small Cap Growth dropped 23.1
  • Credit Suisse Inst. Japan Growth shut down and
    returned assets to investors, but not before it
    lost almost 60 of its value
  • Monument Internet tumbled 56.4
  • Amerindo Technology fell 63.9

62
Business Cost 500,000, Return 250,000 Yield
50
  • Residential Property
  • Commercial property

(Risk)
  • Cost - 500,000
  • Rent - 25,000
  • Yield - 5
  • Cost - 500,000
  • Rent - 50,000
  • Yield - 10

63
  • Property versus Shares

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  • Objectives
  • Identify the fundamental differences between an
    investment in residential property and an
    investment in ASX listed company shares.
  • Give you an understanding of the various options
    available for investment in both sectors
  • Understand the essential differences when
    leveraging into these asset classes
  • To provide you with information with which you
    can make informed decisions

65
Over 300 years of booms and busts
demonstrate that human nature changes very
little, if, at all. The inescapable lesson of
history however, is that wealth building takes
time, work, good savings habits and very
importantly the emotional discipline to shy away
from get rich quick schemes and investment fads
  • Nothing Changes

66
In all investment segments there is no substitute
for experience and, for most people this doesnt
come until late in life. In fact experience
should be measured in terms of decades rather
than years
We also need to understand that government
regulation and licensing provides no guarantees
against incompetence or malpractice and that even
the biggest institutions and their expert
analysts make mistakes.
67
Investors should seek a thorough, research driven
selection process which is combined with active
and disciplined capital management. The aim is
to capture trends in industry sectors through
processes which have been both mathematically and
empirically tested. This methodology if applied
to property or share investment will deliver
consistent, positive returns in all market
conditions.
68
Subjective views and gut-feel should not cloud
investment decisions. Discipline should be
fundamental to all portfolio structuring. By
using methodology to minimize the risks inherent
in traditional investment styles you can insulate
investment decisions from the emotional biases
that exist in traditional analysis.
69
Investment Outcomes
Property
Shares
Growth Income Tax Benefits Risk Liquidity
70
Performance Drivers - Shares
71
Performance Drivers - Property
72
Property Investment Options
73
A Protective Shield
Investing successfully requires long term focus
and commitment. Whether the asset class be
property or shares a clearly defined risk
management system will allow you to monitor your
portfolio to ensure that your investment risk
will remain within expectations.
74
Emotional Check-list
  • If you don't invest ...You will lose.
  • If you don't manage risks ...You will lose.
  • If you follow tips ...You will lose.
  • If you don't investigate before you invest You
    will lose.
  • If you panic ...You will lose.
  • If you want to speculate ...You will lose.
  • If you don't understand your finances You will
    lose.
  • If you don't use dollar cost averaging .You will
    lose.
  • If you want to play ...You will lose.
  • If you are greedy ...You will lose.
  • If you place all your eggs in the same basket You
    will lose.
  • If you don't know when not to invest You will
    lose.
  • If you can't afford to lose ...You can't afford
    to make a profit.

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  • A stockbroker is someone who invests your money
    till it's all gone!

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  • Stockbroker What is a million years like to
    you?God Like one second.
  • Stockbroker What is a million dollars like to
    you?God Like one penny.
  • Stockbroker Can I have a penny?God Just
    a second

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  • The safest way to double your money is to fold
    it and put it in your pocket.

Homer Asian Pacific Forest Lake
78
Calm seas dont make good sailors
  • Twenty years from now you will be more
    disappointed by the things that you didn't do
    than by the ones you did do.
  • Ric Hayter

79
  • Psychology of Investing
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