Every week here at TWST, we speak with portfolio managers who tell us a little bit about why they invest in the companies they invest in. Whether they’re value or growth or GARP investors, each and every one of them has dedicated themselves to finding reasons to invest in some spaces, and not in others.
While this may sound obvious, two money managers we spoke to this week had other ideas. They practice something called “Behavioral Finance”, which takes as its premise that the market participants are ”predictably and persistently irrationally when they invest.”
Christopher Blum and Theodore Dimig of JP Morgan Asset Management focus their behavioral finance philosophy on the behavior of investors in the market; investors who make the same mistakes time and again. They attempt to use these predictable blunders for the profit of their clients.
They gave the example of this behavior, and their own attempts to profit from it, in 2005, the case with Merck and Altria:
“Think of a company like Merck at the end of 2005 or Altria at the peak of the tobacco litigation. Many managers avoided those stocks because they didn’t want to have to listen to their clients saying, “What are you doing? Don’t you read the newspapers?” It’s very risky for a manager’s reputation to buy an Altria or Merck (during points of stress) because of all the headline risk out there. As a result, many stay away because it’s safer to err on the side of being conventionally wrong with the masses (and avoid such names) than to put yourself on an island and take a chance of being unconventionally right. In fact, that’s the exact reason why these cheap stocks consistently outperform expensive stocks, because emotionally many managers cannot bring themselves to buy these stocks.”
For the complete interview with Mr. Blum and Mr. Dimig, including an overview of the investment climate from their unique perspective and stock picks, click here.
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