“Fear & Eating Your Own Cooking”: Jonathan M Satovsky discusses recent fear and negative sentiment regarding the markets, fund flow data quantifying such sentiments, and a study showing the benefits of managers who eat their own cooking.
Good afternoon! This is Jonathan Satovsky of Satovsky Asset Management at the end of May 2018 with a video blog update. And as the saying goes April showers bring May flowers and down we’re looking to end the month of May with a very positive upswing in financial markets. And should be a good backdrop for a wonderful Memorial Day weekend for everybody. But I want to take this moment to reflect on my favorite topic of behavioral finance and share some observations in the last several months. So there were several worries and fears and concerns that people had over the last month. Mainly around trade wars and some of that has subsided at the moment. But there was so much fear that had caused a major panic and spike in early February the financial markets where people were absolutely petrified of the future and you could see this by a major spike in the CBOE volatility index. And it’s some since subsided quite significantly. And to give you a highlight of how that translates in financial markets, here’s the past six months visual of the S&P500 you can see everything was moving along nicely moving along nicely oh my god everything’s terrible sell it all and then you know things have been shopping along and and now starting to get some footing and lining up. So what happened is during these times of panic you see massive money flow changes in fact the last is just last four or five weeks of money flows you see domestic equities people oh I want to buy equities, I want to sell equities, I want to sell equities, I want to sell equities, I want to buy equities. But people have got a steady appetite for owning fixed income or owning bonds. And it’s interesting because with even a ten year Treasury at three point one percent it’s hard to imagine that anyone is going to retire or educate their kids or accomplish their long-term goals without having greater growth and three percent. On top of that here’s just a visual depiction from February 8th at the moment when the volatility and spiked criterialy through May 18th. To show you if you put your money in Treasuries long-term Treasuries on that day. Through the 18th you’d be down a percent a half and if you would have just sat in the overall equity markets you’d be up close to 6%. So it’s fascinating you know going back to the behavioral economics concept of wanting to lean against the population and against what everyone else’s fears and anxieties are. You know certainly fear is a material driver decision-making. But it should be if you can maintain a cooler more level-headed demeanor and breathe we can react possibly better through the future panic attacks. There’s another article I wanted to highlight that I thought was quite fascinating. We invest for other people or combination of indexes and at times we use active managers and I’m using active managers. People say well why don’t you want to pay for inactive matter you know the active manager’s gonna underperform. Well there is actual evidence the predictive power of an eat your own cooking mentality sort of a Buffet-esk idea where that if you’re aligning your interest where you’re investing along side your shareholders you’re gonna feel the pleasure in pain with your shareholders and therefore likely at least have an alignment. And maybe increase the probability of success over time. What I’m gonna highlight here, although there’s been evidence that it has exhibited higher probability across most areas, the area that I’m most fascinated with about these balanced funds because you see a dramatic rise in the probability of someone’s success if some managers managing a balanced fund it isn’t pigeonholed to just on equities or just on the fixed income. That can actually have an intersection between where valuations look attractive or less attractive or fear gets higher or lower at different points of times and actually make decisions to take advantage of others behavioral biases. And with that have wonderful Memorial Day weekend and great starts at summer. Bye-bye.