Thursday, July 28, 2011

On Campus: No Summer Slowdown

Virginia-Darden Dean Bruner
Just weeks ago, members of the MBA Class of 2011 dispersed all over the country--first to take well-deserved breaks and vacations, second to prepare to move to big cities or other outposts to start new positions. Business schools get a short respite, a chance to pause after a bustling school year.

Afterward summer activity picks up again at most schools.  Many have summer semesters and course offerings. Most are gearing up to welcome the parade of bright, confident faces who will make up the Class of 2013. (Some have representatives who have just returned from the Consortium's Orientation Program in Minneapolis.) At some schools, orientation starts in a few days. At most, deans will inevitably proclaim the Class of 2013 as its best, most ambitious, most talented, most diverse and most interesting.

The pulse of business discussion, academic research, and the continual revamping of b-school curriculum is as vigorous as ever. Business schools, including the Consortium 17, don't lose a beat in their efforts to remain as relevant as ever.

In recent days, Virginia-Darden's Dean Rob Bruner shared his views of the tension and stalemate that has engulfed Washington. The debt-ceiling fracas, he says, will make a fascinating case study on business negotiation. The typical business setting is about negotiations, especially in finance, where deals are proposed, discussed and struck, and where prices, fees, terms and conditions are debated. Dean Bruner says, "To aficionados of bargaining, watching (the Democrats and Republicans in Congress go head to head throughout July) is high entertainment"--even if it's not amusing to the rest of the country.

In his blog (See , he highlights primary discussions between two principals, but also the "hidden discussions" among the principals within their circles--the discussions that take place out of view. Tactically, negotiators should investigate those "hidden discussions."

He writes about "brinksmanship," the timeline point where neither side moves toward compromise and a deadline is looming.  He doesn't project how the Congressional stalemate will turn out, but he challenges professors to use the current imbroglio as a teaching point in classes in negotiation and policy. And perhaps even ethics.

Business schools still favor the case method of study for some courses.  With new technology (iPads, tablets, notebooks and laptops), do professors still hand out or require students to purchase the volumes of paper cases for students to review, analyze and discuss in class? Yes, many do. New technology is spurring schools to go the electronic route, especially schools that have thousands of cases on file.  NYU-Stern has tried to migrate to the iPad and other tablets, while Virginia-Darden is experimenting with the Kindle. 

The transition is not as easy as planned, even for b-school students who don't know a world without personal computers and cell phones.  Some students say using iPads, Kindles or other tablets for case study in class makes it difficult to keep up, turn pages, or make notes. Improvements will come inevitably.

At Indiana-Kelley, Consortium alumna Joy Somerset was featured this spring on its school site as an example of a graduate who achieved several objectives in finding the right job. (See http://www.kelley.idu.ed/.) While a Consortium student at Kelley, Somerset approached career coaches to help her decide what she would do after getting the MBA. A coach reaffirmed her interests in brand management, but observed she wanted to do something "altruistic," or "bring joy to others."

The advice and coaching helped lead her to an internship and eventual full-time offer at Consortium sponsor Eli Lily in brand management in a special role where she works with doctors and cancer patients.

North Carolina-Kenan this month launched its new MBA-online program, called MBA@UNC. Some approached this with apprehension, thinking it might not have the rigor, prestige and attraction of its full-time program. Will it offer the same credential, some asked?

The program, as it has rolled out, will prove to be anything but MBA-lite.  In its new class, many of the 19 new students have doctorates and law degrees. They will meet for class and have case-group discussions online. Students will be converge on campus at least twice for "immersion weekends." 

Many wonder how students will engage in partnerships in projects, in exchanges of ideas, or teamwork activities online. Students, however, will not be anonymous during classes and case groups.  At all times, when they log on, their faces will be on the screen, and they will be expected to participate and contribute in the same way in a classroom. Professors and case-group leaders will know who is not in class or who is not attentive or adding to the discussion.

UCLA-Anderson admissions director Rob Weiler told Businessweek ( this summer that once again Anderson's full-time MBA program is gearing up for one of its best classes ever, a class that includes Consortium students. "Anderson students are confident, but not arrogant or cocky," he said."  "They tend to play well with others. They tend to be people who dive in." They don't sit on sidelines.

From about 2,500 applications, Anderson will welcome a class of 360, including about 30% minorities and 30% with an expressed interest in finance.

While full-time students are away, Yale's School of Management Shiller participated in the program.

Michigan-Ross welcomed its new dean, Alison Davis-Blake, who started her new job July 1.  She spent 15 years of her career at Consortium school Texas-McCombs and says her objective at Michigan will be to focus on entrepreneurship, innovation and globalization.

Meanwhile, with market volatility, debt struggles among sovereigns, and a financial system still trying to right itself three years after the demise of Lehman, there is much to research and discuss on campus. B-schools have been involved in that and much more, including such topics as the phenomenon that is Groupon, the fragility of the Murdoch media empire, and the anticipation of what could possibly be the next "black swan" event.

Tracy Williams

Wednesday, July 27, 2011

Financial Planning Q&A

Recently I wrote an article for a women's magazine - Citta Bella. Perhaps some of the questions addressed here are your concerns as well. Here's the article:

Q & A For Citta Bella

Case: 30-year old Single Office Lady

1. I have 20K, how do I invest my money?

According to your risk preference, you may invest in fixed deposit, shares or unit trust. Fixed deposit is the safest investment however it generates only 2-3% per year return. As for shares and unit trusts there is certain investment risk involved but the potential returns are much higher than the fixed deposit, in general the gains are usually around 7-12% per year.

For a 30 year old single office lady, you can tolerate much higher risk than those who are married with children and those who are nearing retirement age, hence I would advice a 25:75 asset allocation for you, which means you may put aside RM5000 (25%) in the fixed deposit and invest RM15,000 (75%)in blue chip stocks.

Asset allocation is how much money you put into different asset classes—the percentage of your assets that are in stocks, bonds, cash, real estate, and commodities. Believe it or not, the choices you make in this regard are the most important part of your investing. A good mix of asset allocation will enable you to achieve sustainable profits from the stock market over the long run.

I usually recommend people to invest in blue chip stocks as blue chip stocks are good investment, not only you can gain capital appreciation, every year you’ll receive attractive dividends from these companies. Some examples of the blue chip stocks are: Maybank, CIMB, Genting, and Public Bank. However, if you are not comfortable investing directly in the share market, you may choose to invest in unit trust from a reputable fund management company.

2. How much savings do I need? I’m a 30 yr old single OL (office lady).

Assuming your retirement age is 55 and you live until 75 years old, you should set aside minimum RM500 every month into your retirement fund preferably in stocks or unit trust which will give you RM1,500 every month during your 25 year retirement period.
After deciding how much we need in the future, now, let’s see how we can achieve our retirement goal. Many people have the wrong attitude towards savings, they will choose to pay their monthly expenses first, whatever the balance (if any) will then turn into their savings. Sometimes, they may have impulse buying on branded handbags or hand phones, and they will not hesitate to withdraw from their savings to purchase them.

The right attitude should be to pay into the retirement fund before any monthly expenses. In addition, you should try not to withdraw from the fund for any impulse buying. A good way to help you to achieve your retirement goal is to set up a unit trust regular saving plan with a reputable unit trust company with initial RM1000 investment, followed by auto-debit instruction from your bank account to invest RM300 monthly into an equity fund.

However, if you notice, I did not include the EPF into this retirement fund. The reason why I didn’t include is because most of us, before the retirement age, we have already used up at least one third for purchasing property, and the remaining upon retirement the money is usually used for children’s university expenses, hence, the remaining may not be significant. However, if you do have money left from the EPF that will be a bonus for you.

3. I love traveling to different parts of the world, but I’m afraid I might spend too much on trips and not saving enough for my retirement, what should I do?

As Malaysia is moving towards becoming a developed nation and our society is becoming more affluent, overseas trips has become part of our lifestyle. However, these trips are not cheap, they may cost up to about RM2000 to RM6000 per person. If we lose focus we may ended up spending too much and not saving enough for our retirement fund. My advice is that you need to be disciplined enough to set aside the required amount, say RM500 monthly for your retirement fund first, the remaining you may allocate according to your other needs such as your overseas trip. Hence, it is very important that we must have proper financial planning to safeguard our hard earn money so that our retirement goal can be achieved.

4. Medical cost is getting too expensive, is it advisable to get myself covered with insurance? What is the right amount for my insurance coverage?

Medical expenses are rising faster than the costs of any other service. They are climbing at rates that very much exceeding the inflation rate. On top of that, with the hectic lifestyle and bad eating habits, the chances of contracting terminal illness have increased tremendously in the recent years. Hence it is very important that everyone should buy a medical insurance for protection.

How much medical coverage is enough depends on the following factors: your ability to pay the premiums, your health condition, your family history of terminal illness, your debt obligations and your family commitments and other personal objectives such as whether you need some investment component in it.

In general, for a 30 year old woman with good health condition would need minimum RM200,000 for a lifetime medical coverage. However, if budget allows, you may consider increase your coverage through other add-on benefits such as hospitalization, disability benefits, income benefits, and regular saving feature in it.

5. I am still young, do I need to write a Will?

It’s never too young to write your Will. As soon as you have turned 18 years old, you may start to write your Will. What is a Will? A Will is an important legal document that contains your instructions and wishes for distributing your property and assets after you die. This document contains the names of the people you want to benefit, your beneficiaries, as well as details about your home, land, vehicles, bank accounts, investments, jewelry, artwork, and other possessions. Your Will also allows you to choose a personal guardian to care for your children if you should die when they are still minors. Your Will should be written carefully, correctly and in compliance with the laws of your state to be sure your beneficiaries will be taken care of when you are gone.

In order for your Will to be valid, and accepted by the court, it must be in writing, signed with your signature, and witnessed by at least two witnesses who are neither relatives nor beneficiaries. Otherwise, the court may not accept your Will, and it may be unenforceable. If your Will is found invalid, the court may distribute your assets as if there were no Will (or intestate), and the court will distribute your asset according to the Distribution Act 1958 (amended 1997) and it may take up to seven years for the whole process.

Thursday, July 21, 2011

Business Schools: "Satisfied" Alumni

Dartmouth's Tuck leads top business schools in alumni-participation in donations

Who are the most satisfied alumni among top business schools?  "Satisfied," for these purposes, isn't defined by the alumni happiest in their careers, the most content in their outlook,  or the most optimistic about business opportunities. Satisfied," in this case, applies to alumni who are happiest about their business-school experiences. 

They are the ones who most appreciated the two years of toil to get the MBA and reflect fondly on time spent with professors, deans, classmates and career advisers. They might recall cheerfully the class "field trip" to China, the end-of-year skit performed before a standing-room crowd, or the thought-provoking cases in project finance. They will have appreciated the school's brand-new, state-of-art facility--featuring technology marvels and electronic wizardry.

Sometimes satisfaction in career correlates closely to satisfaction at business school, because alumni reason that the b-school experience helped prepare them well for a thriving career. Other times, unhappy alumni may not appreciate a long-ago experience until years after they graduate.

They will complain about a tortuous experience in an advanced accounting course while in school, but will appreciate the principles they learned while doing a deal years later. They will gripe that a school is too far from the finance centers of New York and Chicago, but will appreciate decades later the contacts they made and the friendships and networks they cultivated. They may not understand why they must take a required course in policy or decision-making until they are sitting in decision-making roles later on.

Business schools, their stakeholders, and those who try to rate, rank and evaluate business schools struggle to define ways to measure "alumni satisfaction."

One way they do it is not necessarily the best or fairest way. But they measure it anyway. They measure satisfaction by tallying up the numbers of alumni who contribute consistently to their respective schools.  They presume alumni happy with their experiences on campus will happily write checks once or twice a year. The amounts will vary, depending on what alumni are doing and where they are in their career stages.

Along this premise, CNN and Money magazine tried to determine which top schools have the "most satisfied" alumni based on percentage of alumni who give back ( Consortium school Dartmouth (Tuck) was a run-away leader with 67% of nearly 9,000 living alumni who made donations in a recent year.  Analysts attribute that to "satisfaction" with their experiences in Hanover, to appreciation of how Tuck prepared them for careers, and to Tuck's vast, tight global network of alumni.

Consortium schools Yale and Virginia (Darden) followed in second and third place, with 46% and 43% participation rates, respectively.

As with any list, readers should approach statistics-based rankings with care.  Some observers or deans say alumni giving is influenced by many factors. Some schools, for example, encourage alumni to write their big checks during reunion years (once every five years), so year-to-year participation rates can be misleading.  Other schools encourage alumni to contribute something--any amount in any way--every year to get into the habit of giving. 

Some, according to CNN, say public business schools lag because alumni may presume as neighboring tax-payers they are already supporting schools.  Other schools encourage giving, but are just as happy if alumni donate time, volunteer in service, or partipate in mentor programs, interview prospects, or recruit.

Satisfying and memorable experiences surely influence alumni giving. But economic conditions, personal situations, time constraints and the schools' own alumni infrastructure can be significant factors, too.  The development offices at some schools are more efficient and successful than at others.  National alumni networks are better organized at some schools. 

Then there could be the UC-Berkeley MBA graduate, who appreciates the courses and professors in entrepreneurship that helped her launch a start-up in nearby Silicon Valley. She has intentions to give back, but in her company's early stages does not have the resources or time to be "reflective" or "appreciative" of experiences at Haas. Or she simply promises herself to write the big check when her personal net worth soars.

In general, Consortium schools fared well on CNN's list.  Cornell (Johnson), 23% participation, was seventh; Consortium schools UCLA, Carnegie Mellon and USC were 11th, 12th and 13th , respectively with participation rates between 19-20%.  UC-Berkeley, Emory, UNC, Michigan, Indiana, NYU, and Texas were also included in the list. 

Consortium schools Wisconsin, Washington Univ., and  Rochester were not included on the list--likely because they were unintentionally omitted from the survey or CNN may not have had sufficient information.

For all schools, the median gift is about $150--suggesting that many alumni, no matter their age or experience or net worth, will make a nominal donation yearly because they are sufficiently satisfied and because they are respectful of the schools' solicitation efforts (the e-mails, the letters, and the phone calls).

What about giving rates among Consortium graduates? Do Consortium graduates give back to their schools? Do they also give back to the Consortium?  Compiling these statistics is more complex than it appears. Consortium graduates give back to their schools, probably in comparable percentages as the rest of their classmates. Many Consortium graduates give back to the Consortium, too. Some make donations to both; some request and hope contributions to the Consortium are also counted as contributions to their schools, and vice-versa. 

Some even dream of making a philanthropist-like contribution, too, once personal net worth soars "after the IPO" or after "the new business takes off."

In 2010, the Consortium reported a 13% increase in the amount of donations from over 1,200 individual donors (including alumni)--an increase that is due in part to improved economics, but also to the Consortium's own well-planned efforts to reach out to alumni and others.

The statistics may not capture one popular Consortium sentiment: Most, if not all, Consortium alumni, whether they contribute regularly or not, will say they are "satisfied" with the opportunity the Consortium experience afforded.

Tracy Williams

Monday, July 11, 2011

Margin of Safety

"A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world." Seth Klarman

By far the most effective behavioural finance strategy which is highly recommended by many investment gurus is value investing. The virtue of value investing is that investors buy at prices that are already low, so there isn’t much room for further down play. I would like to introduce to you our "Father of Value Investing" - Benjamin Graham.

Benjamin Graham
Benjamin Graham, born in 1894 witnessed the devastation of the 1929 crash and has since developed resilient techniques that could be used by any investor. He popularized the examination of price-earning (PE) ratios, debt-to-equity ratios, dividend records, net current assets, book values and earnings growth. That earned him the name of the “Father of Value Investing”. He brilliantly concocted the ‘Margin of Safety” theory that has gained tremendous support across the finance industry. Graham defined margin of safety as the margin at which a stock can be purchased with minimum downside risk.

There are many criteria for Graham’s margin of safety investment approach, the most stringent is this: Purchase the stock with price not more than two-thirds of Net Current Asset Value (NCAV).

How to calculate the NCAV?

Net Current Asset Valuation (NCAV) is computed by total current assets less total liabilities.

Example – Calculation for NCAV
Cash at bank 200
Debtors 100
Inventory 100

Total Liabilities 200
# of shares 100

Share price 1.80

In the example, given that the total current assets are RM400,000 and total liabilities are RM200,000, the net current asset per share is RM2 which is lower than the current market price. However, it is still not good enough as according to Graham’s criteria, the purchase price must not be more than two-thirds of the NCAV which is RM1.33. Therefore, we will not purchase the stock.

The margin of safety for this case is 26% (the difference between current market price and the conservative calculation using Graham’s criteria) which is lower than the minimum margin of safety of 33%. Buying at steep discount using the margin of safety approach can help to cushion the negative surprises in the financial market.

The above theory looks nice in theory but it is not very practical in the modern world now. Using this method, I can't find any good bargain because most of the companies have more debt than their current assets. But this method does screen out those companies with solid cash position in their balance sheet. Perhaps, we can improvise the strategy a little, rather than 2/3 of NCAV, maybe we can multiply the NCAV by 2 or 3 times instead.

Happy investing,
Pauline Yong

Thursday, July 7, 2011

Affinity Groups: To Join or Not to Join

To join or not to join. To get involved or not.  The New York Times Sunday posed the query to Consortium CEO Peter Aranda in its July 3 edition:  Should members of under-represented groups join the "affinity groups" that exist in certain business settings?  They are special-purpose groups within a company that attract a membership of women, Hispanics, or Asian- or African-Americans. Or they may be groups that attract others with shared interests or backgrounds:  LGBTs, Native Americans,  Arab-Americans, or South Asians.

They may include--within the institution--groups of African-American investment bankers, an Asian society of traders, researchers and analysts, or women in risk management. They could include Latinos in private banking or financial consulting.

The Times posed a challenging question, one that many within these groups grapple with from time to time. Is there an advantage or disadvantage if you choose to affiliate with affinity groups while you are ambitiously trying to advance within the company? Is there a negative stigma in the eyes of those who appraise and promote you? (See

Aranda suggested affinity-group involvement is beneficial if the primary purpose is not social. "Affinity groups can operate like focus groups," he told the Times.  The affinity group should have a purpose consistent with the business objectives of the company. Aranda suggested you should join  groups that have senior-executive sponsors and that are directly tied to business functions like recruiting, marketing, or product development.

Or you should join if the group has a mentor program.  "From a minority perspective, you should have mentors, so if you are a Hispanic junior executive and you hope to rise through the ranks, you can talk to someone who has been down that path ahead of you," Aranda said. "What you need to be careful about with affinity groups is that you aren't creating segregation by being exclusive."

Many major financial institutions, such as Citi, JPMorgan Chase, and BofA endorse the formation of affinity groups and support them in many ways.  Most such groups were formed to help in professional recruiting and evolved into networks that assist in retention and career development. They work with recruiting units to top identify candidates and escort prospects through the recruiting process. 

It's not unusual, however, for a woman, African-American or Asian-American to assess whether being associated with such groups slow down progress to get promoted or win an opportunity to transfer overseas. In financial services, performance, commitment and productivity count during appraisals. But impressions do, too, whether or not they are conveyed fairly. So inevitably, women and minorities ask themselves about the possible stigma of being associated with groups that might be regarded by outsiders as separate or exclusive.

Often, however, affinity groups offer broad advantages and institutional assistance. Big banks, firms and institutions in recent years have not shunned their formation and have not frowned on them.

How then can affinity groups be formed "without guilt" and with pride and enthusiasm, while conforming to overall business objectives?

1.  Affinity groups can assist in recruiting. They can participate by visiting campuses and identifying candidates. They can help institutions formulate firm-wide recruiting strategy, establish relationships with diversity pipelines (such as the Consortium, of course), improve relationships with professors and career advisers at colleges and business schools, and assist recruiters as they comb through long lists of candidates.

Members of affinity groups are usually committed, experienced business professionals. They will know better than corporate recruiters the special talents and strengths necessary to excel on the job. They will be able to pinpoint outstanding women and minority candidates more quickly. They will, also, be more familiar with the sources, pipelines and places to find that talent. They will know HBCUs, understand the value of such groups as National Black MBA Association, the Consortium, or Toigo, or have ties to social and professional organizations within these communities.

2.  Affinity groups can assist in the institution's efforts to hire experienced or lateral talent.  How often have we heard banks, funds or companies say they want desperately to hire experienced vice presidents from under-represented groups, but "can't find them"?  Affinity groups usually know who they are, where they can be found, and whether they might be interested in a lateral move.

3.  Affinity groups can assist in the development of entry-level professionals, including recent MBA graduates.  And they can do this in formal or informal ways.  Most large institutions have structured professional tracks (for analysts, associates, etc.) and care about the development of all who join. Often, however, some junior professionals get more attention and support than others. Others are deserving of support and encouragement, but get lost among the throngs of new people. 

Affinity groups, therefore, can step in to ensure that everybody is advised, guided and encouraged to progress. They can do this via mentor programs, special seminars or career-development sessions. Or they can encourage senior managers, bankers and traders (including those who are part of the affinity groups) to reach out to junior professionals.

4.  In finance, topics, markets, and business can be complex and always changing. The learning curve is always upward. Keeping up can be difficult. Affinity groups can (and should do more to) be a source for members to reach out to each other for information, knowledge and understanding.  The affinity group may act as a "clearinghouse" for questions about products, markets, clients, and technical analysis.

For example, a junior banker may need a refresher on equity derivatives or foreign currencies.  The affinity group can match the banker with another member who is an expert on the topic and will gladly take the time to explain the product.  A recent MBA graduate may want more information about tax-related accounting, financial models, or corporate valuations.  The affinity group can find a member expert who will gladly help.

Once formed, how can affinity groups be effective and self-sustaining? How can they exist long beyond the initial enthusiasm of the early days of formation?

1.  As mentioned above, they should have business-related purposes and specific objectives aligned with the business objectives of the institution, the sector, or business unit. If so, the group will likely provide ongoing institutional support.

As Aranda said, affinity groups should have senior-management presence or senior sponsors.  A senior manager should agree to be more than an in-name-only sponsor and should agree to be involved and act as a champion for the group in business-unit meetings, corporate strategy sessions or even board meetings.

2.  To ensure it transcends being a social outfit, the group should define objectives and strategies clearly, should share them with the broad corporate population, and should meet routinely.  The group should show that it is serious about its intentions and it plans to be around.

3.  The group should reach out early to new professionals, solicit their ideas, absorb their energy and accept them as equals in the group.

What then makes affinity groups vulnerable and ineffective or perceived negatively?

1.  Petty issues and politics suffocate affinity groups.  Sometimes they get bogged down in non-essential issues or caught up in broad corporate politics. The groups sometimes risk spending too much time on the wrong issues. Members lose interest, when they think the time is better spent going back to the office to tackle the in-box.

Affinity groups should, therefore, be attentive to and conscious of how members use their time.  Most members must weigh the time involved vs. the time involved in daily job responsibility. But most are willing to take the time, because they see the long-term benefits. Affinity groups must strive to avoid unnecessary work or projects.

2.  Sometimes they smother themselves with power struggles within the groups. Sometimes members become more impressed by their being heads of their organization than by the mission at hand.  Members risk wasting time figuring out what the titles or name of the group should be or who will represent the group in its meeting with the CEO.

3.  Vague and inconsistent communication sometimes hampers such groups. A group's steering committee might fail to inform all members about what the objectives, programs, strategies and updates are.  Members then feel isolated or disillusioned and become less interested to support the overall cause.

Affinity groups are effective when they are inclusive and are fierce in their efforts to keep everybody informed.

4.  Sometimes affinity groups trip when their objectives are vague, confusing or cumbersome because of corporate-speak.  Some outsiders are already not sure why they have been formed or why they exist; hence, members shouldn't be confused about the real purpose.

The objectives should be crisp, simple, straightforward.

5.  Affinity groups shouldn't be exclusive. They shouldn't try to define membership qualifications and should, in fact, encourage those of different ethnic backgrounds or sex to join and participate. Sometimes groups have stumbled over themselves trying to stipulate who can join or not or who can become leaders or not.

To join or not to join?

If the objective is proper, if the ultimate aim is consistent with institutional mission, if the passion is there, and if the time involved is productive, then why not? There will be long-term benefits for members--and for the institution.

Tracy Williams

Monday, July 4, 2011

Herd Mentality

“Although markets do tend toward rational positions in the long run, the market can stay irrational longer than you can stay solvent.” - John Maynard

Today I would like to share with you a mental bias that concerns every investor, which is known as "herd mentality". But before that, let's acknowledge that the phenomenon of the herd mentality can be useful in many ways. For example, research shows that although 5% of the animals in a herd know the location of the water source, the entire herd is able to find it. In our daily lives, we use this instinct to navigate to the exit in cinemas and crowded streets.

We have to admit that herding is our human instinct. Herding always makes us feel comfortable, and being the odd one out make us feel uneasy. We are programmed to feel that the consensus view must be correct one; and this mistaken belief has led to many disastrous decisions such as the “Four Dragons” and “Four Tigers Era” of the 1990’s where many investors who were initially sceptical ended up buying into the hype under the mistaken belief that not everyone could be wrong. And yet, most people were wrong.

Some researchers theorise that investors follow the crowd and conventional wisdom to avoid the possibility of feeling regret in the event that their decisions prove to be incorrect.

Fear of Regret
People tend to feel sorrow and grief after having made an error of judgment. Investors deciding whether to sell a security are typically emotionally affected by whether the security was bought for more or less than the current price.

For example, most investors avoid selling stocks that are making paper losses in order to avoid the pain and regret of having a bad investment. The mentality is: after all, it’s only a paper loss, as long as I don’t realise the loss, it doesn’t count!

In addition, investors have the mindset of “what if the price goes up after I’ve sold it”; hence they would rather hold on to bad stocks hoping one day it will turn into a star.

However, some professional traders even advocate trend following as their winning trading strategy. They would apply technical analysis to help them in identifying the prevailing trend and trade with the trend. The biggest pitfall of this method is that it ignores fundamental analysis totally.

Herd mentality can be for good or bad. It is not totally wrong to follow the herd, but we must know when to follow and when not to. The challenge is in making an educated guess about when a turning point will occur and developing a trading plan to capitalise on it.

Happy investing,
Pauline Yong