BF Guest lecture : Building a solid investment philosophy

investment philosophy / beleggingsfilosofie

a clear view on fundamental market mechanics, on what forces are at work and how they interact

→ het bredere kader binnen het welke je een belegginssrategie moet formuleren

solid one = cornerstone of every successful investment strategy

Louis Bachelier (1870–1946)

• Beroep: Franse wiskundige.

• Belangrijk werk: Théorie de la spéculation (1900).

• Bijdragen:

  1. Introduceerde de Brownse beweging voor financiële markten.

  2. Stelde dat aandelenkoersen willekeurig bewegen.

  3. Legde de basis voor moderne financiële theorieën.

Bekend om: Grondlegger van financiële wiskunde.

brownian motion

bachelier first to develop a mathematical model of ‘brownian motion’ which he applied to financial markets

• Definitie: Een willekeurig proces dat beweging beschrijft waarbij veranderingen op elk moment onafhankelijk en onvoorspelbaar zijn.

• Toepassing: Veel gebruikt in financiën, natuurkunde en statistiek.

• Eigenschappen:

  1. Onvoorspelbaarheid: Elke verandering is onafhankelijk van vorige bewegingen.

  2. Continu proces: Beweging verloopt continu over tijd.

  3. Normaalverdeling: Veranderingen volgen vaak een normale verdeling.

the random walk

bachelier → 2de benadering

• de beurst volgt een stijgende tendens maar het pas daarrond is willekeurig

1952, Harry Markowitz publishes ‘Portfolio Selection’

• first scientific approach to build a protfolio of risk assets

• first to define risk as ‘deviation from the mean’ AKA volatility

• first to emphisize and quantify the benefits of portfolio diversification → “the only free lunch in financial markets’

types of portfolio diversification

• across asset class

• geography wise

• across time

• investing style

• within asset class

• across capitalization

efficient market (Eugene Fama)

is a market in which numerous investors, most of which are rational, compete in order to maximise their pofits. All investors try to estimate the fair value of a security by using all relevant information which is publicly available. Intellectual competition ensures that the maket price reflects all relevant information available at any point in time. Therefore the market price is the best possible estimate of fair value

→ fluctuates over time

markt efficientie als de concurrentie ervoor zorgt dat de prijs op de markt alle belangrijke informatie weerspiegelt die op dat moment bekend is

behavioral finance

a branch of psychology that focuses on observable behaviours

• decision making relies heavily upon simplifications, that lead us into error

• decision making is heavely influenced by the way in which invormation is presented

• emotions (when they run wild) interefer with rational decisions

→ the investor dors not always act as a rational utility maximiser

the wisdom of crowds

when certain conditions are met, a group of common people will always outsmart any individual expert

• this sets the scene for market efficiency and market inefficiency

• sets the scene for active management

when conditions for wisdom of crowds are met, go passive, when not, go active

the conditions for crowds to be wise

• diversity of opinion

• access to local information

• independent decision making

• information aggregation mechanism

market’s statistical distribution

very long term : stock market returns more or less normally distributed → reliable long term forecasts (within certain ‘normal’ boudns) are possible

are short term forecasts good ?

no, they are doomed to fail

it’s time in the market, not

marketing time that is important

what is volatility

the natural shadow side of the large return premium for equities