What factor investing can do for your returns, a lesson from the TSX rebound and why do we keep making stupid investment decisions?

The Behavioural Investment blog provided a useful review of common psychological pitfalls for investors in “Why Do We Make Stupid Investment Decisions?” The section on outcome bias was particularly noteworthy.

“The problem of outcome bias is particularly pernicious in financial markets – this is because of the inherent level of randomness in results (particularly over short-time periods) which means that sensible decisions can often appear quite the reverse. Sometimes stupidity is rewarded.”

The other topics for discussion included many we’ve discussed before in this newsletter – overconfidence, impatience, herding, and misguided advice from experts.

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The need to constantly restate these concepts – the numerous ways that normal human thought patterns interfere with successful investing – is what interests me. Much of the advice has become common knowledge yet investors continually ignore them, like I did last week.

Nobel Prize winning psychologist Daniel Kahneman’s recent comments on happiness research might help explain investors’ stubborn refusal to rein in their worst impulses.

“I don’t think that people maximize happiness … that’s one of the reasons that I actually left the field of happiness… [people] actually want to maximize their satisfaction with themselves and with their lives.”

I suspect that investors have goals that, subconsciously at least, take priority over maximizing long-term returns in the same way that Mr. Kahneman notes self-satisfaction takes precedence over happiness. Specifically, the temptation to pit a stock idea against the market, potentially proving our intelligence and investing acumen, is gratifying to the point where longer-term financial goals are discarded. And, we get these psychological rewards immediately, unlike the satisfaction of maximizing long-term retirement savings.

All this could be over-analyzing. But there’s no doubt that the mental compulsions preventing us from following proven investing rules must be powerful if they usually win out even when we know they’re detrimental.

For subscribers interested reading a more comprehensive look at investing and behavioural psychology, my Thursday column, “My new pick for the best research report ever written for investors” describes a must-read new paper by Michael Maouboussin called Who’s on the Other Side?

— Scott Barlow, Globe and Mail market strategist

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The Rundown

Factor investing offers a realistic way to boost your returns – but there’s one catch you need to know about

The best minds in investing agree on one rather downbeat conclusion: Returns over the next decade are likely to be less generous than the ones we have enjoyed over the past decade. This is not pessimism. It is just reality. At current yields, bonds generate very little payoff once you account for inflation. Stocks may still have room to rise, but after several years of mostly good performance, it is difficult to argue they are exceptional bargains, especially after the sizzling returns of the past month. So what is an investor to do? One answer is to consider what is known as factor investing. It promises to help people do better than the overall market and is being heavily promoted as a strategy by several fund companies. Ian McGugan takes a look (for subscribers).

Don’t listen to the market cheerleaders: David Rosenberg

The global stock market, especially in the U.S., has spent much of this year correcting the deep oversold condition created in the December meltdown. The S&P 500 just had “the worst December since 1931” followed by “the best January since 1987.” This is not the stuff that bull phases are built on. The volatility in both directions is very intense. It must be remembered that after a similar 20-per-cent market recovery in the opening months of 1932, the S&P 500 rolled over and ended up hitting fresh lows that spring. And as for 1987, we heard this last January, too – nobody seems to recall January of 1987 or 2018 as the most memorable in those years. Everyone only remembers October. Pack that in your back pocket. The key for successful investing is to stay ahead of the curve and not to live in the moment. And avoid the temptation of following the herd at all times. David Rosenberg outlines his view (for subscribers).

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The important lesson for investors from last month’s big TSX rebound

The Canadian stock market’s strong start to 2019 is a reminder that it’s never a good idea to blow up a portfolio after a particularly good or bad year. The S&P/TSX Composite Index surged 8.7 per cent on a total return basis in January. Last year’s loss for the index came at 8.8 per cent. The index actually needs to rise 9.7 per cent to offset the 2018 setback – that’s how the math of losing money works. Still, in the span of a month, we’ve mostly backfilled the hole from last year. Rob Carrick reports (for subscribers).

Shopify’s stock price ‘just doesn’t matter much’: Q&A with Tobi Lutke

Ottawa-based Shopify Inc. debuted on the Toronto and New York Stock Exchanges in May, 2015, and is now Canada’s largest technology company by market capitalization. CEO and co-founder Tobi Lutke spoke with The Globe and Mail after the company reported fourth-quarter earnings. Sean Silcoff reports (for subscribers).

Others (for subscribers)

75% of CFOs are bracing for a recession

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Will investors adopt a ‘Trump and dump’ strategy?

Levi Strauss files for New York IPO after 35-year absence from public markets

Canadian ETFs: January’s launches and terminations

Thursday’s Insider Report: Executive VP of this large-cap dividend stock cashes out over $1-million

Thursday’s analyst upgrades and downgrades

Wednesday’s analyst upgrades and downgrades

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Others (for everyone)

Survey finds investors as bullish on U.S. Treasuries as they’ve been since 2016

Ask Globe Investor

Question: Are you expecting any of the banks to increase their dividends in the first quarter? If so, which ones?

Answer: The banks will start reporting first-quarter earnings on Feb. 22, and you’re going to need a program to keep track of all of the dividend hikes.

In a note this week, Desjardins Securities analyst Doug Young predicted that the banks’ earnings per share will grow by about 5 per cent, on average, for the three months ended Jan. 31. The gains will be “driven by NIM [net interest margin] expansion in Canada, and in some cases the U.S., decent loan growth across various businesses, a benign credit environment, good expense control and share buybacks.”

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Of the Big Five banks, Mr. Young expects that four will increase their dividends – namely Toronto-Dominion Bank (up an expected 10 per cent), Royal Bank (4 per cent), Bank of Nova Scotia (4 per cent) and Canadian Imperial Bank of Commerce (2 per cent). Because Bank of Montreal increased its dividend in the fourth quarter, it’s expected to sit out the dividend hike parade this time around.

Royal Bank (RY) will kick off earnings season on Feb. 22, followed by Bank of Montreal (BMO) and Scotiabank (BNS) on Feb. 26, National Bank (NA) and Laurentian Bank (LB) on Feb. 27, and CIBC (CM) and TD (TD) on Feb. 28. Mr. Young also expects a 4-per-cent increase from Canadian Western Bank (CWB), which reports on March 7.

(Disclosure: The author owns BCE, T, BMO, BNS, CM, RY and TD personally and (with the exception of BNS) in his model Yield Hog Dividend Growth Portfolio.)

–John Heinzl

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What’s up in the days ahead

The outlook for the bond market is looking up. This weekend, Rob Carrick presents his ETF Buyer’s Guide for the asset class.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston