The psychology of money: Understanding bias in investing

Sentiment for the stock market appears to be reaching new heights as multiple financial firms have increased their target goals for the S&P 500 (^GSPC), including Evercore ISI, which recently gave an all-time high target goal of 6,000 points.

Ritholtz Chief Market Strategist Callie Cox joins Yahoo Finance Anchor Jared Blikre for Stocks in Translation to discuss the increasingly bullish sentiment for the S&P 500, and how bias might shape investors' point of views when investing in the stock market and what should be kept in mind when investing in the broader market.

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This post was written by Nicholas Jacobino

Video Transcript

Welcome to stocks in translation, your essential conversation.

Cutting through the market, mayhem, the noisy numbers and the hyperbole to give you the information you need for your portfolio.

And today I'm joined as always by Sidney Fried, our Intrepid producer along with Callie Cox, who is now, excuse me, the chief market strategist over at Ritholtz Wealth Management, a brand new role for you and really excited that you're here.

Hi, Jared.

It's so great to be here.

And you know what I feel like I'm in a familiar role because I've just been a fan of Ritholtz and Yahoo Finance for years.

All right, appreciate it.

And we're going to be joined here.

Actually, we're going to talk about today.

This is the psychology of money.

We're gonna kind of frame the direction of the show and some of the topics around that in our related phrase of the day is bias.

Uh We've all got biases sometimes they help us many times not.

Uh but we're going to dig into that and see what it means for investors in investing.

And this episode is brought to you by the number 6000.

That is the New Street high target for the S and P 500 by Evercore.

I si we always take a note when a big bear throws in the towel.

Now, Callie said I want to break down where we are in the markets and you can pick up the ball here.

But we've got the NASDAQ and the S and P 500 at record highs.

The Dow has been lagging, by the way, I was just looking at the, the month long tallies in June, the dow is negative by a small percent.

The NASDAQ 100 is up 7%.

So, you know, we keep hearing these markets, these concentration arguments.

Uh What are we to believe here?

Well, first of all, I'm gonna say, I don't have a crystal ball.

Every strategist who comes on the show should, should say that.

But I'll tell you everything that I'm seeing and I'll teach you about, you know how all these dynamics work together.

So, yes, we at record highs, the S and P has been pretty much going up since October of 2022.

So we're almost 20 months into a bull market along the tooth.

You know what the average bull market since 1950 is 5.4 years long.

So based on history, maybe not.

And I think it depends on the job market, but I'm sure we'll get to that.

You asked about tech.

Yes, the gains are very concentrated.

You hear a lot about NVIDIA Apple Microsoft.

Well, the market's rewarding that you're seeing a lot of the gains happen in those stocks.

And unfortunately, that means that, you know, most of the stocks, most of the brands that we work with every day aren't participating fully in the bull market.

I think that's a good thing.

I think that means more potential.

Um, I think that's a good reason to look outside of tech.

But you know what if you're an investor in the late 19 nineties, this probably freaks you out a little bit.

This is, this is what of what happened then they had.

So we had a.com bubble, it bust, it was busted.

Um But so for all the arguments about concentration, I'm just wondering how do they, how do they stack up?

Is it really such a bad thing that we have just a few stocks contributing to the rally?

Well, it's natural.

First of all, you know, a lot of money than you would think more common than you would think if you look at history and I'm a historical nerd.

I love historical data.

You probably know that if you follow me on Twitter, I join you in these efforts sometimes.

Yeah, of course, we're all nerds here.

Let's be honest.

But market concentration is natural and what I mean by that is when markets go up, usually the stocks that are doing really well, get more money because people hear about it.

They want to invest in this age of ETF S and market cap weighted indexes.

Some of that happens just because a lot of us put our money into an E uh an index ETF and that money goes, you know, almost directly by market cap into the stocks.

So it happens, right?

This is so winning, begets winning like the winners get bigger, the winners get bigger.

Exactly.

Jared.

But this is extreme.

You're not, I mean, so there is collaboration here a little bit.

Exactly.

Yeah.

And there's this crazy stat, like 70% of S and P stocks have underperformed the index both last year and this year, year to date, which is a lot of stocks that are not keeping up.

Uh So it, it is a little worrying and it's probably a good reason if you're in the in videos and apples of the world to consider, you know, what's happening here and to think about, you know, maybe spreading it out a little bit.

Yeah.

So Kelly, if you, if you are an early investor, if you know nothing but you're hearing about NVIDIA and all the mag seven stocks, what's just your general advice for that?

Do you get in on those stocks?

Do you go to stocks that have maybe been one of the underperformers in the S and P uh in the hopes that you're kind of diversifying Jason Laggards?

I do it every day.

Yeah.

So what do you do if you're early on?

Yeah.

That's a great question.

And I'll emphasize here that everybody is different, right?

We're all investing for different goals, different reasons.

So the way you invest is going to look a lot differently than the way I invest.

And I'll say it too.

You know what?

If you hear about a stock from a friend and you say, you know, that brand's interesting.

I know a lot about that brand.

That's a perfectly legitimate way to invest.

A lot of people, you know, invest based on the brands they like and typically it works because if a lot of people like a brand, chances are they're making a lot of revenue and hopefully they're managing their costs on the other end.

And you know, it could be a good investment.

But if you're an investor, first of all, you need to sit down and have an honesty hour, you need to understand how long, most importantly, you have to invest this money and what kind of risk you can stomach.

Can you stomach half of your money in the span of a month?

I mean, maybe not.

That's tough, but that's something you can go through if you invest in a single stock and you know what if you're a tech investor, just realize that there is a huge market outside of tech.

Um tech has a lot going for it right now.

I think it could have more in the tank, especially if you know, we do see lower rates and a progression of this A I story.

But at the same time, you know, do you want to be picking winners here?

You know, typically, typically winners, yeah, winners if they win, right?

If they win.

So what, so kind of going off of this?

What's your one piece of advice for those same investors to do their due diligence?

And even if they're hearing something from friends or family or they're seeing stuff online, what's like the one thing they should always and don't say read the prospectus, although maybe you should read the perspective, read the whole prospectus.

Well, it's not bad of us but no, it's not.

But I'll go back to finding your, why sit down and really understand, have an honesty hour with yourself on why you're investing a lot of investors out there.

A lot of it's for ego and for reasons that aren't she going to get you a kind of safety for your money or return?

So.

Exactly.

And you might, and look, I'm not going to pooh pooh, how anybody invest their money.

Right.

It's their money.

They can do whatever they want.

But a lot of people are investing because they want that nice nest egg because they want to, you know, have a nice retirement because they want to have a beach house down the road and look, if that's you, there are a lot of ways to invest where you don't have to extend yourself.

And try to hit that home run.

You know, if you want to do that, that's great.

And if you find, you know, stock picking to be interesting, then do it, just do it on the side and understand what your goals are.

Great advice go slowly.

I think this would be a great time to introduce our word of the day, which is bias and this really relates to the psychology of money and why we're doing this in the first place, which is investing.

So here's the definition of bias.

I was able to cobble together from a few different sources, including psychological sources, like psychology today and also some financial sources.

But bias refers to a tendency, inclination or prejudice toward or against something or someone.

So a tendency, inclination or prejudice in the context of money and finance bias can significantly influence a decision making process and it potentially leads to irrational or suboptimal outcomes.

So I have a different types of biases and this goes beyond investing.

But home bias is one where we favor what's what's really familiar to us.

The grass is greener bias.

We like that shiny new object over there, overconfidence bias, kind of self, self explanatory, but quite dangerous to think, you know, something if you don't really know it and then recency bias, I think that's a really common one.

Uh we tend to be influenced more to a greater degree by what just happened and that kind of fits in with a lot of investing mantras.

Like uh you're always fighting your first bear market because that was the one that kind of cemented itself in your head.

So Callie, my question to you, what do you think of bias?

And how would you tell investors how to approach it?

Bias is everything?

Because let me tell you, your brain influences how you invest more than you think.

And the wild thing is your brain probably isn't wired for.

I actually, I know it's not hired for investing because your brain tells you to run away from risk.

And as an investor broadly, it generally pays off if you're a long term investor to lean in when everything feels scary.

Um Of course, there are a lot of asterisks you can put there.

But you know, one thing you have to conquer as an investor is your brain and these biases that work through you your whole life about money, Jared, I could talk about this for hours.

But psychology is so interesting when it comes to how you view money.

So Kelly, how can investors kind of stack the debt and make sure they're as prepared as possible to deal with some of these market biases?

That's a great question.

And I think the answer is very dynamic, but you know, in general realize that these biases are a thing.

I mean, Jared, you read off five very good biases to study and you know, take them understand them and look at your own portfolio and in the view of, you know, maybe the opposite way.

So like if you have home bias, for example, look at your portfolio and say, you know, what if I believed international stocks are going to just absolutely kill it this year?

Am I ready?

Because that is a scenario that could come across, it hasn't happened a lot lately, but you need to be prepared for that.

And at the very least that helps you challenge yourself.

Right.

It helps you say, you know what I think this way, but let me step out of my skin for a little bit and understand where my weaknesses are.

Number one, investor mistake that I've seen over the years and I've done plenty of times myself and that is just, um, just kind of locking down, doubling down on what you think.

You know, when, in fact, you should be paying, you should be paying attention to something over here, changing your opinions, but you get locked in this mindset like, you know what's gonna happen and you don't hear, you don't see what's going on and, uh, you miss warning signs, there's always warning signs, but we just seem to miss them.

And, uh, it's not, it's not a mystery how you, um, you, you had some really interesting words here and it gets back to fear and greed and the human brain is not wired to invest.

I mean, we're not, it's not just, it's not just fear, it's greed.

We're, we're, we should be doing the opposite of what our brains are telling us a lot of the percentage of time in trading.

And that's why it simply doesn't work out for a lot of people.

Now, what do you do to overcome that?

I think you just laid out some great habits and, and that's what it's all about is just trying to get up our habits going in the right direction so that we have a chance of landing on the right side of the market.

But if you're defending this one position on Twitter, you know, formerly Twitter on X for three months and it's gone the other direction.

Well, you know, that's an obvious example, but that happens a lot.

I love that.

You just said we're not wired to invest or your brains aren't like, that's so interesting.

Yeah, let me give you an example.

So, ok, we all know not to touch a hot stove, right?

You wanna touch it and as a kid, you know, you touch it that one time and you say, oh, never again.

Well, that's a perfect way to think about investing because the reason why we don't touch hot stoves or the, you know, after the first time we touch it, we don't do it again is because our brain says, no, don't do it.

That's going to hurt, you know, that's gonna cause damage to your fingers and that's what your brain is supposed to do.

That's why it's your brain.

You know, that's why we are sitting here like it's, it's a survival tactic, but it just doesn't work when comes to investing in markets and thinking long term, which is so wild.

And I think that's why there are so many arguments and thoughts about how to look at money because it is so unnatural and it's really, it can be so frustrating.

We've all seen the people, famous people.

A lot of famous people melt down on X while they have lost a lot of money.

I'm not going to mention any names here.

I do need to take a short break but coming up, we're going to be talking about market concentration even more and how Taylor Swift is influencing money policy over at the Bank of England.

All right, we are back here and it is time now to get to our sponsor this episode brought to you by the number 6000.

That is a new street high target by Evercore Isi.

That's an investment bank on Wall Street.

And here's a quote from Julian Emanuel who wrote the note, the pandemic changed everything.

Record stimulus, elevated household cash balances and low leverage support.

The consumer then came A I today, ja I uh productivity potential in every job and sector is inflecting the backdrop of slowing in inflation.

A fed intent on cutting interest rates, steady growth have supported goldilocks.

So I think the story for me here isn't the nitty gritty details is that they went from 4750 in the S and P 500 to 6000.

They are the most bullish on Wall Street that kind of threw in the towel here.

So when, when you hear something like this and I don't expect you to comment on your colleague or you know, uh there are specific uh bullet points here.

But what do you think about that?

That's happening a lot these days, we see headlines like that all the time and I, I don't want to name firms, but, you know, there's one reason why we don't do S and P 500 targets because we believe that every investor just needs to stay in it for the long run.

Like I said, we all have our own goals and you don't need somebody, you know, standing out there pretending, pretending like they know what happens next.

I understand why strategists do it.

We don't do it.

That's our philosophy.

Uh But it makes sense, right?

The S and P has surprised everybody this year uh against and most years.

That's true.

Jared.

It's true.

That's just the way it goes.

But this year, you know, we've had a lot of, you know, weird cross tensions to consider and the biggest one is interest rates, right?

Interest rates are sitting at 5% right now and when interest rates are high behaviorally it makes sense to put more money into cash.

You're taking less risk and you're getting high rates on it.

Why wouldn't you do that?

But, you know, while all this is happening, stocks keep moving higher.

And as we said earlier, you know, it's very concentrated in tech stocks which makes a lot of people nervous.

You know, when I think about the stock market, you know, I've been a little more bullish, a little more excited than the average strategist because I believe so much and what we're seeing in the job market, we are seeing a solid but slowing job market too.

Personal story.

Look, you started a new job jolt's job openings right there.

Uh I don't think that's the correct term actually.

Yeah, close enough, close enough.

Uh, but the job market is so strong, especially for people like you and me, the millennials.

Um, you know, and wage wage gains are quite high as well.

Wages have been outpacing inflation for the past 14 months.

That is a great thing to think about.

If you consider that people spend money when they have income, a lot of people's primary incomes come from their jobs and consumer spending is 70% of the US economy.

Look at corporate profits.

You see the same thing, corporate profits dipped a little bit last uh in 2022 coming into last year, but they're rising again and there's a lot to be excited about here.

So I think that there are some doubters and I understand feeling that way, feeling nervous about it but I think, and feeling sometimes betray you.

Yeah.

Yeah, it's true.

Yeah, I think we are seeing some of this bullish excitement from analysts.

We've seen a couple of raises of their, of S and P targets.

I want to back up though and even ask, I understand firm doesn't do this price target.

How do analysts even come up with an S and P?

It is a good question and there are 22 main ways to do it.

Top down, bottom up, top down is considering where the economy is zooming out and taking the 10,000 ft view.

And then digging in and understanding GDP rates, understanding inflation, understanding interest rates, the broader trend of corporate profits, interest rates.

That's another good one.

And then coming up with a target based on that.

A lot of times you see people say, you know, I think S and P 500 companies are going to make X amount of money per share this year.

And if you multiply it by this uh valuation, considering where inflation is, you know, how excited we think investors are about the markets and all these different variables.

This is what, what we think the target will be.

I think they're a bit misleading when it comes to everyday investors though, they're more of like an institutional marketing tactic.

Um That doesn't mean you can look at them and, you know, overanalyze them.

But I caution you against putting too much weight into them.

Well, I was gonna say I see this so much in data or in analysts predictions like, you know, you fall behind the S and P goes up, you, your target was 200 less.

Now you're raising it 1000 but you just keep raising it as it goes up and it's kind of, I don't wanna say it's like you, it's not arbitrary.

Like you, you see similar things with people trying to predict where interest rates are going.

You predict what the jobs numbers are gonna be.

Why is this everything to do with the stock market predicting so much?

How do, how does a simple investor kind of cut through all those predictions and make their own choices?

I mean, that, that's a great way.

Can you understand that nobody has a crystal ball and that we're all students of the markets here?

I will never claim to know what happens next.

Nobody knows.

I think that there's a Warren Buffett quote out there, how he calls himself a student of the markets if Warren Buffett doesn't know what's coming next?

Like, let's be honest, why are we playing somebody would call him and he doesn't know.

So there you go.

Yes.

But he's smart in admitting he doesn't know very voracious reader.

So nothing to take away from his connections there.

I do want to get to a taste of Hollywood.

Here it is.

Who else?

Ok.

Here we go.

Because who better to grace the who wore a better playbook than the one and only Taylor Swift.

So we're going to get to this in Liverpool England Sunday night.

She notched her 1/100 show of the Eras tour.

She is expected to add a billion pounds or more in spending when all is tallied over there.

But all that spending comes at a price inflation and here's where Wall Street comes into play.

We have TD Ameritrade.

They're out with a note Friday saying that Taylor's tour could add 30 basis points or 3/10 of a percent to services inflation in August and about half that in headline inflation.

Again, that's in the UK.

So Taylor's five concert dates in Jolly old England in the middle of August because she's going back there.

They are expected to boost prices such that it could alter the Bank of England's plan to cut interest rates.

Says TD says the analyst.

Meanwhile, we know how this story played out in the US Swift got shouts by the Federal Reserve in official press conferences and business briefs.

Investment Bank.

Nomura estimates that monthly travel inflation rose 2.1% points for us cities in the Era tour.

One more piece of evidence.

Look at the box office because you got her movie Taylor Swift.

The Era tour.

This is based in on her final US concert.

It has already pulled in 250 billion, a million, excuse me, a million dollars.

Um And that's just an incredible run.

So I gotta ask you considering all of this, which domicile, which country is wearing the Taylor swift inflation?

Uh I guess uh tour hype better.

Wow, that is such a good question in full disclosure.

I'm a swifty.

So I love that you asked me this.

I, so first of all, T D's note about Taylor, swift delaying interest rate cuts is a little extreme and I'll tell you why.

So a lot of the inflation that we're seeing in the UK and Europe has been goods based.

Um not to say that there hasn't been this like services, this persistent inflation going on underneath.

But the big problem that we've seen has been, you know, food prices, it's been gas, which is different than the US.

Exactly.

The US has suffered from that.

Of course, I mean, we've all paid at the pump, right?

But in the US, the big problem has been services inflation, what you pay for a haircut, what you pay for insurance, what you're paying for traveling airline tickets, concert tickets, exact all of that and that's influenced by demand.

Uh Europe has a little bit of that but their problem has largely been a supply issue.

You know, they were especially exposed to and still are exposed to, you know, the challenges we see in Ukraine, um they're exposed to you know, different trade, I call them trade dynamics across the globe.

And, you know, they're also at a point where their, their economy is sputtering out a little bit.

So for somebody to say that, you know, Taylor Swift's, you know, few day visit to a European country could influence a central bank.

You know, I'm probably calling BS on that because like, it's not, it's not the right issue.

Right.

But at the same time, that is kind of what they want to see, right?

If their economy is, you know, falling off a cliff, falling off a cliff is extreme.

But if their economy is slowing, they want to see consumers get excited and spend money in their cities.

Kelly, I love how you were able to break that down.

Number one, I do need an answer from you though.

So is it the US or the UK that is wearing the Taylor Swift hype train, I guess to a more extreme.

The UK needs it more right now.

I think, I think the US also needed it last year, but the economy was stronger than people expected and I'll say one more thing.

So 70% of the US economy is consumer spending.

European countries are less exposed to the consumer.

I wish I had a number for you, but they don't get that benefit as much as we do.

So goods matter more.

Yes, exactly.

Goods and businesses for that matter.

Why is that?

Why is the consumer spending more a part of the US or services.

They don't have the discretionary income or?

Well, look around you where Americans are very good at spending money.

I think that's the main reason.

I know.

That's true.

We are very, we are very good at spending money.

We are gonna throw up a little disclosure that you're Taylor Swifty.

We, we must, uh, my question for you is personal.

Uh, we talked a little bit in the break about how you actually saw Taylor Swift.

I saw her in Madrid.

I did, I did not, I don't wanna go into anecdata.

Oh, got him.

I'll leave the economic comment to be worried about uh spa Spanish inflation.

Exactly.

How much did you contribute to the economy personally?

More than you wanted, more than I wanted.

But let me tell you, it was an incredible show.

The production was just fantastic.

Taylor is just such a good singer.

I have nothing but good things to say.

There's a reason why you keep hearing all these like rave reviews about it.

I was on the floor.

I stood for seven hours.

My feet were killing me at the end but totally worth it.

Economy wise.

So economic commentary because I always got to bring that back in.

You know, the show was sold out first of all, but you saw a lot of Americans there.

Um saying, you know, I couldn't get a ticket in the US.

This was my chance.

And in fact, you know, I was in Portugal as part of that trip too and I was talking to a gelato stand cashier and he was like, people in Portugal are actually quite mad because uh they were almost crowded out by the Americans who didn't want to pay $2000 for nosebleed seats in the US.

So I think that's a really interesting dynamic, you know, I don't want to extrapolate too much because that's anecdata, but it really goes to show how well the US is doing compared to everybody else.

And that's an, that's an important thing to remember right now as we think about rate cuts in the US versus rate cuts in Europe that it's relative, all relative.

We got 20 seconds for investors one last piece of advice or just, you know, throw something out there into the ether uh think long term.

Uh I don't know if you caught Roger Federer's commencement speech.

Uh but he talked about how he only won 54 54% of points, but he won 80% of his matches the stock market works, works the exact same way.

And my colleague, Ben Carlson wrote about it today.

It's all about those little moves compounding over time and just remember we're all learning here.

Yes, we are.

And on that note, we're going to keep you tuned to Yahoo Finance where you can learn much more, but keep that dial here.

Thank you for watching stocks in translation.