[This content was copied from a post entitled "THE RECENCY EFFECT - THE INVESTOR'S BEST FRIEND" on the Woolworths thread.]
I have been a keen student of a psychological condition called the Recency Effect, insofar as it applies to investment markets.
The Recency Effect, in psychology, is a cognitive bias that results from disproportionate salience of recent stimuli or observations. People tend to recall items that were at the end of a list rather than items that were in the middle of a list.
For example, if a driver sees an equal total number of red cars as blue cars during a long journey, but there happens to be a glut of red cars at the end of the journey, they are likely to conclude there were more red cars than blue cars throughout the drive.
As a more practical example applicable to investment markets, QBE's share price has been - and still is - subject to the Recency Effect, where the market, seeing rising domestic interest rates, and a concomitant strong A$, as well as multi-generational low US interest rates, extrapolated (wrongly) those conditions to perpetuity.
To the extent that these observations being made under the Recency Effect were out of step with "normalised" conditions, the stock presented an undervalued situation.
In the interests of edification, I thought it would be a useful practical example to demonstrate the Recency Effect in action.
Accordingly, I have copied comments (unattributed) from various QBE posts over recent weeks.
Notice how the tone of the commentrary reflects the prevailing share price, i.e., share price falling = "negative "further downside" tone, while share price rising = "positive tone and "there's further upside" (even if the share price is now rising from a hihger level than when it was argued to have downside:
Date: 20/11 Share Price: 16.55 Comment: ?QBE is starting to sound like a 3 letter acronym for "Dog With Fleas"!!
Date: 20/11 Share Price: 16.55 Comment: ?..my charts can't confirm any bottom yet. there are too many people just sitting and hoping.? ?There will be 1 more sharp pull back to take the last of the hopers out? ?...if your (sic) wanting to buy more, then I Wouldn't there is no turning point in sight presently, and definitely (sic) no confidence about QBE from the market.?
Date: 21/11 Share Price: 16.55 Comment: ?There's an idea for QBE holders sell your QBE shares...?
Date: 22/11 Share Price: 16.50 Comment: ?I will hold onto my vocal view of disapproval as flat ideas coming from management just don?t (sic) excit (sic) me?
Date: 23/11 Share Price: 16.37 Comment: ?Nice 1 does a dead horse bounce. Lol Only into a glue bottle would be my response. Seriously guys its looking very lame. Time for the bullet lol?
Date: 28/11 Share Price: 16.38 Comment: ?QBE is just being smashed by the exchange rate, the $100 is worth much less that what it was when the the $A lower?.
Date: 28/11 Share Price: 16.38 Comment:?...when we 1st started our engagement he indeed post on its great value @ $17.70 now where is it ($16.30ish??) where is the profit !!Down the toilet. Obviously QBE will rise as all boats rise in a high tide but this is definately not the Bluest of Blue chips Peppie and others were spruiking about for the last 3 or so months. Fact!!?
Date: 29/11 Share Price: 16.70 Comment:?...QBE great run today one of the blue chip top scorers today ... However my money is on a pull back tomorrow by how much will be a lead indicator for the remainder of its short term direction.?
Date: 30/11 Share Price: 16.83 Comment:? QBE ran hard today ;) Only concern is it hit 41 ema today and retreated!! Needs to continue north tomorrow or by weeks end for confirmation imo. Xmas rally may bring some smiles to QBE stalwarts, albeit about time,Lol?
Date: 04/12 Share Price: 17.50 Comment:?Gaps up QBE too small energy still upwards, blew past 1st resistance of $17.12 like it was standing still. Im of the opinion that gaps up early are to be ignored as the rocket fuels have only just been ignited ie too much energy (sure they will/could be entry points down the track). Next resistance of $17.67 is worth watching. then its on to next one at $18.40. Xmas maybe/possible?
Date: 06/12 Share Price: 17.51 Comment:?I wouldnt get 2 excited about today all moves are just pawns no big pieces until intel later today (4 those in the know) or tomorrow
Date: 09/12 Share Price: 18.01 Comment:? ...small resistance at $18.40 otherwise off to the moon?, ?I think Ur on a winner, just remember winning ticket isn't a winner til U cash it in. $18.40 easy with its eyes closed $20 something a strong possibility.?
Date: 10/12 Share Price: 18.30 Comment:? My broker calling US bonds a good move for QBE. Dont listen to KBB ie gaps, again still too early for any decent pull back imo.?
Date: 10/12 Share Price: 18.30 Comment:? All news from here has a higher chance of being positive. I Would Not Short QBE even if you offered me Bed time favours as the Reward.?
I have pasted these comments without attribution as they are not intended to casue offence to any individual(s); rather, the exercise intended to highlight mistakes of perception that almost everyone makes. I have conducted the exercise in the hope that HC members might be sensitised to the Recency Effect and, in doing so, become better investors for that is what I beleive to be HC's mandate
Hope it helps.
Cam
QBE Price at posting:
$18.40 Sentiment: Buy Disclosure: Held
(20min delay)