BEHAVIOURAL FINANCE - SECTION V - CHAPTER 32 - Forerunners to Behavioural Finance

1. Module - 51
The Forerunners to
Behavioural Finance
CMT LEVEL - I

2. Introduction to Technical Analysis
Momentum
Strategy & Mean
Reversion Strategy
Value Investing
Noise in Financial
News

3. Momentum Strategy & Mean Reversion Strategy
• Momentum Strategy - Momentum investing seeks to take advantage of
market volatility by taking short-term positions in stocks going up and selling
them as soon as they show signs of going down.
• A momentum investor looks to take advantage of investor herding by leading
the pack in and being the first one to take the money and run.
• Mean-reversion strategies work on the assumption that there is an
underlying stable trend in the price of an asset and prices fluctuate randomly
around this trend . Therefore, values deviating far from the trend will tend to
reverse direction and revert back to the trend.

4. The Birth of Value Investing : Graham & Dodd
• Value investing is an investment strategy that involves picking
stocks that appear to be trading for less than their intrinsic or
book value.
• Value investors actively ferret out stocks they think the stock
market is underestimating.
• They believe the market overreacts to good and bad news,
resulting in stock price movements that do not correspond to a
company's long-term fundamentals.
• The overreaction offers an opportunity to profit by buying stocks
at discounted prices—on sale.

5. How Value Investing Works
• The basic concept behind every-day value investing is straightforward: If you
know the true value of something, you can save a lot of money when you buy
it on sale.
• Most folks would agree that whether you buy a new TV on sale, or at full price,
you’re getting the same TV with the same screen size and picture quality.
• Stocks work in a similar manner, meaning the company’s stock price can
change even when the company’s value or valuation has remained the same.
• Value investing is the process of doing detective work to find these secret
sales on stocks and buying them at a discount compared to how the market
values them.
• In return for buying and holding these value stocks for the long-term, investors
can be rewarded handsomely.

6. Financial News in a world of TV & Internet
• In Modern Financial Markets , there is constant news
reporting on television and the internet on up & downs on
individual securities and such information is known as
“Noise” & Such News Audience could be described as
“Noise Traders”
• A Rational Investor have no interest in year end rallies or
such noise in their investment decisions, they follow their
own analysis.