Journal Of Indexes
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2008
2008
Money and Your Mind
July / August 2008
Journal of Indexes Articles
The Curmudgeon - Behavioral Finance’s Fractured Future
June 12, 2008
 People over-think behavioral finance. They use complex scientific studies, MRI exams, brain-imaging technology and lots of other scientific gibber-jabber to try to show that you can use behavioral finance to improve your investment activity. But it’s really very simple, if you just look at the words. There’s behavior and there’s finance. Words we know. What’s complicating things is how much attention these two words, joined together, are getting.There’s always money to be made monitoring and modifying others’ behavior—financial or otherwise. Let’s look at the intersection of behavior and finance for clues to profiting from behavioral finance, whether you believe this stuff or not. There are companies in the business of behavior modification on an inpatient and an outpatient basis. The inpatient stuff goes into the behavior bucket—the Behavioral Index, if you please. The outpatient stuff goes in the financial bucket. The Behavioral Index is led by Tennessee-based Psychiatric Solutions, Inc. (NASDAQ: PSYS). Don’t ask me how or why the Volunteer State has become the nexus for psychiatric treatment. All I know is that PSYS’ hometown of Franklin, a Nashville suburb, is one of the wealthiest cities in one of the wealthiest counties in the United States. I leave it to you to make whatever connection between craziness and money you’d like. Like the other companies in the index, Magellan Health Services, Inc. (NASDAQ: MGLN) and Universal Health Services, Inc. (NYSE: UHS), PSYS owns and operates behavioral health centers—lots and lots of ‘em. At last count, PSYS owned or leased 90 inpatient facilities in 31 states, the commonwealth of Puerto Rico and the U.S. Virgin Islands. Over the past four years, PSYS’ share price has grown at a 12.1 percent compound annual rate, far exceeding the 5 percent appreciation of the S&P 500. Blended with MGLN and UHS, the Behavioral Index’s 6.8 percent annual growth rate offers a (ahem) healthy alternative to dull and boring blue chips. Now, let’s look at the outpatient side—the finance bucket. There are two public companies that specialize in modifying people’s financial behavior. These denizens of the Financial Training Index include Investools, Inc. (NASDAQ: SWIM) and Whitney Information Network, Inc. (Pink Sheets: RUSS). Florida-based RUSS offers real estate and stock market training courses in the United States, Canada, the United Kingdom and Costa Rica, while SWIM claims to have 337,000 graduates of its core financial market training course and 103,000 paid subscribers to its Web sites. The past four years have been a roller coaster for financial training. While SWIM’s share price trajectory has been upward, gaining an average 61.6 percent per year, RUSS has lurched along losing an average of 17.6 percent per year. Collectively, though, these two issues offered a 13.1 percent annual appreciation potential, more than double that of the S&P 500. Now, consider these companies as subindexes of a broader Behavioral Finance Index. Equally weighted and rebalanced monthly, these five issues would have rendered a market-beating 6.8% annual growth rate. Volatility? Yes, more than the S&P, but hey, what do you expect from folk crazed by the get-rich syndrome? If the connection between behavior and finance still seems murky, think of future synergies. Sooner or later, one of these outfits will figure out how to market inpatient financial training. And when that happens, a lot of trust fund babies will start sweating about involuntary commitments. |
