September 12, 2003

Behaviorial Finance Gives Faculty Member Money Management Insights

A "scholarly money manager" who beats the odds -- that is how Josef Lakonishok, William G. Karnes Chair and professor of finance, was described in a September 1st story in Barron's. Lakonishok's successes as a financial advisor and consultant were featured in the Mutual Funds section of the publication with particular attention given to the LSV Value Equity mutual fund that has outperformed the S&P by more than 9% a year since it was established in 1999.

A faculty member at Illinois since 1987, Lakonishok formed LSV Asset Management with Andrei Shleifer of Harvard University and Robert Vishny of the University of Chicago in 1994.The company now manages $14 billion in assets for such clients as Caterpillar, John Deere, National Geographic, and the MacArthur Foundation. Clients also include state governments and university endowments.

According to the Barron's article by Neil Martin, at the heart of Lakonishok's strategy is "his belief that the stock market is essentially and irrevocably inefficient." Lakonishok believes it is inefficient because the market "is about people and their behavior, sometime erratic and occationally rational but always unpredictable." Such behaviorial biases impact investor decisions causing them, says Lakonishok in the article, to "extrapolate from ... past poor performance and assume that these companies will continue to disappoint going forward." What many investors fail to take into account is that "value trumps growth," something that factors into LSV's investment approach that Lakonishok described as " contrarian [and] deep-value."

LSV also looks at the "attractiveness" of a stock, not the price at which they acquired it. Investors tend to sell in order to realize a gain and frequently hold on to a stock far too long when the price drops. This is because, as Lakonishok explains, "to realize a loss is to admit that you made a mistake. So wishful thinking takes over. But [LSV] ranks all companies by their attractiveness. We don't care about the price we paig. Therefore, a loser can be attractive and a winner can be attractive, as well."

The full text of the article is online to subscribers of Barron's.