EMOTIONAL INVESTINGFall 2012

Brock Melnyk, B.Mgt, CFPFinancial Advisor

ATB Securities Inc.

DisclosureThis report has been prepared by ATB Investment Management Inc. ("ATBIM”) which manages the Compass Portfolio Series. ATBIM and ATB Securities Inc. ("ATBSI") are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Investor Services. ATBIM and ATBSI are licensed users of the registered trademarks for ATB Investor Services and the Compass Portfolio Series. The performance data provided assumes re-investment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that may reduce returns. Mutual Funds are not insured by the Canada Deposit Insurance Corporation, nor guaranteed by ATB Securities Inc., ATB Investment Management Inc., ATB Financial, the province of Alberta, any other government or any government agency. Commissions, trailing commissions, management fees, and expenses may all be associated with mutual fund investments. Read the prospectus provided before investing. Unit values of mutual funds will fluctuate and past performance may not be repeated.

Opinions, estimates, and projections contained herein are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. ATB Financial, ATBIM and ATBSI do not accept any liability whatsoever for any losses arising from the use of this report or its contents.

This report is not, and should not to be construed as, an offer to sell or a solicitation of an offer to buy any investment. This report may not be reproduced in whole or in part; referred to in any manner whatsoever; nor may the information, opinions, and conclusions contained herein be referred to without the prior written consent of ATBIM.

Emotional Investing

“I can calculate the motion of heavenly bodies, but not the madness of people”

- Sir Isaac Newton, in response to the 1720

collapse of the South Sea BubbleATB Securities Inc.

Sep 30 2012

All returns are total returns in CAD

Source: BloombergSep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12500

700

900

1100

1300

TSX S&P 500 EAFE

Major Markets Performance – Past 5 Years

Equity Market RECAP

Investment Decisions are 89% Based On Emotion

1. Which would you prefer?A: To win $80,000B: To have an 80% chance of winning

$100,000

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2. Which would you prefer?A: To lose $80,000B: To have an 80% chance of losing

$100,000

Our Approach

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Agenda

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Standard Theory of Finance (Efficient Markets)

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o Investors Are rational beings Consider all information and accurately assess its meaning

Make decisions that maximize the wealth while minimizing the risk

o Markets Quickly incorporate all know information Reflect the collective actions of rational investors

Represent the true value of all securities

Why Behavioural Finance?

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o If we always behaved rationally…

x Nobody would ever sell stocks in a panic at the first sign of trouble

x Nobody would ever buy stocks (or other investments) based on hunches, hot tips or media hype

x Nobody would ever keep money in the bank instead of using it to pay off high-interest credit card balances

Emotional Investing

“October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February”

- Mark Twain

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Investing vs. Speculating

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o Refers to people’s tendency to:Hang on to losersSell the winners

Disposition Effect

o This allows people to enjoy the felling of winning and defer the pain of losso Investors are about 15 times more likely to sell winning stocks as they are to sell losing stocks

Emotional Investing

“There’s something in people, you might even call it a little bit of gambling instinct . . . I tell people [investing] should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

- Paul Samuelson, 1970 Nobel Laureate in Economics, in “The Ultimate Guide to Indexing,” Bloomberg, September 1999

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Avoiding Market Timing

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o Would you accept this gamble…50% chance to win $15,00050% chance to lose $10,000

Narrow Framing: Trees vs. Forest

o Most people say “no” because they want a chance to win at least twice of what they might lose.

Avoiding Market Timing

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Narrow Framing: Trees vs. Forest

o Now, assume you have a net worth of $500 Billion. Would you accept the gamble now?50% chance to increase your wealth by $15,00050% chance to decrease your wealth by $10,000

Most people say “yes.” They become less risk averse as their frame of reference broadens

Avoiding Market Timing

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o Would you flip a coin if…You get $15,000 if you get headsYou pay $10,000 if you get tails

Narrow Framing: Aggregation

o Again, most people say “no,” but…

What if you got to flip the coin 100 times?Most people would say “yes.” Loss aversion is diminished by aggregation

Avoiding Market Timing

ATB Securities Inc.Fidelity Investments Canada

Avoiding Market Timing

ATB Securities Inc.Fidelity Investments Canada

Ignoring Noise

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Ignoring Noise

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o In 2008 the S&P500 returned -37.72%o In 2008 the average equity investor earned -41.63%

o From Jan 1989 through Dec 2008 (20 years)

Average Equity investor earned an annual return of 1.87%

Underperformed the S&P500 by 6.48% Underperformed inflation by 1.02%

Dalbar, Inc. “Quantitative Analysis of Investor Behaviour 2009,”

(www.dalbar.com)

Emotional Investing

“Share prices are Driven by Fear and Greed”

- John Maynard Keynes

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Not Chasing Performance

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Disciplined Approach

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What you CAN’T Control

o Pick Winning Stockso Pick superior managerso Time the marketso Financial Press

What you CAN Control

o Reduce ExpensesoDiversify portfolioo Minimize taxeso Discipline

Conclusion

“At the end of our investing lifetime, it won’t matter what your funds did, it’ll matter what you did. And what you did will be a pure function of the quality of the advice you got—from one caring, competent [advisor], and not from any number of magazines.”

- Nick Murray,“Investment Advisor Magazine, October 1994

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