Every investor ought to read this….
Had a 6 hour flight back from Lindzonpalooza in Coronado Sunday and started reading this book. Finished it a few hours later and think that it may be the perfect investing book..
From the publisher:
Ben Graham, the father of value investing, once said: “The investor’s chief problem—and even his worst enemy—is likely to be himself.” Sadly, Graham’s words are still true today. Bias, emotion, and overconfidence are just three of the many behavioral traits that can lead investors to lose money or achieve lower returns. Fortunately, behavioral finance, which recognizes that there is a psychological element to all investor decision making, is now firmly embedded in the mainstream of finance. Applying behavioral principles to an investment portfolio can help investors avoid some of the mental pitfalls that so often cost them, and financial institutions, billions.
In The Little Book of Behavioral Investing, behavioral finance expert James Montier takes you on a guided tour of the most common behavioral challenges and mental pitfalls that investors encounter, and provides you with strategies to eliminate these traits. Along the way, he shows how some of the world’s best investors have tackled the behavioral biases that drag down investment returns, so that you might be able to learn from their experiences.
Page by page, Montier explains the importance of learning to prepare, plan, and then commit to a strategy—that is, do your investment research while you are in a “cold” rational state, when nothing much is happening in the markets—and then pre-commit to following your analysis and action steps. He also stresses the folly of trying to forecast what the markets will do, and reveals how the idea of investing without pretending you know the future gives you a very different perspective. Throughout the book, Montier stresses why the need to focus on process rather than outcomes is critical in investing. Focusing upon process, he shows, frees us up from worrying about aspects of investment that we really can’t control—such as returns. By focusing upon process, we maximize our potential to generate good long-term profits.
The Little Book of Behavioral Investing offers a range of time-tested ways to identify and avoid the pitfalls of investor bias. By following these simple strategies, you will learn to overcome your own worst enemy when it comes to investments—yourself.
What make this so perfect?
It does not tell you what to invest in or what method is the best. It does not go into detail on how to analyze a company or take apart a balance sheet. What does it do?
The book exposes “earnings forecasts” , price targets and “buy ,hold” ratings for what they are….worthless (Chapters 4 and 5). Not only does it back what we have been saying here about those metrics but Mr. Montier takes it a step further and shows how the use of them by investors causes certain “biases” to come into play in their investment decisions. Without going into detail on them (Chapters 1-4 do that), suffice it to say that bias and investing are not a good combination.
Montier illustrates how our genetic mental makeup at times works against us in investing and better still suggests ways to limit the effect of it.
Chapter 6 is of particular interest as it goes to information. Common thought is that the “pros” have an advantage over “at home” investors because of their superior access to tons of information. Montier notes experiment after experiment that determines not only is large amounts of information not an advantage, but more often than not it becomes a disadvantage. The more information people have before making a decision, the more likely a decision gets made based on extraneous data rather than core data. This increases the odds the decision made is a poor one. Paradoxically, despite this being true, the more information people have before making a decision, the more highly certain they are as to its accuracy (this leads to other biases which hurt results). Investors are better served using a simple, effective system than attempting to analyze highly complex information from a multitude of sources before making an investment decision. Montier notes the system both Ben Graham and Warren Buffett have used (rather successfully?) and its simplicity. This chapter is a must read…
This book could have easily become a mind boggling recitation of psychological theory and terms which would have made it nearly unreadable for almost all. Montier avoids that trap and is able to distill the theory to its essence with real life examples that makes what could have been confusing and arcane theory into easily understandable situations that every reader can relate to. This is the success of the book.
Most of the editions in the “Little Book” series can be read in an afternoon and this is no exception. The difference with this one is I can see it becoming a reference to investors. Its lessons are very important ones that can be easily forgotten in the day to day noise of the market. Reading this occasionally is a great way to “reset” your thought process to where it should be…
Montier has a 700pg. book on Behavioral Investing for those interested in diving head first into the subject but I think those who get through it aren’t likely yo re-read it. Over time some of the lessons may get lost. What I like about the Little Book is that the format makes it perfect “weekend refresher course” material.
Here is an interview with Montier.
Here is the book (click to purchase):