Do you really want to become a better investor? Do you want to learn from your mistakes and learn to make better investment decisions?
For decades, behavioral economics/finance has been uncovering all the ways we make mistakes as investors. What’s been missing is how to correct these mistakes — how to turn these behaviors on their heads and make better investments.
The Insightful Investor does just that. In this free ebook, you’ll learn
From Barry Ritholtz’s recent conference (The Big Picture Conference), this deck came from Barry’s own presentation entitled “Behavioral Finance, Neuroeconomics and Cognitive Psychology, and Investor’s Decision-Making Process” (whew, LOOONG title.)
I wasn’t there — anyone attend? How was it? Let me know in the comments.
By the way, I didn’t just randomly pick the new categories above — I’ve spent a lot of time thinking about how investors learn to become better and how this information breaks down into categorization.
The changes have resulted in a slightly higher open rate (how many people are opening my weekly message) and and almost double the numbers of clicks on links. I take that as a good thing.
Are you reading my weekly Tradestreaming newsletter? What do you think — do you like the changes?
What would you like to see more of from me? Let me know in the comments below.
Finding the right books on behavioral investing, behavioral finance, behavioral economics (whatever you want to call it) is tough.
I’ve compiled a list of some of the best selling behavioral finance books on Amazon. While we can argue which are better (please rank/add your favorites!), it’s important to be able to start the discussion.
From Thaler to Mauboussin to Montier to Shiller, there are a lot of books being written now on the behavioral aspects of investing. Some are good — some are better.
Prof. Meir Statman (who will participate in our new podcast, Tradestreaming Radio in the upcoming weeks), author of What Investors Really Want, is interviewed by Bloomberg TV about the challenges investors face in sizing up their own performance, overconfidence, and the inability to forecast the future. Here’s an interview with BB’s Pimm Fox yesterday (click here if you can’t see the video below)
It’s hard to be a rugged individualist in the investing world. So much is predicated on media hype and momentum investing. It turns out that best results are typically produced by investors that are careful and confident. One way to view this is via the BB&K Model:
Source: Bailard, Biehl & Kaiser
These researchers judged investors on two attributes, method of action (careful or impetuous) and level of confidence (confident or anxious). The result was a framework that divided investors into 5 classes of people:
Individualist: careful, confident and often takes a do-it-yourself approach
Adventurer: volatile, entrepreneurial and strong-willed
Celebrity: follower of the latest investment fad
Guardian: highly risk averse and wealth preserver
Straight arrow: shares the characteristics of all the above equally
It shouldn’t be surprising that the individualist performs best. Much of the collective tradestream is made up of celebrity adventurers, pumping and jumping on every new stock or fad. Many of these momo guys make a lot of money, until they don’t. It’s important for investors to be able to dissociate themselves — to unplug from the tradestream — for a period of time to rationalize their motivations for investing in general and in specific securities in particular.
Do we need to be in the stock market at all? Are we trying to play defensive or opportunistically? So many times we meet with clients with existing, large portfolios who don’t know why they’re investing. Like so many other things in life, if you don’t know why you’re participating, you probably shouldn’t be. The stakes are too high, the noise too loud and the gravitational force of trend chasing just too strong.
For those independent enough to withstand all the pernicious hamstringing behaviors unaware human investors display, it’s a lonely path, long and winding. But, like most valuable pursuits in life, worth the effort.
Tradestreaming is all about finding the right investor willing to share the most valuable information. Sometimes, sharing important information is required by law. Like, when an investment fund or company is required to report portfolio holdings. Piggyback investing using regulatory filings to create all-star portfolios made up of the best picks by the world’s most profitable investors.
Warren Buffett is clearly one worthy of piggybacking and a new research paper further dissects his historical performance and lays the groundwork for investors willing to mimic Buffett’s investment moves.
Findings of market under reaction to Berkshire Hathaway’s public disclosures through quarterly filings of their holdings of publicly traded company stocks through Form 13f with the SEC for up to a year or more rationalizes Buffett’s long-term investment strategy. We investigate over confidence as an explanation for under reaction indirectly by examining associations between changes in Berkshire Hathaway’s holdings and changes in both financial analysts’ recommendations and institutional holdings for the same stocks…
The link to overconfidence is based on the argument that overconfidence on the part of analyst and fund managers is likely given the highly competitive investment community in which they perform and the high rewards afforded those who distinguish themselves as possessing independent expertise. As a complementary finding, insiders whose overconfidence is more likely to overweight similar private information to that of Buffett tend to follow Buffett’s lead when buying by, as net sellers, selling less.
Interesting aside, the study also finds net sales of corporate insiders of stocks held by Berkshire Hathaway tend to decrease when those holdings increase consistent with shared private information.
Hughes, John S., Liu, Jing and Zhang, Mingshan, Overconfidence, Under-Reaction, and Warren Buffett’s Investments (July 5, 2010). Available at SSRN: https://ssrn.com/abstract=1635061