Inside The Investor’s Brain
Richard L. Peterson
“The content of this book is treading on psychologically sensitive ground. Not only is there social taboo around money, but there is also discomfort when emotion is openly discussed. Most people feel vulnerable during such conversations because the thing being addressed, emotion, lies protected underneath awareness…”…Richard Peterson, Inside The Investor’s Brain
“Honing the courage to face one’s powerful emotions requires practice and inner strength…”… Ibid
With a warning like that one it is something of a magnet to me… … Well at least here in 2010… Portions of this book I think we will study as a team.
I am finding more and more openness to a widening idea of how very little I know and my growing awareness during the past 15 years has put me in a position to live wanting to be more aware and being aware that I simply can’t be “that” aware…
Breaking the back of my sense that I do not what I am doing has been critical in my satisfaction in the work I do as an investor.
What i found so enjoyable today about this wonderful book would have been merely a string of threats to my brain 20 years ago and as such I suppose the author faces the “self-help” “sel-selection” dilemma but oh well…
My wife, kelly, has a phrase she uncovered a couple years ago and she now and again tosses it out to me as a life preservers when I am in the midst of getting stuck in a very unconstructive fashion: “how human of you…”. This could be shorthand for “hey, goofball, you are digging yourself a hole, stop and get out if you want by just blaming your ‘wrongness’ on being human… A great scapegoat, huh?”
It is important to have a helpful teammate
A few thoughts about Inside The Investor’s Brain on the negative side before I mention some additional positives for me….
#1. It was too long for me: the last 100 pages seemed filled with one off notes kinda tossed together.
#2. I really am not that interested in the chemical and electrical engagements inside my brain as is now very fashionable to write about although I am very interested in being aware of what my brain does that undermines my effectiveness! The pictures of fMRI may be interesting to many others but I pretty much ignored them in favor of his take aways about my possible tendencies
#3. He cites Jim Cramer… Aye ye ye – I will look past it as there is so much of value.
There are a string of points the author makes while occasionally telling about what specifically happens in the brain at these moments and dropping in pictures of fMRIs
“Accepting responsibility for error is simply too painful for most people…”… Pip add: last week in amsterdam someone asked me what could he do right away that might make the biggest difference near term to overcoming emotional biases. I suggested going home tonight and practicing telling his wife “I was wrong” whenever it might be appropriate . I have a thought that an inability to say “I am wrong” or considering such an “admission” as opposed to an observation may be a critical hindrance in our work as investors. As an interview question I often ask “give me an example in the last week where you were wrong and had to go tell someone about it?” If they can’t come up with anything it might not be a great thing…
“What gets us into trouble is not what we don’t know. Its what we know for sure that just ain’t so…”…Mark Twain
“There are conditions in which overconfidence is rapidly extinguished, such as during decision-making tasks where (1) predictability is high (2 swift and precise feedback about the accuracy of the judgments is provided, and (3) tasks are highly repetitive… ‘Correspondingly, expert bridge players, race-track bettors and meteorologists were found to be well-calibrated in their predictions…’… Investors receive much less feedback. As such, overconfidence is a particularly acute problem…”
“Markets can still be rational when investors are individually irrational. Sufficient diversity is the essential featurs in efficient price formations…”… Michael Mauboussin… The autho goes on to discuss “diversity breakdowns” when suddenly a group of investors os affected in a way that eliminates diversity of thought — herd takes over. We experience that everyday and last week we wrote about the length if time a diversity breakdown might last…
“Emotion also plays a role in how investors feel about the “idea” or story behind a stock. Researchers found that emotion and imagery, aroused by the concept of a stock, bias predictions of stock performace…stocks with exciting stories cause people to forecast higher stock returns…”
“Don’t check prices frequently! This is especially true for long-term investors and non-professionals… Checking too frequently leads to increased awareness of volatility, emotional reactivity, and a VERY high likelihood of overtrading…”
“Discipline is all-encompassing – it stops every emotional bias in its tracks…”
“It is difficult to get a man to understand something when his salary depends upon his not understanding it…”… Upton Sinclair
Absolute Returns: The Risk and Opportunities of Hedge Fund Investing
Alexander M. Ineichen
Superb, clear view of the realities in the hedge fund world as opposed to the general biases that linger
Investing Most importantly he gets into his use of “reflexivity” in which the capital markets and the product markets inter relate with one another… The separation is gone… They become co-mingled. Also, his trading diary is worth the price of admission in just grasping how he does his work and allowing us to honor his success as a macro trader but quickly decide that we couldn’t copy his style if we spent a lifetime working to do so. Every great investor seems to have a method, process and style that matches who they are… There is no one formula… There are many
Against The Gods
Peter L. Bernstein
The development and rationale behind behavioral finance — basic reading for any one in investing
Barbarians at the Gate
Burrough and Helyar
The classic saga of the RJR LBO… says as much about Wall Street as anything
Buffett: The Making of an American Capitalist
A sensational review of Buffett’s life and various stages of his investment and personal life. We learn of his departure from his mentor Benjamin Graham. We also see the consistency in how he applied his thinking in different times and situations.
Tribute to venture capital heroes of the past several decades
Randall E. Stross
Venture capital diary of Benchmark… interesting but not compelling here in 2005
Engines That Move Markets
Superb superb history of tech manias and a near must-read for anyone wanting to invest in hyper growth markets… probably a tad too much detail for some readers but not me
Extraordinary Popular Delusions & the Madness of Crowds & Confusion on de Confusionses
Charles Mackay & Joseph De la Vega
CLASSIC… for every investor that thinks hyperbolic mkts can last — they can’t
Fooled By Randomness
Nassim Nicholas Taleb
Spotting and taking advantage of when “common wisdom” is just flat-out wrong
For many in the investment world this my just be a required read which connects the work of information theorist Caude Shannon to attempts to exploit the market systematically. For others who base their investment work on gaining a fundamental edge by turning data into information and then into insight this book doesn’t go so far at all… In other words, the attempt here is not to explain why Warren Buffett is a great assessor of businesses but rather how you can beat the market without going past the “factset database”… For the second type of folks this book is just a very very pleasurable and insightful romp of its own and written to be entertaining as well as educational.
Foundation and Endowment Investing:Philosophies and Strategies of Top Investors and Institutions
Lawrence E. Kochard and Cathleen M. Rittereiser
Below is part of the note i forwarded to one of the co-authors… From the title you might be surprised that this was one of the fastest reads of the year for me even though it wasn’t Sci-Fi… Maybe it is because i love biographies nearly as much as Sci-Fi… Pip
Just finished… That was great
Don Lindsey sounds like he could be my twin brother! Yikes!
I also loved Dan Kingston and Scott Malpass
My copy is now fully rabbit-eared and i will likely loan to david harvey.
What stands out perhaps most in hearing the stories is the quality of the people and values… It may seem strange (or obvious) but having grown up in the cut throat world of wall street and still moving in and out of that culture (but today in a way that works) i am so grateful when i meet people who manifest their core values everyday. Wall Street has a terrible culture in my view where values tend to degenerate and so many people are lulled into steadily trading their values that create integrity for anything else. Odd but notable and sad.
It has been so fun and uplifting to have started building a business filled with not only very talented elite clients but those who are grounded in deep beliefs about how they wish to have their business reflect their values… And effortlessly… And so successfully.”
One of the key investment thought pieces of all time… would be good required reading as opposed to the CFA exam
Introduction to Logic
Irviing M. Copi
Building blocks for clear thinking which some of the time helps in investing
Judgement under uncertainty: Heuristics and biases
Edited by: Daniel Kahneman, Paul Slovic Amos Tversk
Dan Kahneman worked on behavioral psychology for 30+ years and then the mainstream recognized the huge hole his thinking could fill — won the Nobel prize in economics
Went against the grain of the day and was right.
One Up on Wall Street
Basic reading for positive fundamental change pursuants.. Surprising there aren’t more of us
As close to required reading for our group as there may ever be…. The book dives into every nook and cranny of the critical building blocks of society, economy, business and investing in an efficient 454 pages. A great great work. (2006). Will probably be up there w Germs, Guns and Steel as well as The Clash of Civilizations as a core part of understanding our multi-faceted world
Principals of Corporate Finance
Brealey and Myers
Sits at the side of many investors as a key referenced checked out every few years for one reason or another
A glimpse of investing in the 1996-2001 period but more importantly a book about investing in the major changes transforming economies and societies… Written in basic english thankfully
Superb book filled with insight upon insight and the composition of his theory of reflexivity is set out. The theory says that because markets are the result of human decisions and because humans are affected in their actions by what they observer and by what their observers observes a number of complex factors must be taken into account. The book also provides a Soros diary during a six month period of his trading. Very interesting
The Big Tech Score
Sell-side analyst discusses what works in tech investing
The Essential Buffett: Timeless Principles for the New Economy
Robert G. Hagstrom Jr.
Every time I spend time deeply thinking about and reminding myself of Warren Buffett’s simple ideas about studying businesses and making investments I wonder a couple things: Why don’t I review this work more often? Why do I get sucked into thinking investing has to be complicated? I also see why Warren Buffett is so admired for his results and simplicity but so rarely actually followed…. It is very easy to day trade (albeit unsuccessfully) but it takes dedication to be in a position to benefit from his simple wisdom and to enact his process. While more and more will show up to Omaha to meet the rock star of investing I unfortunately see no threat that more than a sliver of society will choose Buffett’s way when all the cultural forces press in the opposite direction.
The Gorilla Game
Geoffrey Moore steps into investing — not on par with his other master pieces
The Little Book that Beats the Market
A lot of sage advice from a stock market genius whose genius seems to circle around insuring he keeps his stock picking and portfolio management simple!
The Tao Jones Averages
Bennett W. Goodspeed
Right and left brain thinking the shortest required reading one would ever imagine
The Internet Bubble
Anthony B. Perkins and Michael C. Perkins
Went against the grain of the day and was right.
Story of nobel peace prize winner Muhammad Yunnus’ development of the Grameen Bank in Bangladesh and how he nurtured hundreds of billions of dollars in micro loans of $300 on average and how he changed lives in the process. 98% repayment rates.
The Blue Sweater
This book is something of an autobiography of the founder of Acumen Fund. I found it exceptional as it routes her thru the pre genocide Rwanda as well her return to absorb as best possible the aftermath. She is courageous in all her journeys as well as the vulnerability she is willing to allow in telling her story… Mostly it is about her development as a human being fully committed to serving the basic needs of people throughout Africa and Asia.