Book Review Of The Little Book of Behavioural Investing by James Montier

Behaviour and psychology are crucial to having success in investing. I recently read The Little Book of Behavioural Investing: How Not to Be Your Own Worst Enemy by James Montier. It’s a valuable little resource I highly recommend.

Do you go into an investment with the humility that you could be wrong? Can you invert your thinking or articulate the bear case as well as the bears?

A behavioural pitfall we all default to is to look for confirming rather than disconfirming evidence. Philosopher of science Karl Popper argues that in order to properly test a hypothesis we must look for all the disagreeing information, a process known as “falsification”.

He states that we should embrace those who disagree with us the most, not necessarily to change our minds but so that we can understand the opposing viewpoint better. You should be able to argue the bear case (negative case) about your investment just as well as anyone else.

“If we can’t find the logical flaw in the argument, we have no business holding our view as strongly as we probably do.”

Spend as much time thinking about what could go wrong with a company and seek out and embrace opposing viewpoints in an attempt to kill your best ideas. If the idea survives, maybe you have something.

Self-attribution bias is our habit of attributing good outcomes to our skill as investors and blaming bad outcomes on something or somebody else. Hindsight bias is the tendency to perceive past events as having been more predictable than they actually were (knew-it-all-along phenomenon). How will you objectively determine in 1, 2 or 5 years’ time if your success was based on skill or luck?

Montier argues we should be keeping an investment diary. A written record of our decisions and the process behind them is a strong way to tackle self-attribution bias.

“…a real-time investment diary can be a very real benefit to investors because it helps to hold us true to our thoughts at the actual point in time, rather than our reassessed version of events after we know the outcomes. An investment diary is a simple but very effective method of learning from mistakes and should form a central part of your approach to investment.”

This will also help resolve hindsight bias. It will enable you to assess whether you were right for the correct reason, or because of luck and whether you were wrong for the wrong reason (a mistake that requires learning from) or wrong for the right reason (bad luck).

Montier stresses the importance of being process focused as opposed to outcome focused. If you ran 5 red lights to get to work on time without getting a ticket or into an accident this could be considered a successful outcome. However, it’s obvious to us all that over the long-term this process is not repeatable nor is it safe. Being outcome focused causes us to avoid uncertainty, get distracted by noise and to follow the crowd; none of which will led to superior long-term investing results.

“People often judge a past decision by its ultimate outcome rather than basing it on the quality of the decision at the time it was made, given what was known at the time. This is outcome bias.”

This is just a small sample of the wisdom within this book. I highly encourage you to add it to your reading list as it has something we can all apply to improve our investing processes.

If you’d like to buy The Little Book Of Behavioural Investing, please consider using this link, so we receive a small contribution.

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