Sunday, May 08, 2011

Investing and the Irrational Mind

I ran the Elizabeth T. McNamee Memorial 5K today. I was over a minute slower than last week coming in at 23:13. Still put me close to the top 10% at 89th out of 830 runners.

It was a very inefficient way to run since the pollen killed my productivity for the day. I need to carefully plan my outdoors time these days. Someone really needs to develop a pollen filter that works.

I was pleased with the jobless stats this week. More private sector jobs which is exactly what we need for sustainability. Much of the press though has focused on the increase in unemployment rather than the the increase in private sector jobs.

I read a great book by Robert Koppel - Investing and the Irrational Mind - Rethink Risk, Outwit Optimism, and Seize Opportunities Others Miss.

I have actually become quite a successful investor. Part of this is helped by what I touched on recently - because I worked hard when I was young, I now have the capital to invest. I have the psychology for it - willing to take risks, willing to wait, willing not to risk it all, willing to invest when everyone says not to and willing not to when everyone else is investing. Or as you read later in this review - perhaps I suffer from "self serving bias".

One of the phrases I use in business is "fail often, fail fast, fail cheap". Koppel starts the book by saying that successful investors have wins and they have losses.

I like reading about how we think and how the brain works. Many investment mistakes are illogical but people make them all the time. Koppel cites Arily's Predictably Irrational book and builds on it.

Koppel has researched all the research on mistakes investors make. Early on, he quotes Baruch:

"Only as you do know yourself can your brain serve you as a sharp and efficient tool. Know your own failings, passions and prejudices so you can separate them from what you see."

And Baruch's rules for successful investing:

1 - don't speculate unless you do it full time (I violate that one or perhaps I don't since I do not like to think that I speculate)

2 - resist "information" or tips

3 - Before purchasing a security, know everything you can about the company.

4 - never attempt to buy at the bottom and sell at the top.

5 - Take your losses quickly

6 - don't buy too many securities. Focus on a few and watch them.

7 - reappraise strategy periodically.

8 - never invest all your funds - keep some liquid

9 - don't try to be a jack of all investments - stick to a field you know (I notice I tend to make money in technology and lose money in other areas)

I liked all the studies Koppel cites. It is a well researched book.

He points out the "self serving bias". We tend to attribute our success to us and our failures to external events. I call this the "be careful when you start thinking you are smart" syndrome.

I am very good at not falling prey to most of the investor mistakes like herd mentality (investing just because everyone else is). I do notice that some traps I do fall into. Good book - makes me re-think some of my strategy.


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