I have always been a fan of James Montier. Montier is currently a member of GMO’s asset allocation team. James Montier has written several books about behavioral finance and how it relates to value investing. I have wanted to read his books but they were all quite lengthy and I never got around to it. Luckily, James Montier recently wrote a short book which sums up behavioral finance. The book is titledThe Little Book of Behavioral Investing: How not to be your own worst enemy (Little Book, Big Profits)
and was released on February 2, 2010.
I got my first exposure to behavioral finance by reading several of David Dreman’s books on investing. Dreman largely focuses on proving why experts are wrong about stocks and the reason for their errors. Dreman believes “experts” are wrong on a variety of issues and they are not able to predict the future. Therefore, their advice should be largely ignored. Dreman tells of a classic study regarding tonsillectomies performed on New York City school children in the 1930s. 1,000 children were examined by a group of doctors. The doctors recommended removing 61% of the children’s’ tonsils. The remaining children were examined by a second group of doctors who recommended 45% of the children get their tounsils removed. The story kept going until only 65 children out of the original 1,000 had their tonsils remaining!
I once got an email from a reader who was getting started in value investing and he wanted to know what the best book on the topic was. He said he wanted a book about how to pick stocks and not a book that focused too much theory behind value investing. I responded that I can give him some good book suggestions but to be a good value investor you need to know the theory behind value investing and why it outperforms overtime.
This is exactly what James Montier’s new book accomplishes. He covers various topics regarding how human beings think and their thought process and how many times this causes them to make big mistakes in investment. Like Dreman, Montier brings numerous examples of “experts” mistakes and biases from other fields and how this applies to investing also.
Not to put down any of the other books I read on behavioral finance, but this is the first book I really enjoyed. I was never too keen on psychology but Montier writes in a fashion that makes it enjoyable for the reader. Throughout the book Montier quotes various great investors including Benjamin Graham, Joel Greenblatt, Seth Klarman, Bruce Berkowitz, John Templeton, Howard Marks and their thoughts on human instincts and how it effects their investment decisions.
James Montier covers a variety of topics related to investing throughout the book. He writes about how humans many times use the X-system of our brain instead of the more logical C-system to make decisions. Montier also covers many other topics including over confidence, the need to feel active which he calls ADHD investing, and risk aversion.
My favorite chapter in the book is chapter eight where Montier discusses confirmation bias. Montier states that we like to talk about politics with the people who agree with us most. We will not change our mind quickly once we have already made up our mind on an issue. For example Montier tells of a group of people 50% favoring the death penalty and 50% anti death penalty. They were given a series of publications from both sides of the aisle that were well argued, sound and important. After reading the studies the pro death penalty group felt even stronger about their stance, and the anti death penalty group felt the same.
This obviously is an awful way for investors to think. We are wired to be biased for or against a stock, but an investor must really go against human nature and look objectively at the stock. This is something that Montier shows is very hard to do.
Montier ends off the chapter with a great quote from Bruce Berkowitz. This quote really shows investors how they should be looking at stocks. Bruce Berkowitz stated that “we spend a lot of time thinking about what could go wrong with a company- stagflation, zooming interest rates or a dirty bomb going off. We try every which way to kill our best ideas. If we can’t kill it, maybe we’re onto something. If you go with companies that are prepared for difficult times, especially if they are linked to managers who are engineered for difficult times, then you almost want those times because they plant the seeds of greatness.”
There are 17 chapters in the book I will not list them all but provide the reader with a short list to let them get a sense of the theme of the book.
Chapter 1 - Paralysis Of Empathy Gap
Chapter 2 - Fear/Risk Aversion
Chapter 3 - Overoptimism
Chapter 4 - Authority Respect/Overconfidence
Chapter 5 - Anchoring
Chapter 6 - Information Overload
Chapter 7 - Reason Respecting
Chapter 8 - Conformational Bias
If you want to read a great interview with James Montier, check out a recent interview Guru Focus columnist Miguel Barbosa conducted with James montier where they dicuss Montier’s new bookThe Little Book of Behavioral Investing
The link is here http://www.gurufocus.com/news.php?id=86969.
To Purchase the book on Amazon.com click on the following linkThe Little Book of Behavioral Investing: How not to be your own worst enemy (Little Book, Big Profits)
Disclosure: New FTC regulations require me to report that I have a material connection because I received a free copy of the book to review.
and was released on February 2, 2010.I got my first exposure to behavioral finance by reading several of David Dreman’s books on investing. Dreman largely focuses on proving why experts are wrong about stocks and the reason for their errors. Dreman believes “experts” are wrong on a variety of issues and they are not able to predict the future. Therefore, their advice should be largely ignored. Dreman tells of a classic study regarding tonsillectomies performed on New York City school children in the 1930s. 1,000 children were examined by a group of doctors. The doctors recommended removing 61% of the children’s’ tonsils. The remaining children were examined by a second group of doctors who recommended 45% of the children get their tounsils removed. The story kept going until only 65 children out of the original 1,000 had their tonsils remaining!
I once got an email from a reader who was getting started in value investing and he wanted to know what the best book on the topic was. He said he wanted a book about how to pick stocks and not a book that focused too much theory behind value investing. I responded that I can give him some good book suggestions but to be a good value investor you need to know the theory behind value investing and why it outperforms overtime.
This is exactly what James Montier’s new book accomplishes. He covers various topics regarding how human beings think and their thought process and how many times this causes them to make big mistakes in investment. Like Dreman, Montier brings numerous examples of “experts” mistakes and biases from other fields and how this applies to investing also.
Not to put down any of the other books I read on behavioral finance, but this is the first book I really enjoyed. I was never too keen on psychology but Montier writes in a fashion that makes it enjoyable for the reader. Throughout the book Montier quotes various great investors including Benjamin Graham, Joel Greenblatt, Seth Klarman, Bruce Berkowitz, John Templeton, Howard Marks and their thoughts on human instincts and how it effects their investment decisions.
James Montier covers a variety of topics related to investing throughout the book. He writes about how humans many times use the X-system of our brain instead of the more logical C-system to make decisions. Montier also covers many other topics including over confidence, the need to feel active which he calls ADHD investing, and risk aversion.
My favorite chapter in the book is chapter eight where Montier discusses confirmation bias. Montier states that we like to talk about politics with the people who agree with us most. We will not change our mind quickly once we have already made up our mind on an issue. For example Montier tells of a group of people 50% favoring the death penalty and 50% anti death penalty. They were given a series of publications from both sides of the aisle that were well argued, sound and important. After reading the studies the pro death penalty group felt even stronger about their stance, and the anti death penalty group felt the same.
This obviously is an awful way for investors to think. We are wired to be biased for or against a stock, but an investor must really go against human nature and look objectively at the stock. This is something that Montier shows is very hard to do.
Montier ends off the chapter with a great quote from Bruce Berkowitz. This quote really shows investors how they should be looking at stocks. Bruce Berkowitz stated that “we spend a lot of time thinking about what could go wrong with a company- stagflation, zooming interest rates or a dirty bomb going off. We try every which way to kill our best ideas. If we can’t kill it, maybe we’re onto something. If you go with companies that are prepared for difficult times, especially if they are linked to managers who are engineered for difficult times, then you almost want those times because they plant the seeds of greatness.”
There are 17 chapters in the book I will not list them all but provide the reader with a short list to let them get a sense of the theme of the book.
Chapter 1 - Paralysis Of Empathy Gap
Chapter 2 - Fear/Risk Aversion
Chapter 3 - Overoptimism
Chapter 4 - Authority Respect/Overconfidence
Chapter 5 - Anchoring
Chapter 6 - Information Overload
Chapter 7 - Reason Respecting
Chapter 8 - Conformational Bias
If you want to read a great interview with James Montier, check out a recent interview Guru Focus columnist Miguel Barbosa conducted with James montier where they dicuss Montier’s new bookThe Little Book of Behavioral Investing
The link is here http://www.gurufocus.com/news.php?id=86969.
To Purchase the book on Amazon.com click on the following linkThe Little Book of Behavioral Investing: How not to be your own worst enemy (Little Book, Big Profits)
Disclosure: New FTC regulations require me to report that I have a material connection because I received a free copy of the book to review.
