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Robert Abbott
Robert Abbott
Articles (456)  | Author's Website |

Behavioral Investing: Stop Being Your Own Worst Enemy

How we can make better investing decisions by managing our emotions and logic

August 10, 2018 | About:

James Montier subtitled and began his book, "The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy," with words that may be familiar: “You are your own worst enemy.” In doing so, he echoes many other investing gurus, including Benjamin Graham, who famously wrote, “The investor’s chief problem—and even his worst enemy—is likely to be himself.”

What distinguishes Montier from Graham and others is that he is focused entirely on behavioral issues, rather than adding a layer of behavior to conventional investing knowledge. His important message is that while we humans may be our own worst enemies, we can escape and learn to make better investing decisions:

“The Little Book of Behavioral Investing will take you on a guided tour of the most common behavioral challenges and mental pitfalls that investors encounter and provide you with strategies to eliminate these innate traits. Along the way, we ’ll see how some of the world ’s best investors have tackled the behavioral biases that drag down investment returns”

He notes the process and goal will not be achieved easily, but they are possible. First, though, Montier said we must recognize the most important lesson of the book: Every single person is likely to share the blindspots and mental stumbling blocks he discusses.

Ironically, said Montier, we are all likely to recognize these hazards—but, in other people, not ourselves. While all readers will start in essentially the same place, some will learn to recognize and deal with these shortcomings.

Here are some highlights from the introduction and chapter one.

X-systems and C-systems

The author referred to emotion-based systems as X-systems and logic-based systems as C-systems. The latter requires a “deliberate” effort to begin engagement, while the X-system responds to stimuli in the immediate environment, almost instantly. The C-system requires a step-by-step process, and thus is slow way to respond. Sometimes the two go together, as is the case when we make a snap decision using the X-system and later review or justify it using the C-system.

Bringing this all home to investing, we make better buy-sell decisions when we use the C-system, but it is also easy to relapse. Behavioral biases such as loss aversion, conservatism and impatience are among the conditions that trigger the relapses.

Montier argued our biases are inherited, based on our ancestors’ environment 150,000 years ago, a time when X-systems, rather than C-systems, held sway. Emotion held the top spot because emotional reactions were swift and saved us from predators. Logic was less useful to hunters on the plains of Africa, but is more useful to those of us living now.

He further argued we are more likely to use our X- system under five conditions: (1) a problem is “ill structured” and complex; (2) information is incomplete and fluid; (3) when goals are fuzzy, changing or competing; (4) time constraints or high stakes make stress high; and (5) decisions are based on interacting with others.

Montier cites Warren Buffett (Trades, Portfolio): “Success in investing doesn’t correlate with IQ once you’re above the level of 100. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” Temperament, of course, referring to the ability to apply C-systems rather than X-systems.

The empathy gap 

Our reactions in the heat of the moment will be less satisfactory than we might have imagined before the moment occurred. Consider how, after eating a heavy meal, we can’t imagine being hungry again. Also bear in mind how going to a supermarket when hungry leads to a fuller shopping cart.


This is one of the drivers of empathy gaps and refers to our inclination to put off work (such as due diligence, perhaps) for as long as possible. Montier reported psychologists found that imposed deadlines work best because they prevent us from trying to do everything at the last minute. When we set our own deadlines, we make fewer errors and are more likely to finish our tasks on time.


This is another way of referring to self-imposed deadlines and the “seven Ps":

“Perfect planning and preparation prevent piss poor performance. That is to say, we should do our investment research when we are in a cold, rational state—and when nothing much is happening in the markets—and then pre-commit to following our own analysis and prepared action steps.”

Montier also quoted the biographer of investing guru Sir John Templeton, who said Templeton managed the empathy gap by making buy decisions before a selloff occurred. He kept a “wish list” of companies that were well managed but too expensive and, in some cases, had standing orders at targeted prices with his brokers. Montier added:

“This prime example of pre-commitment in the face of a known empathy gap is exactly what you should seek to emulate in your investment strategies. Sir John knew that on the day the market or stock was down say 40 percent he wouldn’t have the discipline to execute a buy. But, by placing buy orders well below the market price, it becomes easier to buy when faced with despondent selling. This is a simple but highly effective way of removing emotion from the situation.”

About James Montier

The book's author is a member of the asset-allocation team at GMO, the firm founded by Jeremy Grantham (Trades, Portfolio) in 1977. According to his Amazon.com (NASDAQ:AMZN) profile, he was previously co-head of global strategy at Société Générale (XPAR:GLE). The author of three books, he is also a visiting fellow at the University of Durham and a fellow of the Royal Society of Arts. The book we are discussing was published in 2010.

About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution." In his book, "Big Macs & Our Pensions: Who Gets McDonald's Profits?" he looks at the ownership of McDonald’s and what it means for middle-class retirement income.

Visit Robert Abbott's Website

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