The Little Book of Behavioral Investing: How not to be your own worst enemy

Introduction

This Is a Book About You: You Are Your Own Worst Enemy

 

 

 

 

 

 

HOW COULD I POSSIBLY WRITE A BOOK ABOUT YOU? After all, chances are we ’ve never met. Let alone that I know you well enough to write a book about you! The answer is actually very simple: You are a human being (unless the sales of this book have managed to reach interplanetary proportions—evidence of extreme over-optimism on my part perhaps), and we humans are all prone to stumble into mental pitfalls. This is as true in investing as it is in every other walk of life. Indeed, Ben Graham (the father of value investing) even went so far as to say “The investor’s chief problem—and even his worst enemy—is likely to be himself.”

Evidence of this harmful investor behavior can be found in the annual Dalbar studies, which measure the actual returns achieved by investors rather than the returns from a passive index, such as the S&P 500. They also capture the degree to which investors attempt to time their entry and exit to the market (among other things). The results aren’t pretty. Over the last 20 years, the S&P 500 has generated just over 8 percent on average each year. Active managers have subtracted 1 or 2 percent from this, so you might be tempted to think that individual investors in equity funds would have earned a yearly 6 to 7 percent. However, equity fund investors have managed to reduce this to a paltry 1.9 percent per annum. This results from buying and selling at just about the worst possible point in ...