Value Investing: Tools and Techniques for Intelligent Investment

Chapter 14. The Behavioural Stumbling Blocks to Value Investing^[14]

The fact that value outperforms over the long term is not new news. Yet despite this, there are relatively few 'true' value managers. This chapter seeks to explore the behavioural stumbling blocks that conspire to prevent us doing what we know to be right. Loss aversion, present bias, herding, availability and overconfidence are just a few of the hurdles that must be overcome to exploit value opportunities.

• Psychologists argue that knowledge and behaviour are not one and the same thing. That is to say, we sometimes do what we know to be wrong. For instance, the knowledge that safe sex can reduce the risk of HIV/AIDS doesn't always translate into the use of a condom. The same is true in other fields; simply knowing that value outperforms over the long term isn't enough to persuade everyone to be a value investor.

• Numerous other behavioural stumbling blocks help to explain why value investing is likely to remain a minority sport. Everyone is after the holy grail of investing, a strategy that never loses money! But it doesn't exist. Investing is probabilistic, so losses will occur. However, given our tendency to be loss averse (we dislike losses, more than we like gains) strategies that sometimes see short-term losses will be shunned.

• Long time horizons are integral to value investing. However, they are not natural to humans. Our brains appear to be designed to favour the short term. When faced with the possibility of ...