POGO, THAT FAVORITE FOLK PHILOSOPHER, SHREWDLY OBSERVED an essential truth that has particular meaning for investors: “We have met the enemy and he is us.” So true!

In the same vein, George J. W. Goodman, writing as “Adam Smith,” wisely explained, “If you don’t know who you are, the stock market is an expensive place to find out.” We are emotional because we are human. We believe that we’ll do better when we try harder. We find it hard to take advice such as, “If it ain’t broke, don’t fix it.” We are not even close to being entirely rational.

Investing can usefully be understood by dividing it into three parts: the market, the investment manager, and the investor. All too many investors—unfortunately ...

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