Valuable Investing Insights: Behavior Gap

by: ValueWalk

By VW Staff

I don't work in finance, and I don't actively invest, but I enjoyed these three books: The Behavior Gap, The Most Important Thing, and What I Learned Losing a Million Dollars. The authors are students not just of investing. They are students of human behavior. Instead of telling readers how to invest, they explain what smart investors should avoid - the biases and illusions that led naïve investors astray. I've picked three insights, one from each book, and listed them below. via

1. Information Can Hurt You, The Behavior Gap by Carl Richards (@behaviorgap)

2. Appreciate The Role of Luck, The Most Important Thing by Howard Marks

3. Approach Investing "via Negativa" What I Learned Losing a Million Dollars by Jim Paul & Brendan Moynihan

1. The Behavior Gap

The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money by Carl Richards

"It's not that we're dumb. We're wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right - but it's not rational." - From The Behavior Gap

Why do we lose money? It's easy to blame the economy or the financial markets - but the real trouble lies in the decisions we make.

As a financial planner, Carl Richards grew frustrated watching people he cared about make the same mistakes over and over. They were letting emotion get in the way of smart financial decisions. He named this phenomenon - the distance between what we should do and what we actually do- "The Behavior Gap." Using simple drawings to explain the gap, he found that once people understood it, they started doing much better.

Richards's way with words and images has attracted a loyal following to his blog posts for The New York Times, appearances on National Public Radio, and his columns and lectures. The Behavior Gap will teach you how to rethink all kinds of situations where your perfectly natural instincts (for safety or success) can cost you money and peace of mind.

2. The Most Important Thing

The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor by Howard Marks

Howard Marks's The Most Important Thing distilled the investing insight of his celebrated client memos into a single volume and, for the first time, made his time-tested philosophy available to general readers. In this edition, Marks's wisdom is joined by the comments, insights, and counterpoints of four renowned investors and investment educators: Christopher C. Davis (Davis Funds), Joel Greenblatt (Gotham Capital), Paul Johnson (Nicusa Capital), and Seth A. Klarman (Baupost Group).

These experts lend insight into such concepts as "second-level thinking," the price/value relationship, patient opportunism, and defensive investing. Marks also adds his own annotations, expanding on his book's original themes and issues. A new chapter addresses the importance of reasonable expectations, and a foreword by Bruce C. Greenwald, called "a guru to Wall Street's gurus" by the New York Times, speaks on value investing, productivity, and the economics of information.

3. What I Learned Losing a Million Dollars

What I Learned Losing a Million Dollars by Jim Paul, Brendan Moynihan, Jack Schwager

Jim Paul's meteoric rise took him from a small town in Northern Kentucky to governor of the Chicago Mercantile Exchange, yet he lost it all - his fortune, his reputation, and his job - in one fatal attack of excessive economic hubris. In this honest, frank analysis, Paul and Brendan Moynihan revisit the events that led to Paul's disastrous decision and examine the psychological factors behind bad financial practices in several economic sectors.

What I Learned Losing a Million Dollars - winner of a 2014 Axiom Business Book award gold medal - begins with the unbroken string of successes that helped Paul achieve a jet-setting lifestyle and land a key spot with the Chicago Mercantile Exchange. It then describes the circumstances leading up to Paul's $1.6 million loss and the essential lessons he learned from it - primarily that, although there are as many ways to make money in the markets as there are people participating in them, all losses come from the same few sources.

Disclosure: None.

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