"Graham figured that an investor's worst enemy was not the stock market but oneself.... people who could not master their emotions were ill suited to profit from the investment process."
Graham's 3 important principles:
look at stocks as business
margin-of-safety concept, which gives you the competitive edge
having a true investor's attitude towards the stock market - an investor's appropriate reaction to a downturn is the same as a business owner's response when offered an unattractive price: ignore it.
Behavioural Finance:: The blending of economics and psychology
1. Overconfidence
They typically rely on information that confirms their knowledge, and disregard contrary information
2. Overreaction Bias
The behaviourists have learned that people tend to overreact to bad news and react slowly to good news.
Richard Thaler - "Invest in equities and then don't open the mail."
"And don't check your computer or your phones on any other device every minute.
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Thaler and Benartzi were puzzled by one central question: Why would anyone with a long-term horizon want to own bonds over stocks when they know that stocks have consistently outperformed?
The answer, they believed, rested on two central concepts from Kahneman and Twersky. The first was loss aversion:
3. Loss Aversion
Kahneman and Tversky were able to prove that people do not look at final wealth... but rather they focus on the incremental gains and losses that contribute to their final wealth.
But if you don’t sell a mistake, you are potentially giving up a gain that you could earn by reinvesting smartly.
The second was mental accounting,
Mental accounting
which describes the methods people use to code financial outcomes. It refers to our habit of shifting our perspective on money as surrounding circumstances change. We tend to mentally put money into different “accounts,” and that determines how we think about using it.
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Myopic loss aversion
Thaler and Benartzi reasoned that the longer the investor holds an asset, the more attractive the asset becomes but only if the investment is not evaluated frequently.
Thaler and Benartzi coined the term myopic loss aversion to reflect a combination of loss aversion and frequency.
How long would investors need to hold stocks without checking their performance to reach the point of being indifferent to the myopic loss aversion of stocks versus bond? The answer: one year
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Lemming fallacy
The temptation to follow what everyone else is doing, whether or not it makes sense.
“Most managers have very little incentive to make the intelligent-but-with-some-chance-of-looking-like-an-idiot decision… if an unconventional decision works out well, they get a pat on the back, and if it works out poorly, they get a pink slip.”
Harry Markowitz- Covariance
A method for measuring the direction of a group of stocks. The more they move in the same direction, the greater is the chance the economic shifts will drive them down at the same time.
The start course for investors, he concluded, is first to identify the level of risk they are comfortable handling, and then to construct an efficient diversified portfolio of low-covariance stocks.
Bill Sharpe - Capital Asset Pricing Model
Stocks carry two distinct risks
The risk of being in the market, which Sharpe called systemic risk -is “beta” and it cannot be diversified away.
Unsystemic risk
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