Mohnish Pabrai's Talk at Google on Entrenched Biases

Fund manager Mohnish Pabrai recently gave a talk at Google on how intensive stock research can be injurious to financial health. 

The video's description is "how the plethora of deeply entrenched biases and flawed evolutionary brain wiring makes us prone to make plenty of mistakes when picking stocks.  Specifically, the more time we spend analyzing a given business, the more likely we are to like it and invest in it. 

But if we don't spend time studying a business, how are we expected to understand its prospects and likely future?  This strong commitment bias is an important reason why most investment managers have trouble beating the index. 

Mohnish will lay out the origins of this bias problem and a few hacks to get around it."

Embedded below is the video of Mohnish Pabrai's latest talk at Google:



For more from this investor, we've posted Pabrai's talk on value investing as well.

For other investor talks at Google, we've posted many of those presentations and you can scroll through that link.

Michael Mauboussin on Skill Versus Luck and Developing an Investment Process

Michael Mauboussin, head of global financial strategies at Credit Suisse, sat down with Motley Fool earlier this year to talk about investing.

In it, he touches on skill versus luck and notes how investors need to have a process.  He says this is comprised of 3 things:

1.  An analytical component (financial statement analysis, etc)
2.  A behavioral component (patterns of mistakes and learning from them)
3.  An organizational component (what's going on in your environment that allows you to be more successful)
 
He admits that evaluating your process is a difficult thing to do, but recommends utilizing an investing journal.  Mauboussin says doing this can fight hindsight bias and creeping determinism.

He touches on numerous other topics and embedded below is the full interview with Mauboussin:



For more from Mauboussin, be sure to read his books, The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing as well as Think Twice: Harnessing the Power of Counterintuition.

Dan Ariely on the Psychology of Money: Sohn Conference Presentation

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Dan Ariely of Duke University who talked about the psychology of money.


Dan Ariely's Sohn Conference Presentation

Professor of Psychology and Behavioral Economics at Duke University. Best-selling writer.

His topic: the Psychology of money. Money spent has opportunity cost. Very hard psychologically to make good spending decisions. Wrong decisions:   

1. Think of it in relative terms rather than absolute terms. "For only $3000 more, can get X"    
2. The method of payment effects your decision.  "The pain of payment."  Cash or credit card. Paying with cash is more annoying than credit cards, because of the timing of payment   
3. Principle of fairness. Peak demand pricing annoys us. Locksmith that fixes your lock quickly - we think we pay too much. Money is incredibly interesting. We make lots of mistakes with money.  Design of electronic wallets is very important because they will effect how people save for retirement.


Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Charlie Munger on the Psychology of Human Misjudgment: Harvard Speech

Berkshire Hathaway's Charlie Munger gave a speech at Harvard University back in the 1990's on the topic of the psychology of human misjudgment.  T2 Partners' Whitney Tilson was kind enough to transcribe it and we've posted up below.

It seems that outside of the requisite financial analysis, investors are often faced with two other keys to success: mastering emotions and making good decisions.  In a sense, both of those can be intertwined as you often have to set aside emotion to make smart decisions.  Munger tackles some of these issues in his speech by focusing on the biases we often have to overcome.

Embedded below is the transcript of Munger's Harvard speech:




You can download a .pdf copy here.


For more reading on behavioral finance and decision making, head to Blue Ridge Capital's recommended reading list. 

Three Sources of Alpha: Informational, Analytical & Behavioral

We're compiling more articles on the timeless educational aspects of investing and thought this was worth highlighting. The three sources of alpha is a concept explained in a paper by Russell Fuller of the asset management firm, Fuller & Thaler.

In an old interview with Morningstar, Pat Dorsey of Sanibel Captiva Trust talked about the three sources of alpha and provides a brief overview.

1. Informational: "Knowing more than the other guy" (legally, of course) can provide quite an advantage. He references small caps where sell side coverage is scarce as a prime example. In the digital age of quickly disseminated information, these advantages are harder to come by outside of lesser known companies.

2. Analytical: This is the quantitative side of things and comes down to modeling out scenarios and the various conclusions drawn. Over time, these advantages can dissipate as others copy models etc.

3. Behavioral: The third advantage is the one Dorsey argues is where the most money can be made. He says it's not how you process the information, but it's what you do after you've processed it. If you can act more rationally than others, this can be a more achievable source of alpha over out-thinking others. As Warren Buffett says: "Be fearful when others are greedy. Be greedy when others are fearful."

For more on this topic, be sure to check out hedge fund Blue Ridge Capital's recommended reading on behavioral finance.


The video interview on the three sources of alpha is embedded below:



H/T PragCap

Investor Psychology Illustrated: Where Are We in the Cycle?

It's funny how cycles work. Exactly one year ago we posted up a chart illustrating investor psychology. As we now look back, April of 2009 marked a time when the market had just bottomed and was in the nascent stage of a comeback. Today, we find ourselves in a completely converse situation. Rather than watch the market decline and decimate, we're now faced with a seemingly never ending market rally that some would label an anomaly of an ascension. Ahh the market cycle, don't you just love it? Investors have certainly experienced a wide array of emotions over the past few years. Behavioral finance has long been a compelling topic and if you're interested in learning more, we defer to hedge fund Blue Ridge Capital's recommended reading list.

One year ago, for whatever reason, we were compelled to post up a chart illustrating investor psychology. Today, one year later, we felt compelled again. Below you'll find the 17 stages of investor psychology ranging from rage to disbelief to euphoria. Here is how investors feel during the peak-to-trough market cycle:

(click to enlarge)

As you can see, there are 19 stages in the cycle. By all accounts, it would seem that we are currently somewhere between points 15 and 19 on the chart. Are we past the "what the hell???" stage yet? Some would argue that we passed that point at around 1,100 on the S&P 500. Some would also argue that we are at point 17 in the cycle, the "more crazies who are going to get taken to the cleaners" stage. Who knows.

While it's uncertain where exactly in the cycle we are, the point is that we're still in a cycle. Given that we posted this chart up exactly one year ago, we found it fitting to remind everyone of the various levels of mania an investor can experience. We do know this though: many have turned cautious. While he admits market timing is not his forte, legendary investor Jim Rogers recently started some short positions. Additionally, over the past few weeks, hedge funds have drastically reduced long exposure as the smart money's been selling equities. Lastly, we covered how market strategist Jeff Saut summoned the old market adage, "sell in May and go away" and then said don't wait 'til then to do so. Many will deem this as rational thinking given the run the market's had. At the same time, this all reminds us of stage 18 in the cycle where everyone thinks the correction is coming but then the market actually heads higher. In this liquidity driven environment, it certainly wouldn't be the first time.

Couple the above chart with this additional one from Prieur du Plessis, and you've covered the full spectrum of investor psychology:

(click to enlarge)

For more on this topic, we recommend you check out the compendium that hedge fund Blue Ridge Capital has assembled via their behavioral finance reading list. Ahh the market cycle, don't you just love it? Round and round we go. Where we'll stop, nobody knows.