Finance (SparkCharts) Book

Must read for every investor.

Chapter One: Neuroeconomics
"One of the themes of this book is that our investing brains often drive us to do things that make no logical sense- make perfect emotional sense." 3
"The investing brain is far from the consistent, efficient, logical device that we like to pretend it is. Even Nobel Prize winners fail to behave as their own economic theories say they should."5
"And it's not as if emotion is the enemy and reason is the ally of good financial decisions. People who have suffered head injuries that prevent them from engaging the emotional circuitry in their brains can be terrible investors. Pure rationality with no feelings can be as bad for your portfolio a sheer emotion unchecked by reason. Neuroeconomics shows that you will get the best results when you harness your emotions, not when you strangle them."5
"Knowing who you are as an investor can make you a fortune- or save you one." 6
Chapter Two: Thinking and Feeling
-You think with the reflexive system (emotional) and the reflective system (analytical). Reflexive is impulsive and reflective takes longer.
-Trust your gut, know when reflexive thinking will rule your thinking process, ask another question to dig deeper into your assumptions, don't just prove-try to disprove, conquer your senses with common sense, only fools invest without rules, sleep on important decisions, do your homework ahead of time so you are ready to buy when a stock drops, stocks have prices and businesses have values (prices change thousands of time a day but the value of the business takes a lot long to appreciate or depreciate- as the business value increases the price will naturally increase).
- "Buffet says, "My first question, and the last question, would be, 'Do I understand the business?' And by understand it, I mean have a reasonably good idea of what it will look like in five or ten years from an economic standpoint." If you aren't comfortable answering that basic question, you shouldn't buy the stock."32
Chapter Three: Greed
-Expecting a financial gain is more rewarding and exciting than actually receiving one. 35
-Once you've experienced expecting a large financial gain (winning the lottery) once, you chase it again your whole life. You will do crazy things to achieve this feeling again.
-Our brains do this so that we will continue to chase long term goals. The reward we get from anticipation helps gives us the patience and perseverance it takes to achieve long term goals.
-"Jacob Horner is incapable of imagining future pleasures and thus is paralyzed whenever he confronts a choice."40
-"Choosing is existence: to the extent that you don't choose, you don't exist."
- A common saying "Buy on the rumor, sell on the news" works because the rumor is the anticipation which rewards the brain so people buy. When investors finally get the good news they want, it's not as good as they thought it would be so they sell. 42
-Your memory is better when you are expecting a financial gain. This is the reason you remember the risky bets you took that paid off, rather than the ones that didn't.
-Your reflexive system measures anticipation and your reflective system measures probability. That's why we tend to consider anticipation before the chance of it happening.
-Your anticipation circuitry doesn't evaluate potential gains in isolation. We assess our potential outcomes not just against what did happen, but what could have happened.47
-Getting a grip on your greed: 1. There are no sure things on wall street. Be on your guard against those luring you in with excitement over potential gain. 2. Put the money you will use on risky investments in totally different account and don't add any money to it no matter what. 3. Control the cues that could influence you to act impulsively. 4.Think twice
Chapter Four: Prediction
"All these predictions fall prey to the same two problems: First, they assume that whatever has been happening is the only thing that could have happened. Second, they rely too heavily on the short-term past to determine the long-term future."
-Three reasons investors who do the most homework don't necessarily do the best: 1. The market is usually right. 2. It takes money to move money. 3. Randomness rules.
-It is human nature to search for patterns, however, we tend to assume there are patterns in investing where order and patterns do not lie.
-"what we've learned about prediction might make you wonder whether investing is a fool's game or we're all doomed to destroy our wealth with our own idiocy.
-How to overcome your brain's tendency to automatically predict: 1. Control the controllable: your expectations, your risk, your readiness, your expenses, your commissions, your taxes, your own behavior 2. Stop predicting and start restricting: invest on a schedule, not when you think the market will move. 3. Ask for evidence before believing "experts" predictions. 4. Practice before putting money behind it. 5. FACE UP TO BASE RATES 6. Correlation is not causation 7. Take a break 8. Don't obsess (stop checking your stocks so often)
(thought: this book has a ton of information and makes too many points. some could be omitted)
Chapter Five: Confidence
-Familiarity becomes synonymous with safety. People become overconfident in what they're familiar with. We feel better when we are around the familiar. We like things the more we are exposed to them.
-A winning streak makes you feel like you're playing with house money. Streaks make the future feel more predictable. Streaks make the investor feel like luck is on their side over random chance. 107
"Because being on a roll is so thrilling, it generally takes at least two scaldings before even so-called experts can begin to learn not to touch a "market bubble"". People turn manic when they're in a winning streak.
-frequent traders tend to underperform less frequent traders by about 7 points a year. They tend to be overconfident.
"What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes." - Warren Buffet 119
How to correct your confidence: Diversifying allows you to not have to be confident in one sector; after evaluating a stock cut the high and low end of the range down by 25% to account for overconfidence; keep a record of what was on your mind when you made predictions so you can see if it went up for the reason you thought it would; track portfolios of stocks you don't own (thought about buying but didn't, stocks you've sold, etc); compare your earnings and expected earnings to base lines; write down mistakes and lessons learned from them; don't keep more than 10% in your own company's stock; keep asking why to every answer- people who don't know what they're talking about usually can't get past the second why.
Chapter Six: Risk
-Risk tolerance is not fixed; it changes with your moods/emotions.
-How information is framed determines your perspective/feelings about its risk.
-Interaction between thinking and feeling creates framing.
-Framing probability as X out of X people instead of a percentage sounds more like it would occur.
-People who can't afford to take large risks usually are more likely to because they need the possible gain more than richer individuals. 146
How to manage your risk: 1. Don't buy/sell spur of moment because your risk level can change based on your emotions. 2. Step outside yourself (would you advise your mom to do this) 3. Write yourself an investment policy (what youre seeking to do accomplish with your money and how you will get there. Long term objestices and constraints along the way 4. Reframe situations 5. Try to prove yourself wrong 6. Instead of thinking in terms of risk, think in terms of goals. What do you need to do or avoid doing to achieve these goals?
Chapter Seven: Fear
-Dread and knowability determine how scary/risky something is. Dread is determined by how controllable, vivid, or catastrophic an event may be. Knowability is determined by how immediate, specific, or certain the consequences may be.
-Your amygdala helps you overreact to anything that is new, changing, or out of place making you feel afraid before you even realize you're afraid.
-When you don't conform your amygdala lights up.
-How to keep cool when facing your fears: 1. Get it off your mind for a little bit 2. Use your words to describe investment decisions as this dims the amygdala's reaction 3. Track your feelings 4. Get away from the herd (write down your investment ideas/reasons before encountering herd; run group consensus by trusted person not in group;
Chapter Eight: Surprise
-Financial markets humiliate anyone who thinks they know what's coming, so expect to be surprised.
-How to embrace the unexpected: 1. Whenever you're tempted to do what everyone else is doing, don't. 2. High hopes cause big trouble 3. Track why you were surprised 4. Focus on how the surprise affects the company, not the stock price, in the long run.
Chapter Nine: Regret
-Your instincts tell you that you will feel more regret over a mistake of action rather than a mistake of inaction.
-Regret is also based on what you missed out on getting what you got.
-No matter what you do, something else can seem like what you should have done.
-regression to the means: a term that means that progress will eventually be hindered by naturally staying towards the mean. This means stocks that go up will always come down eventually, even if only a little.
-On average, half of stocks will do better than the market and half will do worse, but with fees and taxes, your odds of outperformance drop to one in three. Choosing stocks on basis of past returns along will make you end up wrong about two thirds of the time. Intelligent investors don't make that mistake.
-Your insula puts you in touch with what your body is doing. Main center for evaluating negative emotions.
-"Investors may hurt themselves more by avoiding risks they imagine they might regret than by taking risks they really do end up regretting. People who avoid actions they think might hurt later often are buying emotional insurance that they do not actually need.
Lessons to overcome investing regret: 1. Talk it out with someone. 2. Having rules gives you a reason to fall back on when you feel regret 3. Get second opinions 4. Find silver lining when you sell (tax cuts) 5. Only sell because there's something wrong with the business, not because the price is low. 6. Implement automatic investing 7. Automatically rebalance your asset allocation
Chapter 10: Happiness
-we misjudge what we want, how we will feel when we get it, and how long that feeling will last
-you usually see the past as being better than it truly was.
-money spent on acquisitions is more likely to be thought of as a mistake as time passed. Money spent on experiences are more likely to be thought of as better as time passes.
-whether or not you're happy with what you have partly depends on what people around you have
-the happier you are the more money, the longer life, and the healthier you will probably be
-Being lucky is partly a skill- you can be in lucky situations but you have to initiate and do make the most out of them for them to be good for the most part
-How to be lucky: 1. Don't give up 2. Look outward: curious, observant, engaging 3. Look on the bright side 4.
-How to be happier: 1. Meditate/breath 2. Don't watch tv 3. Combine a dreaded activity with hanging out with friends 4. Exercise 5. Celebrate/throw a party when in a bad mood, not just good ones 6. End experiences on a high note to remember them as more positive 7. Surprise someone 8. Learn something new 9. Accentuate the positive 10. Make your own luck: try new things, notice the world around you 11. Don't procrastinate 12. Experiences are better than materials 13.