Stop. Think. Invest. Buchzusammenfassung - das Wichtigste aus Stop. Think. Invest.

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Zusammenfassung von Stop. Think. Invest.

Name: Stop. Think. Invest.
Rating: 3.9 (296 reviews)
Author: Michael Bailey

Michael Bailey

A Behavioral Finance Framework for Optimizing Investment Portfolios

3.9 (296 Bewertungen)

27 Min.

Inhaltsübersicht

Stop. Think. Invest.
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Kernaussage 1 von 6

What’s in it for me? Learn how to avoid common investment pitfalls.

The term behavioral economics may sound imposing, but it’s rooted in the simple fact that emotions and life experiences influence people’s decision-making. As humans, we each have a set of biases and fears that can be hard to shut off – even if we’re aware of the influence they have over us on a daily basis. Obviously, this applies to our investment decisions as much as anything else.

Two Nobel Prize–winning economists, Daniel Kahneman and Richard Thaler, have championed the concept of behavioral economics over the years. The blinks to Michael Bailey’s Stop. Think. Invest. incorporate their insights, along with Bailey’s own knowledge gained from years of investment experience, to reveal how you can start making better decisions – whether you’re looking for your next opportunity or wondering what to do with the portfolio you already have.

In these blinks you’ll learn

how being too close to a company can blind you to potential problems;
how risk aversion and loss aversion can lead to bad choices; and
why you never want to “set it and forget it.”

Behavioral economics can help you make better investment decisions.

For decades, investment opportunities didn’t get much safer than General Electric. What started as an electric lighting company in the late 1800s went on to become one of the most powerful and profitable conglomerates of the twentieth century. Everyone in America knew what the initials “GE” stood for, and even as the twentieth century was winding to a close, most investors believed that the company was in good hands and would continue to thrive.

In late 2015, the former CEO of GE, Jeff Immelt, painted a rose-colored future of booming profits due to new cutting-edge power plants, health-care technology, and jet engines. Immelt even set the ambitious goal of seeing GE’s per-share price rise from $1.20 to $2.00 in three years’ time.

Alas, it didn’t pan out that way. Instead, between 2015 and 2018, the price per share dropped to a heartbreaking 65 cents. Along the way, many investors stubbornly went down with the ship. Why? Behavioral economics. Investors were blinded by emotions and biases that prevented them from seeing GE as anything other than a safe and reliable bet. GE’s CEO presented investors with a narrative they saw no reason not to accept – even when warning signs were obvious to outsiders.

Behavioral economics is the study of how the social, psychological, and emotional facets of human nature play into the field of economics and investing. It represents a combination of cognitive behavioral factors that should be considered when making important financial decisions – such as knowing which stocks to pick, when to sit tight, when to sell or trade, and how much to invest.

Author Michael Bailey has identified 12 steps in the stock-picking process – along with 100 cognitive behavioral coaching tips – that can help steer you in the right direction. While we won’t get into the details of each and every tip, we will highlight one or two from each of the 12 steps so you can avoid the major pitfalls that have been known to sink even the most seasoned investors.

Narrow down your options with a mix of libertarian and paternal approaches.

With that in mind, let’s start with the steps of looking for new ideas and researching businesses. There’s no lack of options when it comes to investing. In fact, there are way too many out there to really consider them all. This is why the first investment tip is about how, sometimes, less is more.

Some of the more traditional economic theories suggest that the more choices consumers have, the better off they are. But this isn’t necessarily the case. It’s not hard to reach a point where an abundance of choices can lead to what behavioral scientists call the paradox of choice. Basically, this is what happens when there are so many options that it becomes virtually impossible to make a decision.

Neutralize your biases by giving yourself a range of diverse options.

It should go without saying that research requires thinking. But did you know there’s more than one way to think? As it turns out, there are two different ways: System 1 and System 2 thinking. System 1 is the passive thinking you can do when you’re deep-scrolling on your phone, looking for something to watch on Netflix, or pushing your shopping cart down the aisles of a store while listening to a podcast. System 1 is kind of like autopilot thinking.

System 2, on the other hand, requires more concentration. This is the thinking that demands your full attention. You can’t multitask when you’re engaged in System 2 thinking. That would be like trying to check your Instagram feed while navigating your car through downtown city traffic at night during a rainstorm. It wouldn’t end well. Likewise, when picking stocks and researching opportunities, you don’t want to be multitasking. You want to be fully engaged in System 2 thinking. Otherwise, you’re bound to make mistakes.

Two great tools for better investing are an investment thesis and an investment committee.

At this point, it’s probably a good time to talk about writing – or “crafting,” as Bailey calls it – an investment thesis. Doesn’t that sound fun? OK, that was a rhetorical question. Nevertheless, this is a bit of work that will pay dividends in the long run.

Crafting an investment thesis simply involves writing down your reason for picking the stock you decided upon. What made you choose this stock? What are your expectations? This is the time to exercise your rationality and lack of bias. Be clear and practical, and don’t let inside views or bold forecasts skew your judgment. Make sure you’ve gotten multiple perspectives and aren’t giving too much weight to unlikely events – or too little weight to likely events.

Don’t let external influences like media noise push you to sell too early.

Let’s say you’ve done your research, written your thesis, consulted with the committee, and – without any further procrastination – made your initial purchase. Now what?

Well, now it’s time to monitor and analyze the early results. But beware: this part of the process is also full of pitfalls related to human behavior.

Learn from your successes and mistakes by adopting a growth mindset.

As a wise man named Kenny Rogers once said, “You gotta know when to hold ’em, and know when to fold ’em.” Knowing that holding your stocks can be riddled with behavioral pitfalls and misleading noise is important. But there are also things to be aware of when it comes to knowing when to fold ’em.

Let’s take a trip in the wayback machine to that first story about General Electric stock. A scenario where a stock was taking a dive – and a lot of people needlessly went down with it.

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Worum geht es in Stop. Think. Invest.?

Stop. Think. Invest. (2022) takes a look at behavioral economics, a field of study that explores the roles of human emotion and behavior in financial decision-making. It examines how people’s unconscious biases and inherent aversions influence their decisions in every aspect of the investment process.

Wer Stop. Think. Invest. lesen sollte

Anyone curious about the field of behavioral economics
Investors who’d like to make better decisions
Would-be financiers interested in making their first investment

Über den Autor

Michael Bailey is a veteran stock picker and portfolio manager who previously worked at Bear Stearns and Raymond James. During his career he’s become an expert at using the tenets of behavioral economics to help guide his decisions. He is currently the director of research and the investment committee chair for Washington DC–based investment firm FBB Capital Partners.

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