December 2012: How Not to Be Your Own Worst Enemy

Review by Bryan Beatty
Partner
Egan, Berger & Weiner, LLC

How Not to Be Your Own Worst Enemy
A book by James Montier
Publisher: Wiley

In this insightful book by behavioral finance expert James Montier, we learn that bias, emotion, and overconfidence are just three of the behavioral traits that can lead investors to potentially lose money, or achieve lower returns.

Instead, he encourages readers to focus on “behavioral finance,” which recognizes that there is a psychological element to all investor decision-making—and it can help you overcome obstacles.

This academic, psychological approach to investing is what drew me to this book—a gift from a friend that I read in earnest earlier this month. Montier’s “Little Book of Behavioral Investing” takes us through some of the most important behavioral challenges faced by investors.

Montier reveals the most common psychological barriers to productive investing decisions, suggesting that emotion, overconfidence, and other behavioral traits can affect investment decision-making.

I find that understanding the human side of investing helps me be a better advisor and a better investor. And, based on his research and logical arguments, Montier’s book helped remind me why investing is so difficult for almost everyone.

In an interview about the book, Montier admits that his book was tough to write.

“Trying to expunge the jargon and get down to the nitty-gritty of how to defend ourselves against our own bad habits was a real challenge,” he shares.

Why are we our own worst enemy? Montier believes it’s because we are human.

“Traits such as over-optimism may have served us well historically—after all, the pessimists probably stayed at home in the cave a lot, didn’t go out and try and catch woolly mammoths, and thus died out relatively quickly,” he explains. “However, over-optimism in investing can be an unmitigated disaster.”

Some Take-Aways

1. It’s important to learn how to prepare, plan, and then commit to a strategy.

2. Do your investment research while you are in a “cold” rational state, when nothing much is happening in the markets—and then pre-commit to following your analysis and action steps.

3. Don’t forecast what the markets will do.

4. Focus on process rather than outcomes. This frees us up from worrying about aspects of investment that we really can’t control—such as returns.

Food for Thought

I particularly appreciate the use of studies cited throughout the book showing how people behave in a variety of situations. Why? Because Montier shows we are not all wired to be investors. It really takes work to invest wisely.

Montier suggests these action items for investors to consider:

  • Avoid rookie mistakes, such as sticking to pre-commitments because of ego, fear, or inertia.
  • Avoid the tendency to be overly optimistic (especially men).
  • Be aware when you are facing information-overload. It impacts decision-making.
  • Be on the lookout for surprises and “bubbles.”

The Bottom Line

I believe this book will give readers comfort in helping them realize that most investors are confused when it comes to making good investment decisions. This is supported by case studies throughout the book, which indicate that investors around the world agree that investing is an unpredictable field, and it takes work to do it well—and sometimes it takes people who study the field to lend a hand.

If you are determined to be the best investor you can be, I think you’ll benefit from reading Montier’s “Little Book of Behavioral Investing.”

At the very least, by studying how others make the financial decisions they do—or don’t—I believe you’ll gain greater insight into your own investment behavior.

About James Montier

James Montier is a member of GMO, a privately held, global investment management firm in the UK.

Previously, he was the co-head of Global Strategy at Société Générale, and has been a strategist in the annual Thomson Extel survey.

Montier is also the author of three books — “Behavioral Finance: Insights into Irrational Minds and Markets,” “Behavioral Investing: A Practitioners Guide to Applying Behavioral Finance,” and “Value Investing: Tools and Techniques for Intelligent Investment.”

He is a Visiting Fellow at the University of Durham and a Fellow of the Royal Society of Arts.


About Bryan D. Beatty

Bryan Beatty is a Certified Financial Planner™ and partner at Egan, Berger & Weiner LLC, which is based in Northern Virginia. With more than 20 years of experience in the financial industry, he is a principal of this independent financial services firm, which is experienced in all aspects of investment and retirement planning.

An active member of the Financial Planning Association’s Career Development and College Outreach Committees, Beatty is a graduate of the University of Maryland with a BS in Finance. He was the former president of the Finance, Banking and Investment Society, and he is an avid musician who plays guitar and writes music in his spare time, and occasionally plays area venues. Originally from Baltimore, Beatty has lived in Northern Virginia since 1992.

For more information about Beatty’s services, send him an email at bbeatty@ebwllc.com.

For additional information about Egan, Berger & Weiner, LLC, visit www.ebwllc.com.

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