“The investor’s chief problem – and even his worst enemy – is likely to be himself.”
— Benjamin Graham.
Recently, Wall Street Journal columnist Jason Zweig was honored with the Gerald Loeb Award in business journalism. This is a high honor for someone who has written extensively in the Journal on the topic of personal finance, edited Benjamin Graham’s “The Intelligent Investor” and collaborated with Daniel Kahneman on the best-selling “Thinking, Fast and Slow.”
On the occasion of his award, Zweig used the space in his weekly column to reflect on over a decade of chronicling financial behavior through the Internet bubble and crash, the housing bubble, the financial crisis and the crisis du jour. His narrative emphasizes a few characteristics of investor behavior that never go out of style and become increasingly relevant in times such as this spring when fear returns to the markets.
The central tenet of Zweig’s writing is that investor behavior can have a dramatic impact on returns. I am sure that many investors saw the movement of the markets on several days last month and the immediate reaction was “What do I do?”
Zweig’s book “Your Money & Your Brain” is an introduction to the field of neuroeconomics or behavioral finance, the way we think about money. It is an approachable read that spends time discussing the biology involved in our fear of loss and greed for financial gain.
Many times the right answer is to make a change in our strategy in response to fear, but frequently the answer is to do absolutely nothing differently. Regardless, your response should come from acknowledging the biases that we all carry in part. Reading books such as this will help investors to understand themselves better and, as a result, be better investors.
Knowing how you behave when the markets become volatile is important when deciding what advice to take. In recent months when stocks, bonds and commodities have had significant single-day drops, investors have been bombarded by media analysis that most often leads to paralysis.
So what should you read and who should you speak to?
First, I will address the latter. Be wary of anyone offering advice who does not know you and who will not take the time to understand your relationship with money. Accountability on predictions is notoriously weak, and anyone claiming to offer an easy, cheap solution without the requisite legwork is probably worth exactly what was paid for the advice.
Whether you use a professional adviser or someone else who can provide wise counsel, seek feedback that is unbiased and uniquely tailored to you.
The alternative to listening to advice would be to seek to educate oneself as an investor. Sources of information in the media can be perilous, but there are a few books that could help you to gain investment knowledge while avoiding the daily chatter of market watchers.
Here are a few that would be reliable additions to an investor’s bookshelf:
• “Your Money & Your Brain” by Jason Zweig – As mentioned above, an approachable introduction to some complex concepts. The read is made much easier by the broad cultural references to which we all can relate.
• “Thinking, Fast and Slow” by Daniel Kahneman – While the author touches on finance, his book seeks to indentify the ways in which we think and the methods we can use to optimize our decision making.
• “More Than You Know” by Michael Mauboussin – This book is comprised of a set of essays that are designed to help the reader build “the best possible analytical toolbox.” It even includes some contrarian essays such as the one entitled Beware of Behavioral Finance.
• “Devil Take the Hindmost” by Edward Chancellor – The author uses historical examples to illustrate how human behavior has driven mania for different assets over the centuries. Context is always important in understanding our present, and knowledge of history teaches us that there is nothing new under the sun.
One piece of advice when reading this collection or anything in the behavioral finance field: Read with a pencil handy to underline those passages when you recognize a behavior that is particularly familiar to you.
The more you recognize and improve your investment behavior, the more disciplined your investing will become.
Dennis Morton Jr., CFP, a partner and financial consultant with Concannon Wealth Management in Bethlehem, oversees the financial affairs of business owners, executives and families in the region. His practice areas include portfolio management, financial planning, estate planning and insurance. He can be reached at firstname.lastname@example.org.