Reports of the death of mean reversion are premature This was originally written for the FT, but they seem to have gone the same way as so much media and are dumbed down these days - they said it was too technical after sitting on it for more than a week. Investing based on mean reversion will be less compelling II. Tail hedging becomes more important IV. Historical benchmarks and correlations will be challenged V.
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For many investment professionals James Montier is behavioural finance. Its largely through Montier that concepts like anchoring, hindsight bias, herding etc. Too few read books, instead the source of information is papers from investment banks. Hence there is a need for a bridge between theoretical advances and investment practitioners. For behavioural finance Montier has been this bridge and a whole generation of investment professionals is wiser as a result.
This is Montiers second book. The first one builds on a number of lectures in behavioural finance held as a visiting professor at university. The essays are grouped after subject. My only objection is that it could have benefited from at least a small amount of editing. This is a very minor complaint. To me these essays are like old dear friends and I have read them over and over, even before they were published in a book.
In such a way, editing would also have taken something away for me personally. Behavioural Investing is rather an extensive book and large parts are devoted to both individual irrationality and collective behaviours and the bubbles those can create. In the introductions to his first book, Behavioural Finance, the author describes how he left university a devoted rational expectations-man. Perhaps it is his later conversion that gives Montier the enthusiasm and drive to try to make everybody see the same truth as he saw himself.
Everything Montier writes is well researched, clever, unpretentious with a twist of dry British humour , entertaining and above all important. The real strength of the author is when he combines his knowledge of institutional investors and his theoretical knowledge, i. Irrational illusions of how things should be done are exposed for all to see. With investors as audience, what you write have to come to practical use and Montier gives extensive advice on how investment philosophy and process, organisation and incentives could be used to correct the biases investors exhibit.
This could relate to anything from how they should view risk and minimize the use of forecasts to the opinion that they should become value investors. Montier in many ways gives a behavioural finance foundation for the value investing discipline.
I have long held the view that Montier and Michael Mauboussin at Legg Mason should be locked up in a room, not to be let out until they agree to co- write a book on investments. This should have the potential to become the definitive book on investments of all times.
Montier not only dives into investor psychology with emphasis on biases and issues this creates for the broader market , but he also challenges economic theory and provides vast research to back up his claims. This has been my most recommended book on investing for over 10 years. Truly exceptional. Far from offsetting each others biases, groups usually end up amplifying them.
Members of groups enjoy competency and credibility in the eyes of peers if they provide information that is consistent with the group view. Using groups for stock selection seems to be a handicap on performance.
The game of professional investment is intolerably boring. Our ability to exercise self-control over emotional impulses is limited and decreases with use. We are wired for the ST. We find the chance of ST gain very attractive.
ST gains make us feel confident, stimulated and generally good about ourselves. We also appear to be hard-wired to herd. To buy when others are despondently selling and sell when other are greedily buying requires the greatest fortitude and pays the greatest reward.
Be less certain in your views, especially if they are forecasts. People have been found to dislike losses far more than they like gains. High turnover, large portfolios and ST horizons all relate to illusion of control.
Giving forecasting is difficult a mistake is putting forecasting at the heart of the investment process. Over-confidence is whereby people are surprised more often than they expect to be. Deliberation tends to reduce variance. An investment operation promises safety of capital and a satisfactory return. In the world of deflation time is a killer rather than a healer. Dont equate happiness with money- people adapt to income shifts relatively quickly.