The Little Book of Behavioral Investing
By James Montier
Wiley, NewJersey , 2010
Wiley, New
Review by Davide Accomazzo
Rating: 4 - Thought-provoking and intellectually stimulating material
The new frontier in understanding the investment process and in constructing viable portfolios which may survive and thrive even in times of massive dislocations is the study of behavioral finance.
Analysis of behavioral influences on the way we act as investors, has been around for years (in addition to Montier, you can read the works of Robert Shiller, Dan Ariely and Andrew Lo) but until recently it was always overshadowed by the mainstream approach based on market efficiency and rational expectations.
The latest financial crisis and the indiscriminate blow-ups of models finally showed the massive limitations of the Efficient Market Hypothesis (EMH) and ensured work for years to come for behavioral economists.
James Montier, often called “the enfant terrible” of finance for his irreverent approach and critique of the financial orthodoxy, established himself as an authority on the subject with different works such as “Behavioral Finance,” “Behavioral Investing,” and “Value Investing.”
For the causal reader and curious investor, he also put together this short and concise pamphlet on behavioral investing, part of the Little Book series.
It is an insightful look into the real, yet most often disregarded dynamics, that affect our behavior when we are thrown into the investment arena. He talks about the foolishness of forecasting (see Nassem Taleb’s work for more on this subject) and the notorious practice by Wall Street analysts of publishing stock target prices (indeed one of the most idiotic wastes of times in the industry).
Montier also touches on the subject of bubbles in asset prices; how to define them and spot them and why they arise. Along this subject, he writes about a series of behavioral tendencies that mark the human process when it comes to investing:
- over-optimism which blinds us from the dangers posed by predictable surprises
- illusion of control or the belief that we can influence the outcome of uncontrollable events
- self-serving bias or the innate tendency to overweight information that validate our bias
- inattentional blindness or the fact that we do not expect to see what we are not looking for.
In conclusion, Montier provides an interesting and fact-supported look at how our emotions prevent many of us from being successful investors.
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Money Mavericks, Confessions of a hedge fund manager
By Lars Kroijer
FT Prentice Hall,London
FT Prentice Hall,
Review by Davide Accomazzo
Rating: 4 - Thought-provoking and intellectually stimulating material
When I heard about Kroijer’s book during a Bloomberg interview, I knew that reviewing his work would have been an interesting project. I shared many similarities with his experience (even though I must admit he reached a higher level of assets under management than I did so far) and I was curious to learn about his full perspective.
In his book, Kroijer describes his experience in leaving, when barely 30 years old, a high paying job in finance (after a Harvard MBA) to start his own hedge fund. His talent seemed under no dispute and his timing was certainly quite good (lucky?) as he picked the bottom in 2002 to launch.
Kroijer spends a large portion of the book discussing and remembering the concurrent excitement and humbleness of getting his fund off the ground. He eventually launched with a mere and much disappointing $3.5 million which gave rise to many funny stories on how little he was in an industry which strives on constant machismo. I could not help but remembering my own humbling stories and feel somewhat in empathy with Kroijer - an especially funny memory hit me when reading this part; I had just started Cervino Capital Management and while just a tiny blip in the investment community I felt like a million bucks. I was back in the hedge fund game and just quit a large bank where I felt imprisoned; one night, I was sitting at a dinner party at Henry Sloane’s house who at that time was the head of MGM. Next to my wife and I sat a lovely and very understated couple; after the routine chit chat on the evening event, the husband asked me what I did for a living…”I thought you would never ask” I said to myself and proceeded to give him my most proud introduction: “ Well, I am Managing Director at a boutique investment firm where we trade sophisticated alternative strategies around financial derivatives….and what do you do?” At this point I was expecting something like “Oh I am a writer, I just sold my script to Henry….” Instead I get a big smile and:” Great…I run a $6 Billion dollar bond fund downtown..how much do you guys manage?” I wanted to hide under the table and never come out..” Well..we just launched..” and went on to talk about the wine we were savoring - .
Krojer went on to become a medium size fund with a good risk adjusted return until 2007 when under much pressure from investors to increase the gearing of his investments, he ended up suffering his worst run at the highest level of leverage. By the end of 2007, with a negative return for the year, he closed shop and moved on to write this book.
He spends the last part of the book elaborating on the state of the industry, its overall usefulness, the problem with fees and structure, all issues I mostly agree with.
I often get asked by my students about my hedge fund experience and the industry overall, an industry which still carries an enormous appeal among MBAs; for those who would like to hear another candid voice on the subject, I certainly recommend Kroijer’s work. I would also recommend, for a broader and more historical overview of the HF universe the book: “More Money than God” by Sebastian Mallaby.
