Confessions of a Value Investor: Lessons in Behavioral Finance

Confessions of a Value Investor: Lessons in Behavioral Finance
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Confessions of a Value Investor: A Few Lessons in Behavioral Finance by Sanjay Bakshi

March 17, 2010

Vicarious experience

How Warren Buffett Went From Hating To Loving Banks

Berkshire Hathaway Warren BuffettSince the financial crisis, Warren Buffett's Berkshire Hathaway has had significant exposure to financial stocks in its portfolio. Q1 2021 hedge fund letters, conferences and more At the end of March this year, Bank of America accounted for nearly 15% of the conglomerate's vast equity portfolio. Until very recently, Wells Fargo was also a prominent Read More

Most learning comes from extremes.

Instead of focusing on becoming too smart, i urge you to focus on avoiding foolish behavior.

I urge you to learn from mistakes of others

Behavioral Finance: Reflexive vs. Reflective Brain

Reflexive Brain is effortless, automatic, fast, can lend itself to errors.

Reflective Brain is effortful, reasoned, slow, logical, and less prone to error.

Behavioral Finance: Confession # 1 I fell for the Availability trap

Human brains tends to drift into working with what’s easily available to it.

“When I’m not near the girl I love, I love the girl I’m near.”

The brain can’t use what it can’t remember…

…or what it is blocked from recognizing under the influence of certain psychological tendencies

The result? Mind tends to overweigh what’s easily available to it.

“People assess the frequency,probability, or  likely cause of an event by the degree to which instances or occurrences of that event are readily “available” in memory.” – Daniel Kahneman

“An event that evokes emotions and is vivid, easily imagined, and specific will be more available than an event that is unemotional in nature, bland, difficult to imagine, or vague.”-Daniel Kahneman

What sort of things tend to be more available in our minds than others?

What are the consequences of overweighing most available information?

People’s estimates of probabilities will go wrong, so their estimates of value will go wrong resulting in misjudgments.

Behavioral Finance: Why should I buy this stock?

Because its cheap!

Well, so what? Under what circumstances would this be a mistake?

Can you think of three reasons why you could be wrong?

Reason 1: Fraud

Reason 2: value trap

Reason 3: Bubble market

See full Confessions of a Value Investor: Lessons in Behavioral Finance in PDF format here.

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