Thinking about your New Year’s resolutions? You know, the ones you never keep? When it comes to investing, The Laws of Wealth: Psychology and the Secret to Investing Success (Harriman House, 2016) by Daniel Crosby might be a good antidote to yet another year of backsliding. His basic message is that one should engage in rule-based behavioral investing to help defeat behavioral risk.
In the first part of the book Crosby sets out ten sometimes counterintuitive rules of behavioral self-management, the behavioral risk side of his equation for success. They are: (1) you control what matters most, (2) you cannot do this alone, (3) trouble is opportunity, (4) if you’re excited, it’s a bad idea, (5) you are not special, (6) your life is the best benchmark, (7) forecasting is for weathermen, (8) excess is never permanent, (9) diversification means always having to say you’re sorry, and (10) risk is not a squiggly line.
He devotes the second part to behavioral asset management. Investing, he argues, is an area in which intuition and common sense fail us because, among other reasons, it is “performed infrequently, provides delayed feedback and includes an overwhelmingly complex array of variables.” In fact, stock picking can be fairly well described using five variables that, according to Daniel Kahneman, lead to suboptimal decision making: a complex problem, incomplete and changing information, changing and competing goals, high stress and high stakes involved, and must interact with others to make decisions.
If we are to be successful investors, Crosby argues, we must automate the process by which we make decisions. We must follow a model and not taint it with on-the-fly judgment calls. We must “set systematic parameters for buying, selling, holding and re-investing funds and follow them slavishly.” We must take advantage of human fallibility and pursue rule-based behavioral investing.
Crosby suggests one such investing model , which combines value and momentum along with risk assessment (using such metrics as Montier C-scores and Altman Z-scores to vet all purchases).
The Laws of Wealth does not offer a path to consistent outperformance (which, Crosby argues, is one reason his model will have lasting power). Over time, however, systematic behavioral investing should produce an impressive track record. Which, of course, should translate into wealth.
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From New York Times and USA Today bestselling author, Dr Daniel Crosby, comes the behavioral finance book all investors have been waiting for.
In The Laws of Wealth, psychologist and behavioral finance expert Daniel Crosby offers an accessible and applied take on a discipline that has long tended toward theory at the expense of the practical. Readers are treated to real, actionable guidance as the promise of behavioral finance is realised and practical applications for everyday investors are delivered.
Crosby presents a framework of timeless principles for managing your behavior and your investing process. He begins by outlining ten rules that are the hallmarks of good investor behavior, including ‘Forecasting is for Weathermen’ and ‘If You’re Excited, It’s Probably a Bad Idea’. He then goes on to introduce a unique new taxonomy of behavioral investment risk that will enable investors and academics alike to understand behavioral risk in a newly coherent and complete way.
From here, attention turns to the four ways in which behavioral risk can be combatted and the five equity selection methods investors should harness to take advantage of behaviorally-induced opportunities in the stock market. Throughout, readers are treated to anecdotes, research and graphics that illustrate the lessons in memorable ways. And in highly valuable ‘What now?’ summaries at the end of each chapter, Crosby provides clear, concise direction on what investors should think, ask and do to benefit from the behavioral research.
Dr. Crosby’s training as a clinical psychologist and work as an asset manager provide a unique vantage and result in a book that breaks new ground in behavioral finance. You need to follow the laws of wealth to manage your behavior and improve your investing process!