Sound Advice From a Nobel

Here are two behavioral downloads:

Applying Behavioral Finance to Value Investing – Whitney Tilson
Behavioural Finance – Martin Sewell

Daniel Kahneman, from an interview with Money Magazine:

Q. You once said we’d all be better investors if we just made fewer decisions.

A. Two decisions really matter: how much of your wealth you want to put at risk and how much risk you want to take with it.

Q. Those aren’t easy decisions!

A. No, but they are few. Investing should be an orderly process in which you make long-term commitments along the course those two big decisions set for you.

Small decisions tend to be based on what the market does, and are likely to be wrong. That’s why you should implement policies in a broad frame rather than make decisions in a narrow frame.

Q. What’s the difference?

A. Here’s one example. If you use a narrow frame and make small decisions, you will buy and sell stocks one at a time. You will have high trading costs, sell your winners too soon and hang on to your losers too long.

On the other hand, if you use a broad frame and implement a policy, you will rebalance regularly and automatically. You will buy or sell stocks as a class, rather than one by one, and you will do so only when they cross a target level that you have set in advance.