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11. Two Different Species – Econs and Humans as Investors

  • by Rodney Smith
  • Posted on June 18, 2019August 22, 2019
  • Part 2: Human Foibles and Investment Decision Making

In the early 1970s, Amos Tversky and Daniel Kahneman, two Israeli psychologists, started working together on the subject of people’s attitudes to risky choices. The standard theory in psychology at the time, indeed in all social sciences including economics, was the ‘expected utility theory’. In 1979, they published their results in a paper titled “Prospect Theory: An analysis of Decisions under Risk.”

Kahneman says: “Our theory was closely modeled on utility theory but departed from it in fundamental ways. Most important, our model was purely descriptive, and its goal was to document and explain systematic violations of the axioms of rationality in choices between gambles.” (Kahneman, 2011)p.271.

This was the beginning of the study and application of behavioral psychology to decision making. Ultimately Kahneman, following the death of Tversky, became a recipient of the Nobel Prize in Economic Sciences. Tversky would undoubtedly have shared the prize had he been alive. Today their ideas have become an important adjunct to economics and finance.

A large recent international study replicated the essential results of Kahneman and Tversky’s Decision Theory work. Replication is the key scientific method used to verify psychological study results.

https://t.co/WO30KqPZJb?amp=1

Ideas about ‘violations of rationality’, ‘decision making’ and ‘risky choices’ are naturally of great interest to investors.

Daniel Kahneman tells us that in those early days, the field of decision theory “had a theory, expected utility theory, which was the foundation of the rational-agent model and is to this day the most important theory in the social sciences. Expected utility theory was not intended as a psychological model; it was a logic of choice, based on elementary rules (axioms) of rationality.” He continues: “Economists adopted the expected utility theory in a dual role: as a logic that prescribes how decisions should be made, and as a description of how Econs make choices.” (Kahneman, 2011)p.269-270.

Kahneman explains: “To a psychologist, it is self-evident that people are neither fully rational nor completely selfish, and that their tastes are anything but stable. Our two disciplines [psychology and economics] seemed to be studying different species, which the behavioral economist Richard Thaler later dubbed Econs and Humans.” Thaler’s Econ is the same as homo economicus, the latinized intelligent self-interested economic actor. To my way of thinking Econ’s psychological make-up is more Greek than Roman. He is the Platonic form of the perfectly rational man. Thaler recently received a Nobel prize. When I use the italicized Human or Humans I am referring to the word Humans as used by Thaler and Kahneman. For them, a Human was simply a normal human being who is neither fully rational nor completely selfish. Similarly, Econ is their homo economicus.

We have already been introduced to Mr. Market. He is described by Warren Buffet as having incurable emotional problems. In truth, his emotional problems are the least part of it. What he really suffers from is behavioral biases and a propensity to make cognitive errors. Mr. Market is not an Econ, to use Richard Thaler’s term. He is a Human.

So what are behavioral biases and cognitive errors? Psychologists, particularly behavioral psychologists study, amongst other things, both the behavioral side and the cognitive side of Humans. The cognitive side is the mathematical, logical and rational side. Cognitive errors are errors in how we think through problems or solve problems. Investors, like all Humans, regularly make cognitive errors that contribute to poor performance. We will also see that investors, like all Humans, regularly exhibit behavioral biases that also contribute to poor performance. Behavioral biases are systematic errors in our impressions and feelings that result in quirks of behavior that one would not expect of normal rational people.

Psychologists use these terms behavioral biases and cognitive errors. For the most part the line between the two is clear. Sometimes it is unclear as to whether a fault or error is the result of biases in behavior or an error in cognitive function.

Most discussion of behavioral biases and cognitive errors and investing discuss lists of biases and errors and the impact they have on investors. Experts have identified scores of biases and errors. I have come at it somewhat differently. I have identified eight ways in which behavioral biases and cognitive errors harm our investing. In the eight Chapters that follow the present one, I go through each of these eight topics and explain the various biases and errors that are at work. I then explain how investors can overcome the problems.

Before we did into these topics there are some key ideas from behavioral psychology we should take a look at and some terms will need to be defined.

This Chapter continues with these Sections:

11.01 An introduction to behavioral psychology

11.02 Answering an easier question – the availability heuristic

11.03 Causal intuitions

11.04 Relying on whim, sentiment or chance

11.05 Cognitive errors and brain power

11.06 Heuristics and acquired skills

11.07 Last word

11.08 Introduction to the idea of gap-to-edge rules

 

 

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10.05 Even professionals suffer from it
11.01 An introduction to behavioral psychology
  • Table of Contents
    • Part 1: Field of Play
      • 1. Stocks Beat Every Other Asset Class
        • 1.01 There’s good evidence that stocks outperform over the very long haul
        • 1.02 Some representative numbers
        • 1.03 Warren Buffett’s take on this
        • 1.04 The other side of the story
        • 1.05 Conclusion
      • 2. Is it Worth it?
      • 3. Is it Possible?
      • 4. Risk and Uncertainty
        • 4.01 Value Risk
        • 4.02 Price Impact
        • 4.03 Business Risks
        • 4.04 Interest rate risk
        • 4.05 Inflation risk
        • 4.06 Currency risk
        • 4.07 Liquidity risk
        • 4.08 Idiosyncratic risk
        • 4.09 Catastrophic risk
        • 4.10 Fat tail risk
        • 4.11 Systemic risk
        • 4.12 A 1 in 1,000 chance of permanent loss
        • 4.13 Uncertainty
        • 4.14 Risk/reward trade-off assumption
        • 4.15 Equity risk premium
        • 4.16 Are higher rewards from lower risk possible?
        • 4.17 Risks when markets are down
        • 4.18 Risks when markets are up
        • 4.19 Risk on and risk off
        • 4.20 Conclusion regarding risk and uncertainty
      • 5. Efficient Market Hypothesis
        • 5.01 Stock price series seem not to be random
        • 5.02 Stock prices and normal distribution
        • 5.03 Fat tails
        • 5.04 The 25 standard deviation event
        • 5.05 The EMH story unfolds
        • 5.06 The biggest mistake in the history of finance
        • 5.07 Convenient untruth hangs in there
      • 6. Inefficient Market Hypothesis
        • 6.01 Reacting to news
        • 6.02 Stock market as a complex adaptive system with feedback loops
        • 6.03 Feedback effects
        • 6.04 What does it all mean?
        • 6.05 Conclusion
      • 7. Volatility
        • 7.01 Modern Portfolio Theory
        • 7.02 Capital Asset Pricing Model
        • 7.03 Sharpe Ratio
        • 7.04 Risks from lack of volatility
        • 7.05 Conclusion
      • 8. The Economy and the Stock Market – Cycles and Trends
        • 8.01 Economic cycles
        • 8.02 Industry or sector cycles
        • 8.03 Company cycles
        • 8.04 Animal spirits and economic cycles
        • 8.05 Behavioral economics
        • 8.06 Overheated economy
        • 8.07 Underheated economy – recession
        • 8.08 Trends – long term
        • 8.09 Declining prices of commodities
    • Part 2: Human Foibles and Investment Decision Making
      • 9. Great Investors and Market Psychology
        • 9.01 Warren Buffett
        • 9.02 John Templeton
        • 9.03 Maynard Keynes
        • 9.04 Bernard Baruch
        • 9.05 John Neff
        • 9.06 Peter Lynch
        • 9.07 Howard Marks
        • 9.08 Don’t jump to conclusions about this
      • 10. The Behavioral Gap
        • 10.01 It’s been documented
        • 10.02 The behavioral gap and ETFs
        • 10.03 Finance and economics students fail to take advantage of odds of 60/40
        • 10.04 Kelly formula
        • 10.05 Even professionals suffer from it
      • 11. Two Different Species – Econs and Humans as Investors
        • 11.01 An introduction to behavioral psychology
        • 11.02 Answering an easier question – the availability heuristic
        • 11.03 Causal intuitions
        • 11.04 Relying on whim, sentiment or chance
        • 11.05 Cognitive errors and brain power
        • 11.06 Heuristics and acquired skills
        • 11.07 Last word
        • 11.08 Introduction to the idea of gap-to-edge rules
      • 12. Short Term Thinking and our Flower Garden
        • 12.01 Defining terms
        • 12.02 Greed and fear
        • 12.03 An example of how it works
        • 12.04 Success through Broad Framing
        • 12.05 Framing in other contexts – an aside
        • 12.06 The corporate world takes the short view
        • 12.07 Wall Street takes the short view
        • 12.08 Trading too often – more on this
        • 12.09 Cutting the flowers and watering the weeds – holding winners
        • 12.10 Cutting the flowers and watering the weeds – holding onto losers
        • 12.11 Companies also suffer from Bad Options and Sunk Cost Fallacy
        • 12.12 Conclusion
        • 12.13 Gap-to-edge rules for this chapter
      • 13. Overweighting Improbable Outcomes
        • 13.01 When prices go down
        • 13.02 Facing bad options
        • 13.03 Lotteries
        • 13.04 Fourfold pattern
        • 13.05 Hitting the low percentage shot
        • 13.06 Reorient our bearings
        • 13.07 Averaging up
        • 13.08 Particular risks with ‘easy money’
        • 13.09 Rare events
        • 13.10 Stressful events and risk aversion
        • 13.11 The Monday morning quarterback is us
        • 13.12 Fear of failure
        • 13.13 Conclusion
        • 13.14 Gap-to-edge rules for this chapter
      • 14. Changing our minds
        • 14.01 Admitting you are wrong
        • 14.02 Preconceived ideas about your approach to investing
        • 14.03 Path dependence
        • 14.04 Flip-flopping
        • 14.05 We jump to conclusions and then look to support them
        • 14.06 Data mining
        • 14.07 Delusions
        • 14.08 Mr. Market’s preconceived beliefs
        • 14.09 Conclusion
        • 14.10 Gap-to-edge rules for this chapter
      • 15. Jumping to Conclusions
        • 15.01 The brain’s propensity to jump to conclusions
        • 15.02 Liked the product, bought the stock
        • 15.03 Favorable impression of company management, bought the stock
        • 15.04 The halo effect and first impressions
        • 15.05 Base rates and probability assessment
        • 15.06 Belief in the benefits of solar energy
        • 15.07 Familiarity and home bias
        • 15.08 Status-quo bias
        • 15.09 Investors love a story
        • 15.10 What you see is all there is
        • 15.11 Misplaced confidence in written material containing opinions
        • 15.12 Conclusion
        • 15.13 Gap-to-edge rules for this chapter
      • 16. We Overgeneralize and Find Causes
        • 16.01 A complex example makes the point
        • 16.02 The investment guru
        • 16.03 Even stock market analysts and market strategists can get it wrong
        • 16.04 Phony statistics
        • 16.05 Cause and correlation
        • 16.06 Causal connections based on pure narrative and supposed correlation
        • 16.07 Gap-to-edge rules for this chapter
      • 17. Recent Events – Vivid Memories
        • 17.01 Availability cascade
        • 17.02 Media coverage biased
        • 17.03 Investors overreact to recent news
        • 17.04 Gap-to-edge rules for this chapter
      • 18. Over-confidence and Optimism
        • 18.01 Overconfidence and optimism
        • 18.02 Optimism by itself
        • 18.03 The normal state of the world
        • 18.04 Over-confidence and confidence in one’s own judgment
        • 18.05 Courage and confidence
        • 18.06 Overconfident pundits
        • 18.07 The problem of overconfident management
        • 18.08 What is to be done about overconfidence and optimism?
        • 18.09 Gap-to-edge rules for this chapter
      • 19. Our Urge to Do what Everyone Else is Doing
        • 19.01 Crowd mentality is nothing new
        • 19.02 The others can’t be wrong!
        • 19.03 Social proofing
        • 19.04 Groupthink
        • 19.05 Answering an easier question
        • 19.06 Anchoring and priming
        • 19.07 Psychological anchors for the market as a whole
        • 19.08 Experts and authorities are susceptible to Groupthink
        • 19.09 Wisdom of crowds
        • 19.10 Gap-to-edge rules for this chapter
    • Part 3: Thoughts for the Individual Investor
      • 20. The Right Stuff
        • 20.01 Personal qualities
        • 20.02 Self-reliance
        • 20.03 Ability to make decisions based on the long view
        • 20.04 Patience
        • 20.05 Stick-to-itiveness
        • 20.06 Sound judgement
        • 20.07 Insight and good instincts
        • 20.08 Creative thinking
        • 20.09 Counterintuitive thinking
        • 20.10 That something is wrong
        • 20.11 Strategic thinking
        • 20.12 Adaptability and flexibility
        • 20.13 A skeptical mind
        • 20.14 Impulse control
        • 20.15 Kiplingesque cool
        • 20.16 My experience
        • 20.17 Resilience
        • 20.18 Moderate risk tolerance
        • 20.19 Natural curiosity
        • 20.20 Reasonably good intelligence
      • 21. Developing Expertise
        • 21.01 The illusion of skill
        • 21.02 The bitterest way to learn
        • 21.03 Lifelong learning
      • 22. Luck and Investing
        • 22.01 Role of luck in investing
        • 22.02 Luck and taking a flyer
        • 22.03 Lucky or skilled CEO
        • 22.04 Are some people just luckier than others?
        • 22.05 Storming the Bastille
        • 22.06 Nothing left to chance
        • 22.07 Preparation meets opportunity
        • 22.08 Heaven/God helps those who help themselves
        • 22.09 Psychological impact of luck
        • 22.10 Managing luck
        • 22.11 The hot hand
        • 22.12 Does luck beat talent?
        • 22.13 Conclusions regarding luck and investing
      • 23. Decision making under uncertainty
        • 23.01 Thousands of “quants” armed with PhDs
        • 23.02 Not everything that can be counted counts
        • 23.03 Not everything that counts can be counted
        • 23.04 Acting with imperfect information
    • Part 4: Principles of Operation
      • 24. Business objective
      • 25. Investment Styles
        • 25.01 Trading
        • 25.02 Investing and gambling
        • 25.03 Aggressive strategies
        • 25.04 Market timing
        • 25.05 Momentum investing
        • 25.06 Sector Rotation
        • 25.07 Formula investing
        • 25.08 Buy and hold investing
        • 25.09 Passive investing
        • 25.10 Predictable earnings
        • 25.11 Dividend investing
        • 25.12 The big non-cyclical growth stocks
        • 25.13 Copying Berkshire Hathaway
        • 25.14 Stock styles
        • 25.15 Contrarian investing
        • 25.16 Value Investing and value stocks
        • 25.17 Computer based value factor investing and smart beta
        • 25.18 Growth investing
        • 25.19 The investing style of the great investors
        • 25.20 Warren Buffett
        • 25.21 Philip Fisher
        • 25.22 John Templeton
        • 25.23 John Maynard Keynes
        • 25.24 Conclusion regarding investment styles and core principles
      • 26. Buying with a margin of safety
        • 26.01 Timing by way of pricing
        • 26.02 In the doghouse and woebegone regions
        • 26.03 Some of the reasons stocks may sell at bargain prices
        • 26.04 Margin of safety and company quality
        • 26.05 Margin of safety leads to superior returns
        • 26.06 Waiting for a soft pitch in the happy zone
        • 26.07 Margin of safety and point of maximum pessimism
        • 26.08 Keep it simple but do your homework
        • 26.09 Value traps
        • 26.10 Graham’s net nets
        • 26.11 Summing up
      • 27. Sound Principles of Operation
        • 27.01 Core ideas
        • 27.02 Sound Principles of Operation
        • 27.03 Long term thinking
        • 27.04 The economy
        • 27.05 Superb companies
        • 27.06 Company management
        • 27.07 Homework
        • 27.08 Value
        • 27.09 Flexibility
        • 27.10 Diversification
        • 27.11 Balance
        • 27.12 Buying
        • 27.13 Selling
        • 27.14 Managing yourself
        • 27.15 Managing your portfolio
    • Part 5: Asset Management
      • 28. Asset Allocation
        • 28.01 Mixed stock and bond portfolios
        • 28.02 Lowering exposure to stocks when market high and vice versa
        • 28.03 Stocks less attractive by value standards
        • 28.04 Other approaches to varying stock/bond allocation – CAPE
        • 28.05 Criticisms of CAPE
        • 28.06 Conclusion regarding CAPE
        • 28.07 Use of dividend yields to vary asset allocation
        • 28.08 Are any reliable tools available to vary allocation to stocks?
        • 28.09 Changing stock/bond portfolio weightings – market timing is a fools game
        • 28.10 Going to cash
        • 28.11 All stock program and its exceptions
      • 29. Bubbles, crises, panics and crashes
        • 29.01 What to do about bubbles?
        • 29.02 The subject of bubbles has been studied
        • 29.03 Globalization and bubbles
        • 29.04 Bubbles have always been with us
        • 29.05 Identifying a bubble
        • 29.06 Warning signs of a bubble
        • 29.07 Which market?
        • 29.08 GNP indicator
        • 29.09 Two standard deviations
        • 29.10 CAPE as an indicator of bubbles
        • 29.11 Use of charts as a warning of bubbles
        • 29.12 New era talk – this time is different
        • 29.13 Barbers giving stock market advice
        • 29.14 Corporate predatory behavior
        • 29.15 Frauds and swindles
        • 29.16 No bell goes off to warn the investor of an impending crash
        • 29.17 Picking the time to go to cash
        • 29.18 Minsky moment
        • 29.19 Selling by others during a panic
        • 29.20 Recovery
        • 29.21 No return to the dark ages
        • 29.22 Buying after a crash
        • 29.23 Lessons learned
      • 30. Cash Reserves
        • 30.01 Opinions on the subject
        • 30.02 Liquidity
        • 30.03 Cash and the individual investor
        • 30.04 Fixed or flexible cash reserve?
        • 30.05 Cash to live on
        • 30.06 Conclusion
    • Part 6: The Hallmarks of Superb Businesses
      • 31. General Approach to Choosing Common Stocks
        • 31.01 Warren Buffett (1)
        • 31.02 Warren Buffett (2) – hallmarks of a wonderful business
        • 31.03 Buffett (3) – a guide
        • 31.04 Buffett (4) departure from Graham
        • 31.05 Buffett (5) – tenets of companies
        • 31.06 John Templeton
        • 31.07 Philip Fisher
        • 31.08 Fisher final thoughts
        • 31.09 T. Rowe Price
        • 31.10 Peter Lynch – a quirky list
        • 31.11 John Neff – companies laboring outsider the spotlight
        • 31.12 Stephen Jarislowski
        • 31.13 Joel Greenblatt and a magic formula
        • 31.14 Moats – fleshing out the idea
        • 31.15 Board and management
        • 31.16 Common share ownership by management and directors
        • 31.17 Four key features of prospective investments
        • 31.18 Owner earnings
        • 31.19 The business franchise – the Moat
        • 31.20 Management
        • 31.21 Understandable and superior business operations
      • 32. Sectors and Company Attributes to Avoid
        • 32.01 Bad investments per Buffett
        • 32.02 Additions to the bad investments list
      • 33. Thoughts about the Different Sectors and Groupings
        • 33.01 One man’s view of the different sectors
        • 33.02 Cyclicals
        • 33.03 Manufacturing and services
        • 33.04 Financials
        • 33.05 Healthcare
        • 33.06 Consumer
        • 33.07 Natural resources and materials
        • 33.08 Utilities
        • 33.09 Conclusion
      • 34. Bottom Up and Various Qualities
        • 34.01 Large vs small companies
        • 34.02 Turn-around companies and asset plays
        • 34.03 High dividend payers
        • 34.04 Emerging markets
      • 35. Capital Structure, Strength and Economic Performance
        • 35.01 Capital Structure
        • 35.02 Debt
        • 35.03 Book value of equity
        • 35.04 Accounting treatment of intangibles
        • 35.05 Accounting Goodwill and Economic Goodwill
        • 35.06 The flip side
        • 35.07 Understated tangible assets
        • 35.08 Financial companies
        • 35.09 General discussion of debt and debt equity ratios
        • 35.10 Debt to equity ratio conclusion
        • 35.11 Financial strength
        • 35.12 Net long term debt to free cash flow
        • 35.13 Cash flow fallacy
        • 35.14 Net long term debt to NOPAT
        • 35.15 Conclusion regarding coverage ratios
        • 35.16 Measuring Economic Performance
        • 35.17 Return on capital
        • 35.18 Adjusted earnings
        • 35.19 Reported earnings
        • 35.20 Impact of expensing intangible investments
        • 35.21 Capital
        • 35.22 Potentially the bigger problem
        • 35.23 True value of equity, ROC, ROIC and ROCE
        • 35.24 Free cash flow yield
        • 35.25 Coming up with free cash flow yield
        • 35.26 ROC and a company’s cost of capital
        • 35.27 Cost of capital
        • 35.28 Some examples of weighted average cost of capital using CAPM
        • 35.29 Does the use of CAPM make sense in calculation the cost of equity?
        • 35.30 Can we replace CAPM in calculations of cost of equity capital?
        • 35.31 Earnings yields and cost of capital
        • 35.32 Banks and life insurance companies
        • 35.33 Conclusions re ROC
        • 35.34 Return on Equity
        • 35.35 Other measures of company performance – Profit margins
        • 35.36 Ratios used by management
        • 35.37 Tying this together
        • 35.38 Comparing with cost of capital
        • 35.39 Conclusion
    • Part 7: Building and managing a portfolio
      • 36. Diversification, Balance and Strategy
        • 36.01 Correlation
        • 36.02 Digression to idiosyncratic risks and unexpectables
        • 36.03 Correlation continued
        • 36.04 Balance and hedging
        • 36.05 Balance between sectors
        • 36.06 An aside on industrial commodities and agriculture
        • 36.07 Correlation and the business cycle
        • 36.08 A sector rotation strategy
        • 36.09 Company size
        • 36.10 Asset classes
        • 36.11 Sports team analogy
        • 36.12 Thinking about currencies in the context of diversification
        • 36.13 International diversification
        • 36.14 Portfolio strategy
        • 36.15 Windsor’s strategy
        • 36.16 Philip Fisher
        • 36.17 Peter Lynch
        • 36.18 Strategy for the individual investor
        • 36.19 Sector weighting
        • 36.20 How many stocks to own – 1
        • 36.21 Lessons from the world of gambling – betting your beliefs
        • 36.22 How many stocks to own – 2
        • 36.23 Conclusion – portfolio structure for the individual investor
      • 37. Stocks as Disguised Bonds
        • 37.01 An aside – bonds should be bought if more attractive
        • 37.02 Earnings yield on book value
        • 37.03 Earnings yield on price
        • 37.04 Fed model and earnings yield on price
        • 37.05 Stocks vs bonds – more
      • 38. The Problem of Determining Intrinsic Value
        • 38.01 Analysts’ reports
        • 38.02 DCF calculation – the inputs
        • 38.03 The cash that can be taken out of the business during its remaining life
        • 38.04 Discount rate
        • 38.05 Risk free rate
        • 38.06 Risk premium
        • 38.07 What discount rate would Buffett use today?
        • 38.08 Changes to intrinsic value
        • 38.09 An amusing quote on DCF from Warren Buffett
        • 38.10 Conclusion regarding DCF assessments of value
      • 39. Use of Ratios to Value Shares
        • 39.01 Price earnings ratios
        • 39.02 Perspective from the 1990s
        • 39.03 Perspective from the 1980s
        • 39.04 Perspective from the 1950s, 1960s and 1970s
        • 39.05 No simple explanation for ups and downs
        • 39.06 CAPE
        • 39.07 A cycle for inflation and interest rates
        • 39.08 Inflation and price earnings ratios
        • 39.09 Price earnings ratios and interest rates
        • 39.10 Impact of changes in interest rates
        • 39.11 Cash position
        • 39.12 Price earnings ratios through the cycle
        • 39.13 Earnings and investment in intangibles
        • 39.14 Price to free cash flow ratio
        • 39.15 The impact of write-offs on subsequent year comparable earnings
        • 39.16 Past or future earnings
        • 39.17 Is there a correct price earnings ratio for any stock at any particular time?
        • 39.18 The joy of multiple expansion
        • 39.19 Conclusion regarding price earnings ratios
        • 39.20 Other ratios
        • 39.21 Price to book value per share
        • 39.22 Price to net asset value per share
        • 39.23 Enterprise value to EBITDA (EV/EBITDA)
        • 39.24 Enterprise value to EBIT (EV/EBIT)
        • 39.25 Price to free cash flow per share
        • 39.26 EV to free cash flow
        • 39.27 Comparison between estimate of intrinsic value and analyst’s Target Price
        • 39.28 Bottom line on assessing value of company to invest in
      • 40. Finding and studying companies to invest in
        • 40.01 News media
        • 40.02 Positive media stories generally indicate the end of superior performance
        • 40.03 Analysts’ reports and other sources
        • 40.04 Methodical approach
        • 40.05 Analysts’ reports more
        • 40.06 The earnings estimate game
        • 40.07 Herding and the short term
        • 40.08 Reading deeper in sell side analysts’ reports
        • 40.09 An aside about facts vs opinions
        • 40.10 Analysts’ reports continued
        • 40.11 Conclusions re sell side analysts’ reports
        • 40.12 Independent research
        • 40.13 Company website, quarterly and annual reports
        • 40.14 Meetings with company officials
        • 40.15 Alignment of interest
        • 40.16 Scuttlebutt and other sources
        • 40.17 Use of watchlists
        • 40.18 Conclusion
      • 41. Pundits, market explanations and forecasts
        • 41.01 Does anyone have the ability to forecast?
        • 41.02 Can we avoid forecasts?
      • 42. Buying
        • 42.01 Buying tactics
        • 42.02 Buying at the bottom can’t be done
        • 42.03 Waiting to buy a superb company at a bargain price
        • 42.04 Point of maximum pessimism
        • 42.05 Take full advantage of opportunities
        • 42.06 Scaling
        • 42.07 Averaging down
        • 42.08 Dollar cost averaging
        • 42.09 Use of margin
        • 42.10 Placing orders
        • 42.11 Limit orders
      • 43. Uses and misconceptions about charts
        • 43.01 Taming masses of data
        • 43.02 Very long term stock trends
        • 43.03 Usefulness of charts
        • 43.04 A sense of volatility over the long term
        • 43.05 Bubbles
        • 43.06 Illustrating a concept
        • 43.07 End of a negative prevailing bias
        • 43.08 End of a positive prevailing bias
        • 43.09 Identifying time of maximum pessimism, maximum optimism and trend reversal
        • 43.10 Use of linear regression band lines and momentum oscillator
        • 43.11 Use of relative strength
        • 43.12 Out-performed for a month
        • 43.13 Use of charts to monitor stocks in portfolio
        • 43.14 Uses and problems with short term charts
        • 43.15 Anchoring and priming
        • 43.16 Endowment effect
        • 43.17 The availability bias
        • 43.18 Facing bad choices
        • 43.19 Self-fulfilling prophesy
        • 43.20 Conclusion regarding charts and patterns
      • 44. Monitoring your Portfolio
        • 44.01 General reading on the subjects of business, economics and finance
        • 44.02 News specific to our companies and industries
        • 44.03 Analysts’ reports
        • 44.04 Monitor for weeds to pull and flowers to water
        • 44.05 Monitor performance
        • 44.06 Conclusion
      • 45. Selling
        • 45.01 Original appraisal mistaken
        • 45.02 Circumstances have changed
        • 45.03 To take advantage of attractive opportunity
        • 45.04 Selling to generate cash to live on
        • 45.05 Selling when individual position too large
        • 45.06 Selling when the company makes a big acquisition
        • 45.07 When the company is to be acquired by another company
        • 45.08 Selling when company changes its business model
        • 45.09 Selling when balance sheet turns for worse
        • 45.10 Stock price rockets up in short time period
        • 45.11 Commodity sector
        • 45.12 When controlling shareholder sells some shares
        • 45.13 Don’t sell just to take a profit
        • 45.14 Don’t sell just because the price has moved above intrinsic value or is overpriced
        • 45.15 Don’t sell because the price earnings ratio has gone up
        • 45.16 Don’t sell because the stock has reached a price target
        • 45.17 Don’t sell because in anticipation of a market downturn
        • 45.18 One should move to cash once a true manic stock bubble has been identified
        • 45.19 Don’t sell because the price has gone down
        • 45.20 After you have sold
    • Part 8: Final thoughts
    • Appendix 1: A glossary of special terms and phrases
    • Appendix 2: Templeton Maxims 1982 Version
    • Appendix 3: Gap-to-Edge Rules
    • Appendix 4: Works Cited
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