We’ve spent the last two weeks retelling Tim Richards’ “Investing Psychology” (ISBN: 978-1-118-72219-0). It’s been a bracing, sometimes painful journey through the glitches of the human mind.
Twenty-five posts. That is what it took to retell this book. And honestly, when I started this series back on February 4th, I was not sure I would finish it. A post a day for almost a month is a lot. But here we are.
So after all the chapters, all the experiments, all the arguments back and forth, Burton and Shah finally ask the big question. Who wins? Is the market efficient or not? Time for a new theory entirely?
We’ve reached the end of the tour. In the final chapter of “Investing Psychology,” Tim Richards pulls back the curtain on the entire investment industry.
Can you grow a stock market bubble inside a classroom? Not a metaphor. An actual bubble where prices rise above what everyone in the room knows the thing is worth?
We’re nearing the end of Tim Richards’ “Investing Psychology.” In Chapter 8, he tackles the myths that keep us trapped in bad financial habits.
We’ve spent a lot of time dismantling our egos and exposing our biases. Now, in Chapter 7, Tim Richards gives us a toolkit to build something better. He calls it “Good Enough Investing.”
You know all those behavioral biases we talked about in earlier chapters? Loss aversion, status quo bias, overconfidence. The big question hanging over all of them is simple. Where do they come from? Are we born with them? Did we learn them from our parents and culture? Or is there something deeper going on inside our actual brains?
Continuing our look at Chapter 6. We know we need to look at the numbers. Now let’s look at the specific mental exercises that can save your portfolio.
Try selling your house by tomorrow. Not in a month, not after listing it and staging it and waiting for offers. Tomorrow. For cash.
We’ve spent the last five chapters talking about how biased we are. Now it’s time for the “how-to” part. How do we actually fix these mental glitches?
Stocks make more money than bonds. Everyone knows that. But here’s the thing. They make way more money than bonds. And when economists tried to explain why the gap is so big, they couldn’t. Not with their standard models. Not even close.
What if I told you that the day of the week affects your stock returns? Or that one specific month is consistently better than the other eleven? Sounds like astrology for finance people, right?
We’ve reached the end of our retelling of Cyril Demaria’s “Introduction to Private Equity, Debt and Real Assets.” It’s been quite a journey—from Christopher Columbus to multi-billion dollar mega-funds.
Picking up from Part 1 of Chapter 5. We know the institutions are playing a different game. Now let’s look at the actual humans running the show and why their biology might be messing with your money.
When we have a toothache, we go to a dentist. When we have a legal problem, we call a lawyer. So when we have money to invest, we go to a professional, right?
For a long time, private equity was a small, quiet industry that stayed below the radar. But those days are over. Today, it’s a global powerhouse, and that change is bringing some big questions.
Every trader has said something like this at some point: “The stock has good fundamentals, it’s cheap, but the price action looks terrible. I’m going to wait.”
If you’ve ever bought a house, you know it’s a long, stressful process. You have to get an inspection, talk to the bank, and negotiate with the seller. Now imagine doing that for a multi-million dollar company.
Picking up from Part 1 of Chapter 4. We know that groups are dangerous. Now let’s look at how the way information is “framed” changes how we spend our money.
Benjamin Graham is probably the most famous contrarian investor who ever lived. Together with David Dodd, he invented what we now call value investing. The whole idea is simple. Buy stocks that other people don’t like. Stocks with low prices compared to their earnings or book value. Cheap stocks. Unpopular stocks.
Most people think of private equity as just owning a piece of a company. But the “private markets” universe is much bigger than that. It also includes two other major categories: Private Debt and Private Real Assets.
In 1992 two economists published a paper that accidentally shook the foundations of modern finance. They did not mean to. They were actually trying to defend the system. But what they found in the data was so clear and so stubborn that it changed how everyone thought about stock prices.
Humans are social animals. We evolved to survive in groups, and that means we have a deep-seated need to fit in. But in Chapter 4, Tim Richards explains that while “conforming” kept our ancestors alive, it’s making modern investors broke.
Private equity isn’t just one thing. It’s a whole universe that follows a company from its very first day until it’s a giant corporation.
Continuing with Chapter 3 of “Investing Psychology.” We’re looking at all the weird external stuff that influences our money.
Experience actually helps with some biases. Research shows that older investors are less prone to the disposition effect (selling winners and holding losers).
You ever played the Madden NFL video game? For years, EA Sports put a top player on the cover. And then something funny kept happening. The cover athlete would have a terrible next season. Injuries, bad stats, team losses. Fans started calling it the Madden Curse. Some players actively tried to avoid being on the cover.
Every day you make decisions based on past data. What to eat for breakfast. How to approach your boss with a question. You look at what happened before and try to predict what will happen next.
If you ever invest in a private equity fund, don’t panic when you look at your statement after the first year. It’s probably going to show that you’ve lost money. This is what we call the J-Curve.
We like to think of ourselves as independent thinkers. The “American Dream” is built on the idea that you can do anything if you just try hard enough. But in Chapter 3, Tim Richards shows us that we’re heavily influenced by the situation we’re in, often without even knowing it.
People are sticky. Not physically. Mentally. We stick to whatever we already have, whatever is already happening, whatever is the default. And this stickiness costs investors real money every single day.
Picking up from where we left off in Chapter 2. We’ve established that we’re all overconfident. Now let’s look at how that overconfidence turns into specific, expensive mistakes.
Here’s a fun fact: you’re probably already an investor in private markets.
Even if you’ve never heard of a “General Partner,” if you have a pension fund or an insurance policy, your money is likely being funneled into private companies. Big institutions like banks and pension funds take the premiums we pay and invest them in non-listed companies to get better returns.
We usually think of the USA as the birthplace of modern finance. But when it comes to venture capital, the story has a very French twist.
We all like to think we’re smart. If we didn’t think we were going to make money, we wouldn’t invest. But here’s a cold splash of water: 93% of American drivers think they’re “above average.” Mathematically, that’s impossible.
You know that feeling when you buy a stock right after seeing a scary headline, and then two weeks later you wonder what you were thinking? That’s a perception bias doing its work on your brain.
We’ve talked about history, but let’s get into the real engine of private equity: the entrepreneur.
Cyril Demaria makes one thing very clear: without entrepreneurs, private equity has no reason to exist. The entrepreneur is the one who takes a bunch of separate pieces—time, money, ideas—and turns them into something way bigger than the sum of its parts.
Continuing our deep dive into Chapter 1 of Tim Richards’ “Investing Psychology.” Last time, we talked about how our senses lie. Today, we’re looking at why we think we’re in charge when we definitely aren’t.
You know that feeling when you lose a $20 bill on the street? It ruins your whole afternoon. But finding $20 on the street? Nice, sure. You smile for maybe five minutes and forget about it.
We saw how Christopher Columbus was basically a 15th-century startup founder. But for private equity to become a real industry, something big had to change. We needed a shift from “kings and queens” to “partners and contracts.”
Wandering around the average investor’s mind is like taking a tour of Wonderland with the White Rabbit. Most of what we think is true is actually false.
Economics has a favorite character. The Rational Man. He always knows what he wants. He always picks the best option. He never panics, never gets confused, never makes a dumb choice because he’s tired or emotional.
If you think venture capital is a modern invention from Silicon Valley, think again. It’s actually hundreds of years old. In fact, Cyril Demaria argues that Christopher Columbus was one of the first great venture capitalists.
I’ve spent over 20 years in IT and a lot of time looking at charts and numbers. One thing I’ve learned is that the math is often the easy part. The hard part is the gray matter between your ears.
You ever watch financial news and hear someone say “the market broke through resistance” or “the market looks tired”? These phrases sound like the market is some living creature with feelings. And if you come from a science background, your first reaction is probably: what does that even mean?
Because it’s so hard to get good data on private equity, people start taking shortcuts. And those shortcuts lead to some big mistakes.
Remember the dot-com bubble? Companies with zero profit, sometimes zero revenue, trading at insane valuations. Analysts invented new ways to justify the prices. “Forget earnings, count the eyeballs!” And for a while, it worked.
I already talked about why private companies are so secretive. But there’s a whole industry built on trying to find their secrets anyway.
For decades, traditional finance people had a simple answer to the noise trader problem. Milton Friedman said it. Eugene Fama said it. Fischer Black said it. The answer was: irrational traders will lose their money to smart traders and disappear.
One of the biggest problems with private companies is that they don’t have to tell you anything. In the stock market, companies have to share their financial reports all the time. But in the private world, there’s no law saying they have to.
Economics has a rule that sounds so obvious it barely needs saying. If two things are identical, they should have the same price. If they don’t, someone will buy the cheap one and sell the expensive one until prices meet in the middle. Easy. Done. Move on.
Before behavioral finance became a real academic field, people already knew something was off with markets. Traders in the 1920s had their own rules. Value investors in the 1930s had theirs. And nobody was waiting for professors to tell them the market was irrational. They lived it every day.
The words “private equity” get thrown around a lot. But people use them in different ways, and it gets really confusing.
Cyril Demaria started this book because he couldn’t find anything good to read about private equity. Most of what was out there just didn’t make sense. It didn’t match what actually happens in the real world.
Chapter 2 of Burton and Shah’s book is about the math behind stock prices. Don’t run away yet. I promise to keep it simple. The chapter introduces something called CAPM and the “market model.” These are the tools that traditional finance uses to describe how stock prices should behave. And if you want to understand why behavioral finance matters, you need to know what it’s arguing against.
I’ve been reading a lot of books on finance lately. Most of them are either too simple or way too complicated for anyone who doesn’t have a PhD in math. But I found one that actually makes sense. It’s called “Introduction to Private Equity, Debt and Real Assets” by Cyril Demaria.
Chapter 1 of Burton and Shah’s book gets right to the big idea. The Efficient Market Hypothesis. EMH for short. This is the theory that traditional finance is built on, and it is the thing behavioral finance tries to tear apart.
Let me tell you something that took me years to figure out. Traditional economics and finance are built on one really big assumption: that people are rational. And not just a little rational. Perfectly, mathematically, always-making-the-best-choice rational.
I’m starting something new here. Over the next 25 days, I’m going to retell the book Behavioral Finance: Understanding the Social, Cognitive, and Economic Debates by Edwin T. Burton and Sunit N. Shah.