Investing Psychology Chapter 7: Building a Better Process
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.”
The goal isn’t to be perfect; it’s to be less blind than everyone else. In the land of the blind, the one-eyed man is king. Here are the rules for building your own behavioral armor.
The Rule of Seven
Your brain can only hold about seven “chunks” of information at once. If you try to analyze twenty different metrics for a stock, your brain will just start guessing.
Stop trying to be a supercomputer. Focus on a few key things and use tools to manage the rest. If a process is too complicated, you won’t follow it when the market gets scary.
The Behavioral Investing Framework
Richards proposes a 7-stage process to keep you honest.
- Make it Personal: Write a mission statement. Mine is: “I buy high-quality companies when they’re cheap and hold them until they’re crazy expensive.” It’s my anchor.
- Build a Checklist: Ego makes us skip steps. A checklist forces you to look at the boring stuff you’d otherwise ignore.
- Write it Down: Why are you buying this stock? What do you expect to happen in 1, 3, and 5 years? If you don’t write it down, hindsight bias will let you rewrite history later.
- Diarize Reviews: Don’t check your stocks every day. Set a date—maybe every six months—to do a proper review.
- Get Feedback: This is the most important part. Compare what actually happened to what you wrote down in step 3.
- Do Autopsies: When you sell a stock (especially for a loss), figure out what went wrong. Was your thesis flawed? Or was it just bad luck?
- Update Adaptively: If your checklist isn’t working, change it. Markets change, and your tools should too.
Don’t Trust Yourself
You are an unreliable witness to your own life. You will misremember your failures and exaggerate your wins.
The only way to win is to rely on hard facts and written records. And for the love of everything, keep a “rainy day fund.” If you’re forced to sell stocks because you need cash for an emergency, you’re making a decision in a state of high emotion. That’s a recipe for disaster.
Self-Control is a Superpower
There’s a famous study where kids were told they could have one marshmallow now, or two if they waited. The kids who waited had better lives and more money as adults.
Investing is just the “marshmallow test” for grown-ups. If you can’t delay gratification, you’ll be a poor investor. It’s better to admit that and just buy a passive index fund that you never touch.
7 Key Takeaways from Chapter 7
- Satisfice. A “good enough” process you actually follow is better than a perfect one you ignore.
- Use tools. Checklists beat gut feelings.
- Be skeptical. Assume you’re being fooled by your own brain.
- Avoid mental accounting. It’s all one pot of money.
- Diarize everything. Your memory is a liar.
- Demand feedback. It’s painful, but it’s the only way to improve.
- Be humble. The market is bigger and meaner than you are.
In Chapter 8, we’ll look at the “Myths” that keep investors trapped in bad habits.