Big Money Thinks Small: Biases, Blind Spots, and Smarter Investing (Columbia Business School Publishing)

In my opinion, you’ll invest more profitably if you speculate on factors that affect the stream of profits generated by an enterprise, rather than on market prices or crowd psychology. The spectrum splits along two dimensions. First, event or holistic? Are you looking for an identifiable trigger or catalyst to produce a winning trade, or rather for

When businesses decide to invest, they have to consider the profits over the entire life of the equipment, not just the year ahead. But future profits are only projections, not yet facts. Therefore, investment depends on businesspeople’s general outlook, which Keynes called “animal spirits.” Forecasts will be wrong because animal spirits are elevat

Index investors will minimize regrets differently than stock-pickers, focusing most on curbing unnecessary activity and expanding their knowledge base. They tend not to dwell too much on intrinsic value, although I think they would have fewer regrets if they did. Fiduciary misconduct and financial failure are, for them, bolts from the blue. In cont

If you continuously invested in the single largest S&P 500 stock by market value between 1972 and 2016, your compounded returns would have been less than 4 percent, while the index earned over 10 percent. A similar but smaller effect was seen with the ten largest S&P 500 stocks.

before it featured the rugged cowboy in its ads, Marlboro had been launched as a ladies’ cigarette that was as “mild as May.” The red filter tip, meant to hide lipstick stains, was later switched to a manly cork brown. Decades after the rebranding, Philip Morris was still reaping the benefits of an iconic package and mascot. Over a quarter of a cen

This chapter covers the ways psychological biases misinform our investments, and how the stock market charges us for certain emotions and behaviors and pays us for others.

Contrary to popular wisdom, picking stocks based on low P/Es and high free cash flow yields often works particularly well with technology stocks. I think it’s because tracking competition and obsolescence in fast-changing fields is so all-consuming that many analysts do nothing else. Also, financial analysis calls on a different mind-set: cautious,

Wall Street invents financial contraptions with features that are too complicated for many buyers to evaluate properly. For those who understand them better than others, these inefficiencies are profitable precisely because they dupe the unwary victims. Customers may know that a fund is leveraged but not realize that this feature makes it a wasting

Financial companies can bear huge leverage as long as they follow the two matching rules—match risk-averse deposit funding with conservative lending, and match the durations of their assets and liabilities.