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

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.

The downside of history is the narrative fallacy. In The Black Swan (2010), Nassim Taleb wrote: The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship, upon them. Explanations bind facts together. They make them

Seek out the refuting evidence or bearish story. Invert. Consider whether the opposite story also makes sense.

Whether you invest in individual stocks, an actively managed fund, or an index fund, the sources of your regrets are likely to fall into our five inverted (mistake) buckets, which we explore in this book: 1. Allowing emotions, not reason, to guide decisions 2. Thinking you know more than you actually do 3. Trusting capital to the wrong people 4.

It’s never easy to maintain first-rate offerings or keep costs at rock bottom, but I give better odds to the quality strategy as long as the managers are product people. The exception is where costs can be slashed by cutting out an element that customers do not value.

Everything has a shadow side. Find it. Except near bear market lows, every investment usually has some defect, even if it’s just that it’s overpriced. Also, absence of evidence isn’t evidence of absence; just because fraud can’t be proved doesn’t mean it didn’t take place.

If you must sell in a hurry, you will receive market price, not value. However, the central idea of value investing—of which I am an advocate—is that price and value are not always equal, yet should be at some date in the future. Because the date is unknown, patience is mandatory.

Any single number can be a misplaced anchor—be it a stock’s previous highs, a historical valuation ratio, or estimated earnings. It usually isn’t relevant to compare today’s price/earnings ratio (P/E) for a small-cap or growth stock to its five-year average, because its growth profile and market conditions may have shifted radically. Instead, care