Tuesday, December 27, 2016
Crosby, The Laws of Wealth
In the first part of the book Crosby sets out ten sometimes counterintuitive rules of behavioral self-management, the behavioral risk side of his equation for success. They are: (1) you control what matters most, (2) you cannot do this alone, (3) trouble is opportunity, (4) if you’re excited, it’s a bad idea, (5) you are not special, (6) your life is the best benchmark, (7) forecasting is for weathermen, (8) excess is never permanent, (9) diversification means always having to say you’re sorry, and (10) risk is not a squiggly line.
He devotes the second part to behavioral asset management. Investing, he argues, is an area in which intuition and common sense fail us because, among other reasons, it is “performed infrequently, provides delayed feedback and includes an overwhelmingly complex array of variables.” In fact, stock picking can be fairly well described using five variables that, according to Daniel Kahneman, lead to suboptimal decision making: a complex problem, incomplete and changing information, changing and competing goals, high stress and high stakes involved, and must interact with others to make decisions.
If we are to be successful investors, Crosby argues, we must automate the process by which we make decisions. We must follow a model and not taint it with on-the-fly judgment calls. We must “set systematic parameters for buying, selling, holding and re-investing funds and follow them slavishly.” We must take advantage of human fallibility and pursue rule-based behavioral investing.
Crosby suggests one such investing model , which combines value and momentum along with risk assessment (using such metrics as Montier C-scores and Altman Z-scores to vet all purchases).
The Laws of Wealth does not offer a path to consistent outperformance (which, Crosby argues, is one reason his model will have lasting power). Over time, however, systematic behavioral investing should produce an impressive track record. Which, of course, should translate into wealth.