Book Notes: Colin Nicholson's "Think Like the Great Investors"

The best investors succeed because they seem to think counter-intuitively. They make better decisions by avoiding the common Cognitive Biases, which are Natural to us all, but that Hold us Back in our Investing. Learn How the Great Investors Think and raise your investing to a new level so you can join the winners' circle.

Chapter 1 - Shaping our Destiny

It is in your moments of Decision that your Destiny is shaped - Anthony Robbins

Decision Making is right at the focal point of Investing. No investment exists until we make a decision. No investment is successful unless we also make a series of sound decisions in managing it.

When I read about Decisions Great Investors had made that led to their investment success, I found that their decisions often seemed to be Counterintuitive.

When faced with a decision about something, we use Shortcuts or Heuristic: a rule of thumb for solving problems. However, common Heuristic and Intuition that are not always well based on experience can lead us to make very poor decisions, because we are all prone to a wide range of Cognitive Biases when we make decisions.

The initial step to dealing with our Cognitive Biases in Investment Decision Making is to become Aware of them.

Chapter 2 - Men and Women (Overconfidence)

We all make some decisions impulsively and emotionally. We are all prone to Cognitive Biases, and we often make our most important decisions in a less than optimal manner.

The results consistently show that, when making subjective judgements of situations, we all tend to Overestimate the precision of our Knowledge about most of things. Researchers have demonstrated that Overconfidence is greatest when the judgement involves difficult tasks, forecasting things that are difficult to predict and the lack of fast, clear feedback. Trading is just such a situation, just the initial step of Selecting a stock is clearly a difficult task, where prediction is problematic and feedback is confusing and uncertain. Overconfidence leads to more frequent trading and poorer results.

There it is - women are better traders than men, because they are less Overconfidence. The research strongly suggests that both would be better off financially if they traded less often.

SUMMARY: Overconfidence - an overestimation of our trading ability - leads to lower results.

Chapter 3 - I am Absolutely Certain (Overconfidence, Confirmation & Availability)

A frequently overlooked aspect of investment is How we Make Decisions. Our decision making can carry with it important unconscious biases. Typically, this area of decision making is the final step in the investor's development from beginner to good investor. Earlier stages are Analysis, Money/Risk Management and the development of an investment Plan.

Good Decision Making features 2 key elements: (1) Fact Finding; (2) Having an appropriate level of Confidence or being well grounded in the limits of our knowledge.

Overconfidence is when we think we know more than we actually do. We act with great confidence because we are ignorant of our Mistake. We are most likely to tend to exhibit Overconfidence when we try to estimate something that is Difficult to Estimate. Estimate the value of as stock is a good example.

The most dangerous tendency is to be absolutely Certain about anything. It is when we are absolutely sure about something that we may often be wrong.

There are 4 danger zones for overconfidence:

- The 1st is Complex and Uncertain situations.

- The 2nd is General Euphoria - when general confidence in the community is very high i.e. last stages of a Bull market or Bubble. When everyone seems to hold a single common view of the markets, we should be questioning our own confidence. It is a time to be seeking out contrary views and assessing them with the aim of avoiding being caught up in the crowd.

- The 3rd is Expertise - when we find ourselves dealing with issues that are outside our area of expertise

- The 4th is Hubris - if an expert finds they are right more often than others are, they can become very arrogant about their ability, even when in areas well outside their area of expertise.

The first reason that we all tend to be Overconfident is the Illusion of Superiority - 2 main ways in which this Illusion plays out.

- The 1st is that we all tend to be Unrealistically Positive about our own Abilities

- The 2nd is that we all tend to be Unrealistic about our Futures

The second reason that we all tend to be Overconfident is the Illusion of Control - comes from 2 strong tendencies in all of us.

- Firstly, we like to think that we are in full control of our destiny

- Secondly, we all tend to have a strong belief in the superiority of our own decision-making ability relative to that of others

The third reason why we tend to be Overconfident is bound up in our Limited Imagination.

- Every investment we make will be driven by an assessment of a situation and what we think are all the possible scenarios that may play out going forward. Ideally, we would score those scenarios for the Probability of their happening and for the Magnitude of the Profit, or Severity of the Loss, that would occur if they come to pass. However, as investors very few of us ever get anywhere near first base in this exercise. We all tend to imagine that our investment is a Sure thing, we all tend to believe we have imagined All of the possible scenarios. The problem is that we are very poor at this task.

The fourth reason why we tend to be Overconfident is called Confirmation Bias.

- We look for confirmation and simply disregard or try to discredit uncomfortable Contrary views

- Whatever we find ourselves with a strong view about something, we need to try to stop ourselves from locking in on it as the only possibility.

- Investing is about Assuming Risk. When a situation is fairly certain, the likely profit will be small. When there is great uncertainty the profit can be very large if we get our decision right.

The fifth reason why we tend to be Overconfident is Selective Memory.

- We have a selective memory, which is full of our successes but has pushed our failures out of mind. Therefore, we have a quite unrealistic idea of how good an investor we are.

- Most of us do not keep good records.

Another aspect of Overconfidence is the question of the certainty of our own estimates as against the accuracy of our estimates.

- The results have consistently show that our certainty always exceeds our accuracy.

Researchers also caution us about the Illusion of Knowledge which is another aspect of why we all tend towards Overconfidence.

- The general conclusion is that when we are given more information, we become more confident of our judgments, but our Accuracy tends to hit a ceiling.

- There is a common illusion among both experts and ordinary people that more information will increase the accuracy of their judgments

- The illusion that more information is better is intuitive to us all.. However, our intuition fails us because more information might well be poor information.

- What matters is not how much information we have, but knowing which are the important factors driving a situation. In other words, it is not the information itself, but what we do with it that matters.

- More information usually increases our Overconfidence, but not our judgement or decision making skills.

Another very common contributor to Overconfidence is Availability Bias, which occurs because of 3 kinds of situation make a very large impact on us an unconsciously cause us to make totally distorted judgements that are contrary to the principles of Probability:

- if something has happened to us Personally or to people very close to us

- if something was very shocking

- if something happened recently, rather than some time ago


1. We should be very watchful that we are not making investment decisions based only on small data samples. Ask these questions:

- How many times has this pattern or idea worked in the past?

- How many times has it failed to work?

We should try consciously to Never Accept anything as being True without knowing the Full, statistically proven Facts about when it has proved True and when it has proved False, and how many times.

2. To consciously ensure that on any investment decision we examine both the Positives and the Negatives before forming our own view and acting on it. We should never buy a stock unless we understand the reasons Why someone would Sell it to us

3. Cultivate and develop an awareness that Quality is better than Quantity

4. Use SWOT analysis

5. Keep good records

6. Keep a journal

7. Set our Investment Objectives & Strategy. Analyze market condition. Fine-tune strategy for the market.

Chapter 4 – Mine, All Mine (Mental Accounting)

3 Stages Investors go through in becoming proficient:

  • Look for Tips

  • Learn to make own Decisions

  • Gain an Understanding that the path to successful investing lies Within Us

In the 1st stage, Beginners look for Tips – What to Buy and When to Buy and Sell. They are seeking the Solution to the investment problem Outside themselves.

In the 2nd stage, neophyte investors come to realize the need to learn to make their own decisions. This is when they begin their search for the perfect system, that will enable perfect decisions on which stock to buy and when.

In the 3rd stage, the investors gain an Understanding that the path to successful investing lies Within Us. They appreciate that investing results depend on How we Make Decisions rather than on some External system. In other words, they realize that their profits or losses are created by their Actions and that they can change What they Do to improve their performance.

Since investing success depends on the quality of our decisions, to make good decisions we need a set of rules and guidelines in the form of an Investment Plan, and the Discipline to follow those rules and to exercise sound judgment when applying guidelines

This suggests that investing is an activity that is played out in our Mind. Our investment results flow from how well we manage our Emotions and avoid Cognitive Biases in Decision Making.

The successful investor is one who knows that their Paper Profits are their money and should be protected just as diligently as they protect the money that they took out of their bank account to make the investment in the first place.


  1. Revalue every investment regularly to its current value if it was sold today

  2. Each year, start your records again, taking the price and value of each holding at the end of the previous year as your cost

  3. Plot the total value of your portfolio daily or weekly

  4. Take some profit off the table from time to time

  5. Write a report on your total portfolio every 6 months

Chapter 5 – Why we never learn (reinforcement and punishment)

The high-risk ploy is to buy High and sell Higher.

The low-risk approach is to buy when a stock is Cheap and sell when the stock becomes expensive.

Yet when we started out learning the craft of investing, most of us will have failed to do this. Instead, we will have done something that is seemingly inexplicable to independent observers: we will have consistently bought at high prices. Not only that, we were also decidedly reluctant to buy other stocks when they were cheap and to sell any of our holdings when they became expensive.

We buy what we think is a good stock, but at the wrong time, or at a very high price. Then it falls because there is some problem in the business or the market goes into a bear market decline. Eventually, we sell at a loss. At some later time we see one of these stocks that looks interesting and appears to be undervalued. We don’t invest in the stock this time because of our Past Experiences when we bought at much higher prices.

When we are confronted by any decisions, especially risky ones like buying and selling stocks, we come to these situations with a history. We will have made similar decisions before and been either rewarded or punished emotionally by what happened as a result.

The investor’s initial behavior sets them up to make a bad decision.

  • On the one hand, the reward experienced or observed from previous investments reinforced the reward from buying high and led them to do it again

  • On the other hand, the emotional punishment they experienced directly or vicariously reinforced the pain from selling low and led them to shy off taking opportunities to buy low when they later presented themselves


  1. The 1st step is to become Aware of the way our Experiences can reinforce poor investment behaviors

  2. It is valuable to read widely about the history of stock markets

  3. The most important single strategy is to keep a Journal or Diary in which we record our Investing Decisions.

  4. The central problem is that investors did not see the difference between Price and Value. Driven by Emotions, the market can price stocks totally out of whack with value. Our strategy should be to decide on a way to judge whether a stock is priced above or below our estimate of its value.

Chapter 6 – Love is Blind (cognitive dissonance)

Cognitive Dissonance is the Discomfort people feel when they either:

  • hold 2 opinions that are in conflict with each others, or

  • find themselves acting in ways that are in conflict with their knowledge or opinion

Festinger’s theory of Cognitive Dissonance would predict that the fox would then either:

  • change his actions (resume jumping for the grapes), or

  • change his opinion to justify his actions (the grapes are not delicious after all). Most people react in just this way when faced with this kind of situation.

The basic idea is that the clash within a person between 2 opposing views or between their opinions and their actions, called Dissonance, will make them feel uncomfortable. If this Discomfort is strong enough, it will motivate them to try to reduce the dissonance.

While the person suffering dissonance will change their actions in many situations, the theory suggests that there is also a strong tendency for people to change their opinions to bring them into line with, or to justify, what they are doing, or the action they intend to take.

We simply avoid exposing ourselves to information that causes dissonance and we seek out information that confirms our actions or the opinion we favor.


  1. Pros/ Cons list. Try to form an overall judgment of the importance of the pros and cons. This is very important when we feel that an investment is a near certainty; we must also be able to see why someone would sell the stock to us.

Chapter 7 – A Little Knowledge is Dangerous (representativeness)

We deal with most problems through the use of Judgmental Heuristics, which simply means Rules of Thumb or Shortcuts, in order to simplify complex decisions. Most of the time, these shortcuts are very useful and effective. However, they can also lead us into error.

One unconscious rule of thumb that leads use into trouble is called Representativeness. If we need to make a judgment about something, Representativeness is when we look for another situation that is similar in some respect to the present one and base our judgment on that characteristic alone. This will cause a poor judgment if the characteristic we have used was not what really determined the outcome in the situation that we are considering.

Representativeness leads us into making poor judgments in 2 general ways:

  • when we give too great a weight to similarities between situations, ignoring the probability of the possible outcomes

  • when we focus on the similarities to such an extend that we reduce or overlook the factors that really determine the outcome of the situations

Representativeness bias occurs when we base a decision on what looks or sounds right, but ignores the base rate, which is the smarter answer.

Another of the more pernicious of Representativeness traps is the idea that although we recognize the base rate, we do not think it applies to us.


  1. Make it a habit to always Ask ourselves: What is the base rate?

  2. Try to develop a habit of Quantifying things. Find the Statistics. Seek out the Facts.

Chapter 8 – It must be tails next (the gambler’s fallacy)

Reversion to the Mean suggests that following a very long and strong period of growth, future returns are likely to be closer to the long-term average.

Reversion to the Mean does not have much to say about whether next year’s returns will be higher or lower than last year’s. Reversion to the Mean operates only in general terms and over a great number of time periods.

The Gambler’s Fallacy is one of the strong influences on the merry band of private investors who are always found standing aside from full involvement in the stock market even though a bull market is well under way. They reason that the market has just gone up strongly so it must be too late now, because it is due to go down.

This reasoning is applied to individual stocks as well as to the market as a whole. Every day around the country, myriad investors read a report about a great company that has risen in price for the past several years. They sigh and conclude that it is too late to buy now – they have missed the move.


  • The great investors always start with the longest-term picture they can get.

  • Starting our analysis with as much history as we can. This gives us more perspective.

Chapter 9 – Dangerous Rewards (random reinforcement)

Random reinforcement occurs when someone is rewarded unpredictably, by chance or randomly. This is the basis for the gambling addiction, superstitious beliefs and much more. It is very prevalent in the continuing destructive behavior of investors and especially traders.


  • We need an Investing/ Trading Plan that is firmly based on useful behaviors

  • We need to execute all the rules and guidelines that make up our plan with as much Discipline as we can muster

  • Write a journal for every investment. Record what I know at the time I make a decision; my reasoning behind each decision; assess the outcome against investment plan and identify anything that I need to work on doing better in future

Chapter 10 – How much is it? (anchoring)

Research shows over and over again that our adjustment downwards towards commercial reality and objective experience will be nowhere near enough. We are very likely to buy the company’s stock and to pay too much for it.

It is not all that difficult to look up past prices for a stock, but it is much more difficult to judge them in relation to Value because Prices of stocks on the stock market swing widely either side of value as well as with the fortunes of the company.

What the great investors do is totally different. They know how to calculate the Intrinsic Value of a stock. Then they compare that with its Market Price. The great investors are very aware of Anchors and consciously avoid them.

Chapter 11 – Reconstruction (hindsight)

The huge problem is that Hindsight bias makes it very difficult for us to learn from Experience, because our minds reconstruct what we knew when we made decisions.

Investing involves making decisions, the outcome of which is uncertain and the result of which we will not know until later. This makes investing very fertile ground for hindsight bias. When an investment works out well, and possibly even better than we expected, we tend to think we were smarter than we were. We are at great risk of taking credit for what may really have been nothing more than good fortune.

The result is that we have an unrealistic opinion of our investing prowess. In particular, we tend to believe that we knew more than we did when we made the investing decision. This means we have a strong tendency to think we are smarter than we are.

Hindsight bias also arises out of another tendency we have: Selective Memory. In investing, we like to remember the profits, which were pleasant memories, but we suppress memory of losses, which caused us feelings of pain.

Because of our Selective memory, we all tend to:

  • reinforce the memory of our investment successes. We tend to take credit for what was just good fortune

  • suppress the memory of our investment failures. If we do recall them we dismiss them as bad luck rather than bad decisions by us

The result is that we have a distorted memory of the number of Wins relative to Losses. At the same time, we have avoided taking responsibility for poor judgments. This magnifies our estimation of our investment prowess and promotes Overconfidence in our Decision-making ability. Our unbalanced memory of our success rate can cause us to take more Risk than is warranted by our true investment record because we overestimate the probability of future success and underestimate the probability of future loses.


  • It is essential to keep good Record of our investing

Chapter 12 – Why we get it wrong (disposition effect and prospect theory)

One unprofitable tendency that all inexperienced investors have is to sell winning investments too early and to ride losing investments for too long.

The Disposition Effect is the tendency to Sell Winners and Ride Losers. Three ideas explain the disposition effect:

  • seeing each investment separately

  • seeking pride and avoiding regret

  • self-control

People Reject Risk when they have a Profit and readily Accept Risk when they have a Loss, which is the exact opposite of the behaviour that the great investors tell us, is necessary to succeed at investing.

Regularly Review each stock in our portfolio i.e. End of February & End of August in Australia (2 questions: Is it performing satisfactorily? If it is not, what is the opportunity cost of continuing to hold it?)


  • To have a written investment plan: what we expect to happen when we buy a stock; how we know that what we expected is not unfolding; how we sell

  • Setting Stop-Loss levels before we make an investment

  • See Selling Losing stocks as switching to Better stocks, rather than as taking Losses

Chapter 13 – We cannot change the past (the sunk cost fallacy)

The irony that escapes many beginners is that the counterintuitive way to avoid losses is to accept them.

Sunk cost is a cost that has been incurred, but which is no longer recoverable. Where the sunk cost fallacy comes in is when the unrecoverable cost is used mentally to drive an irrational decision.

The way to see past the sunk cost fallacy is this: money that has already been paid is a sunk cost. It relates to the past. It has gone and the transaction cannot be magically reversed. The rational way to deal with such a situation is to assess the options that are now possible.

In investing, the original price paid for a stock is a sunk cost. The sunk cost fallacy comes in when an investor is reluctant to make a rational decision to take a loss on the stock because the current price is less than when the investment was first made.

To avoid the sunk cost fallacy as investors, it is necessary for us to change the way we think about the situation. We have to accept deep down inside us that nothing we do today or tomorrow, no decision we make now or in the future, will ever change something that has happened in the past. The only thing we can do is to affect what happens from now on. We can never change the past, but we can affect the future.

What we paid for a stock is a sunk cost. It is gone. What we now have is a tranche of stock that is only worth what we can sell it for. It is seductive to imagine that if we just sit out the loss, the price may go back to what we paid and we can then sell and get out even. This is the most common and utterly natural way most people think. It is the sunk cost fallacy writ large. It also ignores opportunity cost.

The solution lies in changing the way we think about losing investments. We have to list the options open to us, which are:

  1. Hold on, Hope and Pray until we get our original investment back

  2. Sell and Switch into a better investment opportunity

  3. Sell and Sit in cash awaiting a better investment opportunity if there is not one available at the moment

Option 2 and 3 are the Rational Decisions. Option 1 is the sunk cost fallacy in action.

The Rational Investor should work at developing a habit of forgetting the sunk cost and focusing at all times on the full range of alternatives open: to continue, to switch or to liquidate.

Warren Buffett once reminded an audience of an old saying that if we find ourselves in a hole, the smart thing is to stop digging. Richard Thaler would add: and start to consider all the alternative ways out of your predicament.


  • Regularly Review each stock in our portfolio

Identify the non-performers and make a search for and evaluate several alternatives

Chapter 14 – I remember it all too well (availability revisited)

Heuristics are devices we may recognize by the simpler name of Rules of Thumb.

Intuition is the way we instinctively know that something feels right or wrong.

In Investing, common heuristics include only buying stocks with low P/E, high Dividend yields and low Debt/Equity. When we need to make a decision, we use these heuristics to make sense of difficult situations in which we have to make choices. Intuition is based strongly in our Experience. Our intuition also has its limitations. This is primarily because our memory may be distorted by a cognitive bias called Availability.

The Availability bias is this: when called upon to make a judgment or express an opinion about something, we draw on our memory. We therefore rely for our judgment or opinion on those things that come to mind most readily from our memory. What comes to mind will depend on what have been exposed to, our experience and knowledge, as well as those things that are most recent or that made the most vivid impression on us.

Much of the time, the Availability heuristic will serve us well because events that occur frequently are more likely to be remembered than things that happen rarely. We are therefore able to quickly and accurately make good judgments and form useful opinions.

Nevertheless, reliance on the Availability heuristic can play havoc with our ability to accurately assess how often something has happened in the past and, more importantly, the likelihood that it will occur in the future. This happens when we have very Limited Knowledge, such that we do not have a clear picture of the whole universe of possibilities. It can also happen when the subject is highly emotional, such that it has made an impression on our memory that is out of all reasonable.

Investment is a fertile field for Availability bias. One of the most common examples is the Volatility of Prices.

I may be reluctant to express a view at all because there is so much conflicting or vaguely remembered information available to me. I need to research the matter more thoroughly and assess it carefully before being sufficiently confident to express a view.

The antidote to Availability bias is to substitute Research for Memory. Be very wary about relying only on the most recent or most visible report about a stock. Seek to form a rounded view based on the available facts. Be especially cautious when any situation looks to present an Absolutely Black and White case. There should always be Positive and Negative factors to weight up.


  • Never act without Research to see if there are any other views

  • Search out the data on the stock over a longer period

  • Search out several Alternative stocks both in the same industry and in a number of other industries. Weigh them all up using a few important ratios or key measures.

  • Be Alert when we read about, or someone states, large round percentages, such as that something happens 80-90% of the time

Chapter 15 – What goes up… (small numbers, reversion to the mean)

There is one particular trap where many investors make a serious logic error: Reversion to the Mean does not apply with Small samples. Reversion to the Mean applies only to very Large samples or a great number of situations on average.

Industries rise and decline. Products go through life cycles of growth, maturity and decline. Organizations grow fat and lazy. Government policies change. Mineral deposits are exhausted. New technologies come along. It is really silly and simplistic to assume that because a company was great once and has fallen in price, it will necessarily be that great again. This is one reason that it is unwise to think that any company whose price has fallen will in time rise back to its old peak.

The other reason is that situations change. Many companies reach peaks based on quite unrealistic expectations for new technologies or simply because there was something unusual happening at the time the peak was made. Sensible people will not naively assume that a historical price peak will be reached again without examining the circumstances in which it was made.

The Law of Small Numbers: we are drawing broad conclusions from a small sample rather than examining a large sample of past events to assess the probabilities that any past events will repeat.

The antidote to the law of small numbers is to regard any similarity between the past and the present with a great deal of suspicion. We should force ourselves to research and think through the real causes of past events, together with the circumstances in which they occurred, and compare them with the present.


  • Read History

  • If a stock’s price has fallen a long way, there is always a reason. We should never assume that it will automatically rise again.

Chapter 16 – What is it Worth? (overreaction)

Investors never cease to be surprised that the stock market often seems to Overreact to News. Bad News drives the prices of stocks down by more than would seem warranted by the new information. Likewise when the announcements are good, the prices of stocks seem to rise by far more than a reasonable analysis would expect.

This comes as a surprise to most Beginners, because they have been led to believe by academics that markets are efficient.

It was found that people attached far more importance to the latest information at the expense of earlier data. In other words, they overreacted to the latest information, tending to ignore older data, even when it suggested that the recent news was not typical.

Investors should set out to try to control their emotions in the face of dramatic or consistent bad or good news about companies.


  • Look to take advantage of unwarranted overreaction. If a stock is sold off sharply on some bad news, ask whether the reaction is overdone by focusing too much on the very short-term picture rather than the longer term picture

  • Construct portfolios of undervalued stocks rather than follow the soaring trends of momentum stocks that tend to be overvalued. The important thing is to hold a widely diversified portfolios of undervalued stocks

Chapter 17 – He who hesitates is last (inertia)

The inertia bias comes into play when we procrastinate rather than make difficult decisions. The inertia or status quo trap arises from our natural instinct to protect our Ego.

Inertia is less evident when there is a choice between only 2 possible actions. The more possible actions there are to choose from, the more likely we are to avoid a decision by sticking with the status quo.

In investing we have a combination of uncertainty about the result of our decisions and many alternative actions that we might take. In investing, it is necessary to Embrace Uncertainty in order to make a profit. Investing gains are made by intelligently assessing and assuming uncertainty. The problem of uncertainty is far more acute when the decision is whether to sell an investment.


  • To have written investment plan

  • When struggling with a decision whether or not to Sell a non-performing stock, we Should Sell it. Then, having done so, we should ask ourselves whether we Now Want to Buy it Back?

  • It is best Not to talk about our investments after we make them to reduce a number of cognitive biases that tend to distort our memory

  • To review stock by stock after each reporting season

Chapter 18 – What do you want to do? (regret)

The key battle is not fought in the Market. It takes place in our Minds. It is not What we Know that determines investment result, it is How we Think.

The great and successful investors generally learn at an early age that they are responsible for what happens to them, not just in their investing, but in their whole life.


  • Draw up a Decision Flow Chart

  • Incorporate all decisions into a Written Investment Plan

  • For each day we own the stock, we should write in the diary 2 items: (a) any new information that has come to hand and (b) what decision we made and why

  • When we buy a stock we should have some Expectation of what is likely to happen. We must be able to define When that is happening, then When it is Not happening. That is when we will be wrong about our investment decision and should cut our losses

Chapter 19 – Ask Why Not? (confirmation revisited)

We fall in love with our investments. We then tend only to notice and look for evidence that confirms what we want to believe. Worse, we also tend to avoid and ignore evidence that might contradict our belief.

Confirmation bias exists because none of us likes to be wrong. We find it difficult to accept evidence that tends to cast doubt on our decision. We also invest our self-image in our decisions, especially if we have made them public.

If we can only see how we can win from buying a stock, we should stop for a moment and ask Why anyone would be Selling to us, at least at the price we find so attractive? There must be a different view. It may be mistaken, but equally, we may be the ones who are wrong.


  • Make a list of the Pros and Cons

  • Never to consider only 1 stock to buy. Have a list of 4-6 stocks and assess them against reasonably objective measures

Chapter 20 – I want it now (impulsiveness, immediate gratification)

It seems there is a linkage or association between the need for instant gratification and the need for positive reinforcement.

Good investors are both Patient and Disciplined. The average investor is Impatient and Impulsive. The approach of the good investors is more in step with the Realities of effective investing, while the ordinary investor is out of step with that reality. The realities of investing are that returns do not always come in immediately, steady flow.

We have seen 2 basic rules of investing: (1) The only way to win the game is to stay with winners and let our profits build. Yet the need for positive reinforcement and instant gratification makes most people grab at small profits, or sell at a loss, investments that go on to make big gains. (2) Big Losers that really destroy our result

Another reality of investing is that returns do not flow evenly across the portfolio of investments we make.

We have to give our investments Time to work for us.

Chapter 21 – Tell me Why (randomness)

We have an incredible strong tendency to see patterns and meaning in random behavior.

Most of us feel a hunger for explanations for everything that happens. We are very reluctant to believe that something can happen for no obvious or logical reason, or that the reason is unknowable.

Short-term movements in prices of stocks are often to a large extent quite random and unpredictable. Yet every day in the newspaper we read of a reason for significant price changes.

What we need to accept is that many things happen for no apparent reason or by sheer chance. We can never know the reasons for them, if indeed there is a reason.


  • we should be skeptical and question everything

  • ignore predictions

  • assess the conditions we are investing in, then set a strategy that is appropriate to those conditions and carry it out

Chapter 22 – It can’t happen (normalcy)

When we face impending danger, we easily and naturally fall into a mental state in which we tend to do several things:

We underestimating or deny that the disaster is looming over us or happening around us

We greatly underestimate, minimize, deny or fail to appreciate the likely or possible consequences

We interpret warnings as an overreaction, mentally dismissing them and rationalizing potential dangers as not really serious

Frozen in this mental state, we fail to take any protective action as the danger becomes reality and overwhelms us.

Normalcy bias comes about partly from our natural tendency to think that if something has not happened before, it will not happen now or in the future. In the stock market, this can also take the form of ignorance of history. If we have not experienced something, or even heard of it happening before, we may refuse to believe in such a possibly and reject all warnings.


  • Read histories of corporate crashes and form in our mind scenarios for how a corporate crash may unfold. What will the stock chart look like? What are the key signs to watch for? The most important thing is to have got out of the way early

  • Force ourselves to imagine something one level of magnitude worse than the greatest market catastrophe that we know about

  • Preparation is the Key

PART II – In the avalanche

The most powerful method for us to counter the power of the crowd over us is to develop the Art of Contrary Thinking. This consists of learning to be a skeptic and to question every belief before accepting it on face value, especially when it seems that everyone believes it is true and sees no other possibility.

Chapter 23 – Mob rule (crowds)

The prices of stocks are not always what we expect from a logical examination of the available information. Instead, the information about stocks is filtered by the Hopes, Fears, Greed and Ego of investors.

Investors do not act in a vacuum. They exist in a community and are subject to many influences as they interact with others. Thus, in addition to studying individuals in isolation to understand how investors make decisions, we need to understand how the dynamics of groups also impact on their decision making.

A key idea that Le Bon articulated about a crowd was the way it Thinks in Images, rather than by Rational Argument. The crowd is deaf to argument and rejects dissent. Crowds develop a feeling of Certainty about their ideas. They therefore have the courage to act on their ideas because of the feeling of power in numbers, combined with the anonymity of the crowd. Thus they will do things in a crowd that they would not do as an isolated individual because of fear of the consequences.

When situations are unclear and complicated, we become anxious. The natural tendency in these cases is to rely upon the views and behavior of other people. Importantly, we are very ready to treat the inputs we get from other people as though we had observed them in physical reality, when they are really is the equally uninformed opinion of others. This is then followed up by Repetition until it becomes an Image in the mind of the crowd and will spread as though it is contagious.

Chapter 24 – Notes and commentary on Le Bon’s The Crowd

“The part played by the unconscious in our acts is immense and that played by reason very small”

The crowds do not think logically. Instead, they are driven by emotional feelings of which the individual may not be aware and which are therefore unconscious.

“Men never shape their conduct on pure reason”

While an investment or trading approach should be based on reason on logic, it also needs to take into account the emotional pressures, which can make it difficult to follow our plan.

“Whoever constitutes a crowd, no matter how diverse their character, intelligence, occupation and so on, the fact that they are transformed into a crowd puts them into possession of a sort of Collective Mind that makes them feel, think and act differently than if they were alone. Importantly, certain ideas and feelings do not transform themselves into acts except in a crowd.”

Even highly intelligent and cultured people are susceptible to crowd influences.

“The unconscious mind affects everything including the operations of intelligence. It is far more powerful than the conscious mind. Thus, behind what we do or think rationally are unconscious motives. Behind those are even less conscious motives, so that the greater part of our daily actions will be driven by hidden motives. It follows that while there may be a great difference in education and intelligence between two people, the difference in character deriving from unconscious motives will be slight. It is these general qualities of character, governed by the unconscious, but possessed by most normal people, that become common elements in crowds. Because crowds possess these common ordinary qualities, they can never accomplish acts demanding a high degree of intelligence – no matter how bright or knowledgeable some members may be, the crowd can only bring to bear in common the mediocre qualities of the average individual.”

The level of intelligence of some of its participants has no bearing on the attitudes and actions of the crowd. Because intelligence people, and those of lesser intellect, are all driven by the same basic motives and unconscious desires, there is no difference between them when in a crowd situation.

“The conclusion is that the crowd is always intellectually inferior to the isolated individual…”

“A crowd is at the mercy of all exciting external causes and is the slave of the impulses it receives. An isolated individual, by comparison, is submitted to the same causes, but will be able to control his reflex actions to them, unlike the crowd, which is devoid of that capacity.”

Alone, they are able to think calmly for themselves, but in a crowd there is a collective reaction to the images and events that are witnessed. Also, there is no time to think about the suggestions that are given to a crowd before it reacts and sweeps us along.

“The exciting causes of the moment that vary incessantly and the crowd’s inability to resist them, explain how it is so mobile, swinging quickly from bloodthirsty ferocity to generosity and heroism.”

Consider the way a stock is going up and up and then there is a minor piece of bad news. Its price plummets, even though nothing has really changed. This is the way the crowd swings from hero worship to vilification once a hero stumbles. It is images and perceptions that drive crowds, not facts. Reason cannot change the way they react.

“We have seen that:

  • Crowds do not Reason

  • They accept or reject ideas as a Whole

  • They tolerate neither discussion nor contradiction

  • Suggestions tend to dominate them and turn into acts

  • Suitably influenced, they will sacrifice for an ideal

  • They entertain only violent and extreme sentiments

Chapter 25 – Contrary to popular belief…

We are inherently social animals. All of us crave company to some extent. This is never more so than when we are anxious or afraid, such as when we have difficult decisions to make. This includes most investment and trading decisions, because they involve Uncertainty.

Wilfred Trotter identified 5 obvious characteristics of our Herd instinct:

  • People are afraid of being physically or mentally alone

  • People are more sensitive to the images and values of the crowd around them than any other influence

  • People are remarkably carried away by Euphoria and Panic when in a crowd

  • People are greatly susceptible to leadership

  • People define themselves in terms of the group of similar people with whom they form relationships

It is comfortable to be part of the Crowd. Even if the crowd is wrong in the end, nobody can blame us; everyone was fooled. It is more comfortable to be wrong in company than to be right, but isolated. There are 2 aspects to this with respect to investing and trading:

  • Long experience has shown that when everyone holds the same view, everyone is likely to be wrong. However, we need to be very careful here. The general opinion tends to be correct most of the time as a trend unfolds and builds. It is only as a trend approaches a Climax that the prevailing opinion becomes such that there are hardly any dissenters. This is when the crowd is likely to be wrong; at the very time that it is most dangerous to be wrong. Markets are driven to extremes of overvaluation and undervaluation. These are the times when it is important to do the opposite to everyone else.

  • If we are to have a superior return, it is self-evident that we must invest differently to the way the crowd is investing

When faced with any prevailing view, we should force ourselves to examine other possible views. The more widely the view is held and accepted, the more likely it is to be wrong and that we should consider contrary views.

The Great Contrarian Thinkers:

  • They are people who always demand Evidence

  • They never accept anything at face value

  • They ask unsettling questions

  • They tend to be Loners, or Leaders of Minority opinion groups

  • Their ideas are often rejected as being out of line with accepted truth, yet their ideas tend to become the orthodoxy of the next generation

  • They are always ahead of their time

  • They see where things are going and set their policies on future trends rather than on the present or the past

Humphrey Neill discerned that during trends the crowd was right. However, it was always wrong at turning points; the very time when it was most important to be right. He summed up his experiences like this:

  • Individual opinions are of little value, because they are so frequently wrong, especially at turning points in trends

  • Human traits of Fear, Hope, Greed, Ego and Wishful Thinking are so strong that they make it very difficult to be objective

  • If we rely stubbornly on our own opinion, we are likely to do so whether it is right or wrong. The defense of our own opinion is a very strong urge

His conclusion was that in the face of the unreliability of our own and crowd opinions, why not make the most strenuous efforts to see the opposite; to examine the facts and evidence and, if warranted, act in the opposite way.

The best investors succeed because they seem to think counter-intuitively. They make better decisions by avoiding the common Cognitive Biases, which are Natural to us all, but that Hold us Back in our Investing. Learn How the Great Investors Think and raise your investing to a new level so you can join the winners' circle.

PART III – Catching the Tide

Timing can be critical in investing. Yet timing the market is one of the most difficult aspects of the craft. The problem is largely in our minds rather than in a lack of knowledge or skills.

Chapter 26 – Nine Keys

  1. The Long View. Successful investors tend to invest in tune with the Big Picture. They see through and beyond the daily noise of news and comment. They think independently about the world around them.

  2. Flexibility. Great minds are always questioning everything. The more they know, the less certain they are about anything.

  3. A Plan. Investing success demands discipline. The reason that having a clear written plan is so important is that investing is a highly emotional game. The only way to stay disciplined is to work out what we will do in any given situation before we start, when we are not emotionally involved. The great investors have always tended to think through the possible scenarios and, no matter what happens to them, they always know instinctively what to do.

  4. Never Stop Learning.

  5. Seek Advice.

  6. Humility. Accept making mistakes.

  7. Self-confidence: comes from thoughtful knowledge and experience.

  8. Intelligence.

  9. Persistence. Investing is the hardest way to make an easy living.

Chapter 27 – Failure Traits

Investing involves making sound decisions.

In the book “Why CEOs Fail”, David Dotlich and Peter Cairo describe 11 behaviors that can derail CEO, which also derail Investors:

  1. ARROGANCE. Investing requires a strong measure of self-confidence. Problems emerge when these investors are Overly Confident: their self-belief is so strong that they cannot see anything except their own opinion about a situation. When we think a decision is obvious, there is a risk that we no longer have a balanced view of the range of possibilities. The best antidote to arrogance is to stop to write down Why someone would want to take the opposite side of our transaction.

  2. MELODRAMA. Use the market to show how smart they are. The problem is that, because they are focusing on maximizing the drama created by their outlandish decisions, they lose their perspective on what is really important and concentrate on the impression they try to create. The best antidote is to resist any urge to discuss our trading and investments decisions with others.

  3. VOLATILITY. The markets are constantly testing us. They put us under stress to make decisions in an environment of incomplete information and great uncertainty. We are thrown back and forth between exhilaration and deep despair as our fortunes fluctuate. The best antidote is to cultivate the art of keeping things in perspective and thinking before acting.

  4. EXCESSIVE CAUTION. A careful and painstaking approach is important to successful investing. However, the taking of calculated risks is also an integral part of the art. The antidote is for us to develop a sound investment plan.

  5. HABITUAL DISTRUST. They never pull the trigger on trades because they only ever see the negatives. The antidote is to develop the habit of writing down both sides of the situation.

  6. ALOOFNESS. This is fine if it enables us to keep away from the wild swings of opinion around us and keep our perspective. However, it is very dangerous if, under pressure, we retreat from the fray and literally freeze. We may be trying to ignore the problem by getting away from it.

  7. MISCHIEVEOUSNESS. The real key to success is to have a plan and to follow it.

  8. ECCENTRICITY. Eccentrics find everything interesting; they lack perspective and cannot prioritize.

  9. PASSIVE RESISTANCE. Investing involves making tough decisions about money. Rely on our tested plan, rather than the validation of others.

  10. PERFECTIONISM. They often let small details get in the way of the larger view.


The key skill is to be Aware of How our Personality lets us down when we are under pressure. Habitual behaviors will already be set in our life before we come to trading and investing. The markets will simply magnify them.

Chapter 28 – Dealing with Loss

  • When faced with choice between realizing a Certain Profit and a chance of making a Larger Profit, but with the risk of loss, most people will snatch the Certain Profit.

  • When faced with a choice between realizing a Known Loss, or hanging in with a chance to get out even, but with a risk the loss could get larger, most people will ride the Losing investment.

This is the essential thinking driving the loss-making investors.

If we find ourselves in the situation of holding losing investments, this is how to begin to deal with the situation:

  1. We need to have an investment plan

  2. We rearrange our present holdings consistent with that plan. We take each of our current investments and decide whether to hold it or sell it by reference to its prospects compared to alternative investments available to us

  3. As we follow our plan, we sell quickly when things go wrong and hold onto the winners while they perform for us

  4. If an investment suffers a correction in an uptrend, but both fundamental and technical analysis shows that all is well, we should be patient

  5. We don’t put all our money in one investment

Chapter 29 – Dealing with Loss

Warren Buffett wrote that 2 things an investor needs to succeed are:

(1) good Decision-making skills;

(2) Discipline when under pressure

Another way of saying this is that investment success requires learning to follow a sound investment plan.

An Investment Plan is a statement of Objectives, Strategy and Tactics that describe how the investor is intending to operate. The plan should contain all the information needed to make investment decisions that manage the uncertainty that is inherent in the investment game. The plan will describe the Kinds of stocks to be bought, When to buy them, How many stocks to buy, When to cut Losses or Take Profits…

Every investor must develop a plan that will meet their objectives and is compatible with their investing horizon, knowledge, skills, experience, risk tolerance, attitudes, beliefs and personality.

Faithful Execution of the Plan is more important than its detail.

Chapter 30 – Seven investing sins

  1. Thinking someone can predict the market

  2. Trying to be perfect

  3. Fear of making mistakes

  4. Inability to act independently

  5. Overconfidence

  6. Lack of patience

  7. Having unreal expectation

Chapter 31 – The Wall

Some ideas that can help overcome the fear of pulling the trigger:

  • Nobody can tell us what is going to happen. What we should do is to forget predicting the future and to manage the condition of the markets as we find it now

  • There is no perfect time.

  • There is always uncertainty. Investment is about taking on and managing uncertainty. At best, around 50% of our investments work out and about 20% of them will produce approx. 80% of the gains. The trick is to keep the good investments and quickly unwind the ones that do not work out.

  • Phase our way in. A smart idea is to buy some and watch how it works out. If it goes badly, we can get out. If it goes well, we can buy some more.

Chapter 32 – Capitulation

The market needs to cleanse itself before it can rise again. A Climactic mass sell-off on high volume is the only way a bear market ends. Capitulation may take the form of climatic panic selling, but that is not the only model. It may be that the capitulation takes place slowly over some time, as investors with big losses gradually lose heart that there will ever be a recovery.

Chapter 33 – Tough Going

We will hear investors complaining about breakouts that fail, and about their bad luck. The truth is that many investors underestimate how much of the time stock markets and individual stocks spend essentially tracking sideways.

In a rising market, to some extent the profits tend to look after themselves. In a sideways market, profits can be hard won and the key is not to let the inevitable losses outweigh the profits. In sideways markets, to some extent investors should forget about the profits and focus almost all their energy in avoiding losses.

One of the key strategic decisions that investors should make is What % of their Capital should be invested in a sideways market. Interestingly, many investors never think about this. They just assume that they should always have all their money in the market.

In seems to make far more sense for small investors to learn the skills to be in rising markets, out of falling markets and cautiously involved in difficult sideways markets.

Chapter 34 – Be Early

The best profits will always be made when we invest at the most difficult time to make the decision. If everyone knew what was going to happen, then the good prices would not be on offer.

One of the things that contribute to the problem for inexperienced investors is that the next Bull market will always start at a time when there is bad news all around us.

Market prices are set not on current events, but on the conditions that investors are expecting in the future. We don’t buy last year’s earnings when we buy a stock; we buy the expected earnings next year.

Once the Facts are known, prices tend to retreat towards a more realistic level. Stocks are sold down to the price that is acceptable to the most fearful seller.

Chapter 35 – Blinded by Fear

Fear is important in the stock market, but while it can protect us, it can lead us into grievous error.

When we think we are in danger, fear takes over our mind. We imagine only the worst that can happen. Because of our total focus on the potential danger, we filter out all other information.

A fundamental mistake among investors: to react blindly to what is happening in the market right now. All markets overreact, because others are panicking and being swept up in crowd behavior.

It is most important to maintain perspective. This means we have to stand apart from the crowd. It also means understanding that markets swing between extremes of panic and euphoria.

Chapter 36 – Conquer Fear

As beginner, we all come to the stock market with completely the wrong idea. We come looking for a way to buy and sell stocks and make a profit every time.

I came to understand that losses are part of the nature of investing, because it involves taking on and managing uncertainty.

There are 3 primary ways in which Fear stops us succeeding as investors:

  • We are frightened to pull the trigger

  • We are frightened to take out bad medicine

  • We are frightened to take our profits

The most valuable thing I have learned over more than 30 years of investing in stocks is not how to analyze the market and to manage money and risk, important though they are. The key is that the way in which great investors THINK is different to the way everyone else thinks. What is different is that they understand that the essence of investing is in assuming and managing uncertainty.

The logical corollary that follows from the idea that all investments involve uncertainty is that some of them will lose. It also means that we cannot know in advance which ones will lose. If we did, we would not make those investments in the first place.

The best investors have learned to accept uncertainty, which means the risk of loss as well as the opportunity to profit. Once they do this, they can conquer fear. Put quite simply, if all investments involve uncertainty and we cannot know which ones will succeed and which ones will fail, then there is nothing to fear.

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© 2016 by aTrader