Book review:
The Emotionally Intelligent Investor: How self-awareness, empathy and intuition drive performance by Ravee Mehta
Finished reading: 29 Jan 2017
I found the book to be incredibly valuable as it includes valuable insights into how to become a better investor. Historically most of the literature I have read on investing has been focused on value investing. More recently I have begun to read more literature on traders. This book provides comfort to the investor that there is no one correct approach and they should choose their own style that fits towards their personality and not try to shape themselves within a particular style of investing. “Relying on someone else’s work simply does not put you in control. There is nothing wrong with listening or reading about the ideas of others, but in the end, you need to do your own analysis and make decisions that fit an investing style based on your own personal set of strengths, weakness, motivations and personality characteristics”. “Value investing involves trying to make money by guessing that the pendulum is near the end of its swing, all the way to the left or all the way to the right, and that it should eventually swing the other way. Growth or Momentum investing involves betting that the pendulum will continue in its current direction, left to right (let’s call it “bullish”) or right to left (let’s call it “bearish"). Success in each of these styles generally requires distinct personality traits and strengths.”
It is also important to understand the underlying motivation for yourself as an investor as this work infor your basic philosophy on investing. “The author’s conclusion is the best long-lasting motivator for success is self-improvement based. Instead of focusing on how much money I make or whether I am wrong or right on a given investment, I try to put the focus on continuous learning.”
The first part of the book the author describes of various cognitive biases and suggest when we may become susceptible to these biases and the likely effects from falling prey to them.
The author spends a lot of time describing how he tries to emphasize with other investors in the market and in the particular stocks he is looking to invest. An understanding of how other investors are feelign will inform him as to how the stocks will likely behave given the investors reactions.
For example he tries to understand whether the existing investors are mainly growth type or value type investors as they will behave differently to stock price movements and earnings announcements.
Another interesting observation is why intuition should not be ignored especially when intuition has been built up through years of observations in a particular field. Intuition is valuable because of the patterns that investors are able to draw two similar past investments and the likelihood of certain outcomes occurring from a particular set of facts.
The author advocates keeping a trading journal and being very introspective as and analysing past decisions and why they were made . One useful exercise is to keep a journal in which you try to keep track of when and how often you fall victim to these common mistakes as well as when you are successful in avoiding them. It can be useful to write down in a journal what type of mood you are in. “The better we can understand our feelings, the better we will be able to control and recognize how they impact our decision-making.” “Kasparov believes that the secret to success in chess and in most other endeavors is a relentless review of prior decisions and focused practice on areas that require improvement. Critiquing prior decisions develops intuition, because it increases the odds that prior patterns stick somewhere in one’s mind.”
The author describes that our common investing mistakes can be placed into three categories: Self-defense mechanisms against feeling shame, regret and fear. Irrational reactions to stress and overloading of the brain’s capacity for rational thought. Vulnerabilities caused by fluctuations in mood.
Another tip that came out of the book was to visualise how an investment could perform before investing, especially on the down side. By visualising this scenario it will better prepare you for how you will react in such a situation. It is also beneficial to seek out the counsel of other investors as they are more likely to see the pitfalls in an investment rather than yourself, given the cognitive biases you have to an investment idea that you have generated personally.
The author also advocates the use of technical analysis to understand what the market is feeling towards a stock. He combines the use of intuition based on pattern recognition, fundamental analysis which is based more on deliberate rational thought and technical analysis to emphasise with how the market is feeling about a stock.
Conclusion
This is one of the best books I have read in a long time as it contains reflections from an investment practitioner who has spent a lot of time in self reflection and endeavoured to understand what techniques are helpful for improving process and becoming a better investor and human being.
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