In October, Professor Richard Thaler of the University of Chicago was awarded the Nobel Prize in Economics "for his contributions to behavioral economics." That discipline, which skewered the standard economic assumption of perfect rationality by showing that people's real-world economic decision-making is plagued by cognitive biases, is no longer just a pesky upstart in the economics firmament (Daniel Kahneman, a pioneer of behavioral economics, received the Nobel in 2002).
Richard Thaler has spent his career focused on the way people actually behave, rather than the way economists think they ought to behave. And lest you believe an academic lacks the real-world experience to speak usefully on investing, you may be interested to learn that Thaler is a partner of Fuller & Thaler Asset Management, Inc., an investment firm that seeks to capitalize on cognitive biases. Both the Fuller & Thaler Behavioral Small-Cap Equity Fund and the Undiscovered Managers Behavioral Value Fund are beating their respective benchmarks from inception.
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Below, you'll find 9 quotes of his that contain some of his accumulated wisdom and can help make you a better investor.
1. Closed-end mutual funds: "THERE ARE IDIOTS"
Closed-end mutual funds are a bit like stocks in that they raise a fixed amount of capital from investors through an initial public offering, with fund shares going on to trade on a stock exchange. Here's what Thaler had to say about them:
The lesson here is to avoid closed-end mutual funds altogether -- an excellent rule for all ordinary investors.
2. The problem with incentives in the investment industry
Even without getting into investment frauds, this warning extends to high-cost investment products (actively managed mutual funds, hedge funds, etc.) versus low-cost investment products (e.g., index funds). Always remember that people will try hardest to sell you things that make them a lot of money.
3. Picking stocks vs. picking "helpers"
I would add "market-beating fund manager" to the list of "helpers" who are extremely difficult to pick -- another reason to consider low-cost index funds for the majority, if not all, of your investable assets.
4 and 5. On beating the market
Elsewhere, Thaler said:
If you can't get onboard with Richard Thaler on this point, perhaps you'll listen to another investor who knows a thing or two about beating the market. In his 2013 Annual Letter to Berkshire Hathaway shareholders, Warren Buffett wrote:
6. Why buying shares in a good company isn't enough
Buying a stock based solely on the quality of the company without a thought given to price is an example of what Oaktree Capital Management co-chairman Howard Marks calls "first-level thinking," which is inadequate for a stockpicker.
As Marks wrote in a 2015 memo to his investors:
7. One failing that keeps investors from achieving their goals
As a general rule, stocks, due to their growth potential, ought to be the bedrock of a portfolio for investors who are saving for retirement. As such, investors ought to train themselves to put short-term paper losses in perspective and remain focused on achieving superior long-term gains. Being able to bear short-term losses with equanimity does not come naturally, but it can make an enormous difference in your long-term investment results.
8. The (negative) value of financial media
One simple step investors can take to ride out short-term losses is to ignore them -- literally. The less often you consume financial media or check the value of your 401(k), the less you expose yourself to unsettling emotions that can distort rational decision-making. Reducing your regimen of financial news and data will help you increase your investing time horizon and your risk tolerance.
9. On the benefits of laziness
Thaler's "lazy strategy" is reminiscent of Berkshire Hathaway Inc. vice-chairman Charlie Munger's "sit-on-your-ass investing" style: "You're paying less to brokers, you're listening to less nonsense, and if it works, the tax system gives you an extra one, two, or three percentage points per annum."
Bonus sports quote: Moneyball-ing American football
It has been widely documented that, over the long-term, "growth" stocks tend to underperform "value" stocks because investors overpay for growth prospects. In a 2005 paper titled Overconfidence vs. Market Efficiency in the National Football League, Richard Thaler and Cade Massey documented a similar phenomenon in the NFL draft, whereby football teams systematically overvalued the right to make early picks:
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