The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money

First of all, a happy belated new year to everyone. A new year will give us renewed hope and ethusiasm as we strive to further improve ourself and to further enjoy our lives. I picked up this book by Carl Richards in a book fair and it was a bargain as the book only costs RM10. The book is about how we can improve our behaviour with respect to money as the title of the book suggests. The book is easy to understand and is quite readable. It strikes me as I am also a victim of my own irrational behaviour with money and as such, I find the book a timely reminder to not follow the herd with respect to investing and how I manage my money. I guess the sketch shown in the book cover describes most of us.

As usual, I would like to share excerpts of the book which I find useful (Words in blue are my own opinions):

1) But in the end, financial decisions aren't about getting rich. They're about getting what you want - getting happy. And if there is a secret to getting happy, it's this: be true to yourself. (Do you know what you REALLY want in life to be happy? Are you following others definition of happiness?)

2) The more expensive stocks (or houses) are, the more risky they are - yet that's when we tend to find them most attractive. (We are all worried that we might miss the train - if we don't buy now, we would not be able to afford it.)

3) ....... as the historian and philosopher George Santayana said (more or less), those who don't remember the past just get hammered again and again.

4) The next time you're about to make an investment decision because you're sure you're right, take the time to have what I call the OC (Overconfidence Conversation). It's been a truly powerful tool to help people in their decisions. Find a friend, spouse, partner, or anyone you trust, and walk them through your answers to the following questions:

- If I make this change and I am right, what impact will it have on my life?
- What impact will it have if I'm wrong?
- Have I been wrong before?

5) Before you invest your hard-earned money, ask yourself: Are you buying a particular investment because you think it's a good investment? Or are you relying on a Greater Fool to come along? If so, doesn't that make you - no offense - a bit foolish yourself?

6) It turns out that fees are the only factor that reliably predicts a fund's performance. The higher the expense ratio - the cost of owning the fund - the worse the performance for shareholders. This is a case where you actually get what you don't pay for.

7) Trying to figure out which fund will lead the pack during the next quarter or next year or next decade is a fool's game. Focus instead on finding a low-cost investment that you can stick with over the long haul.

8) (On a friend who wrote stock-picking stories): He eventually quit writing stock-picking stories. "It's a little like writing about horse racing," he says. "It's really fun, and you learn a lot about how companies operate and how people try to value stocks. Sometimes you can help weed out the worst stocks, and once in a while you come across something that works out and you think it's because you're smart. But in the end most of it is just entertainment. You know that, and you hope no one takes it too seriously. But you know some people do."

9) This reminds me of another problem confronting every investor. We have a tendency to assume that what we do know is more important than what we don't know.

10) My point was that decisions should be based on principles, not on our feelings about what's going to happen.

11) If people make enough guesses, they are bound to get at least a few of them right. Even a broken clock is right twice a day. So don't take it too seriously when someone calls a market turn correctly. Most likely, it's luck.

12) (On life planning): First, imagine you are financially secure. How would you live your life? What would you change? Next, imagine a doctor tells you that you have only five to ten years to live - but you won't feel sick. What will you do in the time remaining? Finally, this time the doctor says you have twenty-four hours. What feelings arise? What did you miss?

13) I don't know what constitutes a bad or good time to invest. The point is that it's always a good time to stop the cycle of selling low and buying high.

14) Set a course, realize that you'll certainly be wrong, and plan on making course corrections often. Remember: the ongoing process of planning - not the plan - will keep you headed toward your goals and out of the behavior gap.

15) ..... Jim Rogers: "Any economy which saves and invests and works hard always wins out in the future over countries which consume, borrow, and spend."

16) While making wise decisions about how you invest your money is important, it doesn't have nearly the impact of working hard and saving more - let alone starting a business, going back to school, or reinventing yourself in any number of ways.

17) Investment decisions should be made based on what we know, not how we feel.

18) Slow and steady capital is far more concerned with avoiding large losses than with chasing the next great investment. Being slow and steady means that you're willing to exchange the opportunity of making a killing for the assurance of never getting killed.

19) Moral: if you decide to be slow and steady, remember to take with a huge grain of salt all those stories of people getting rich quick. Slow and steady capital is short-term boring. But it's long-term exciting.

20) The goal isn't to make the "perfect" decision about money every time, but to do the best we can and move forward. Most of the time, that's enough.

In summary, a good book but I guess it won't make it into the best sellers list. Don't get me wrong, it has got nothing to do with the content but the message. People like to hear advise on how to get rich quick and easy with the least of hard work while this book highlights the importance of hard work and slow and steady investing. Not exciting but in my own humble opinion, it is the truth and the earlier that we accept it, the better our lives would be.