Behavioral Finance

For Charlie Munger the "Efficient Market Theory" and "Modern Portfolio Theory" are "twaddle". Graduate business schools attempt to make investment analysis seem a lot more of a science than it really is. It is Charlie Munger's calls this "Physics Envy the craving for a false precision. The wanting of formula ..." Markets (and economics) are not about science, they are about psychology. On Charlie Munger's side is Jeremy Grantham who says:

"I believe that markets are usually inefficiently (emphasis added) priced, both in detail and in aggregate, and that they are driven by very fallible, emotional investors who have neither the mathematical nor the psychological means to process data efficiently in economic terms, nor, in the case of professionals, the incentive."

Graduate schools teach that the markets are efficient — that stock prices accurately reflect all information that is available. But how can you reconcile this with Ben Graham's bipolar Mr. Market who is wildly optimistic one day and violently depressed the next. I admit to having been attracted to EMT theory when I first read about it. On the surface it seemed to make sense. Eight years of employment as a broker from 1967 to 1975 had taught me a great deal of respect for the markets and absolutely none for market analysts.

For are part we firminly agree with Jeremy Grantham the Mr. Market is usually inefficent becuse he is bi polar. The following is a list of Investment Manager's Letters where I have attempted to deal with the subject of human psychology and its impact on the markets we study in some detail.

Investment Manager's Letter November 2005 – The Price of Easy Money

Investment Manager's Letter November 2004 – Some Thoughts on Investment Risk

Investment Manager's Letter November 2002 – Bond Bubble

Investment Manager's Letter September 2002 – Behavioral Economics and Educated Capital Markets

 

Bear Markets

Bear markets are powerful demonstration of the workings of human emotion on the equity markets. If the markets were rational why would we need bear markets?

Investment Manager's Letter November 2008 – Bear Markets

Investment Manager's Letter September 2004 – Too Many Bears

Investment Manager's Letter October 2003 – Secular Bear Market

Investment Manager's Letter August 2002 – The Bear Market

Investment Manager's Letter December 2000 – Bear Tracks

 

Charlie Munger

Charlie Munger, Berkshire Hathaway’s resident psychiatrist has had a lot to say over the years about the behavior of investors and about the impact of their behavior on the investments. But Prof. Charlie Munger's Psych lessons are not just about investing, they are about life.

Investment Manager's Letter June 2006 – Perfectly Obvious

Investment Manager's Letter April 2005 – Building a Latticework of Mental Models

Investment Manager's Letter April 2004 – Physics Envy

Investment Manager's Letter April 2003 – Charlie Munger. Psychology of Human Misjudgment

Investment Manager's Letter May 2000 – Charlie Munger's Rules

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