Stop Think Invest Book Review

Here’s the last book of the 5 investing or financial books that I said I would read for my 2024 Personal Finance Resolutions. The other books I usually read are parenting books, like how to your strong willed child (lots of gems in these books but difficult to apply under stressful situations). Here’s my Stop Think Invest book review.

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Who is Michael Bailey?

Michael Bailey is a CFA and director of Research and Invesmtnet Committee Chair for FBB Capital Partners. It is an investing firm with $1.4 billion in assets under management.

Stop Think Invest Book Review

Stop. Think. Invest. A Behavioral Finance Framework for Optimizing Investment Portfolios written by Michael Bailey was just okay. There’s been a lot of talk about behavioural finance recently and he does put a different spin on investing. This is not your usual investing book.

Michael Bailey goes through the steps of the investing process with a behavioural finance lens.

Behavioural finance is a relatively new concept, and researchers like Daniel Kahneman have broken a lot of ground (he died earlier this year at the age of 90). He wrote the book Thinking Fast and Slow.

Here’s a summary of Stop Think Invest: A Behavioral Finance Framework for Optimizing Investment Portfolios.

• Explore a Brand New Idea of Theme
  • Be aware of your internal biases that you may have before starting to invest (for example, narrow framing, your level of risk aversion)
  • Be aware of external biases- he talks about mental accounting and those who favour dividend paying stocks- mental accounting is irrational way of treating different pots of money in different ways (for example, treating dividends differently than cash obtained from a sale of a security)
• Begin Initial Research
  • Make sure you’re not late to the party for your investment idea
  • Be careful of the halo effect (favouring one aspect of the company but ignoring another negative aspect of the company)
• Complete the Research Process
  • Look at how the company operates using System 2 approach of due diligence
  • Review management and be wary of overconfident CEOs
  • Use a process for reducing bias, stick to the facts
• Craft an Investment Thesis
  • Be aware of the noise, forecasts when you are writing your investment thesis
  • Conduct a ‘pre-mortem’ before making decisions to dial down overconfident optimism- to look at potential flaws
• Decide on Timing and Sizing of Trade
  • The tips in this section were a bit ‘basic’, such as avoiding major investment decisions and meetings before a meal, since hunger can prompt people on the team to make an easier decision than the best decision
  • Look at making decisions as a small group, larger groups are more risk averse
• Make Initial Purchase
  • Instead of pontificating too much, just take action because opportunity cost is at play here
• Analyze Early Results and Stock Movement
  • Don’t get emotional after initial losses- he suggests to “turn off the screen” to avoid rash decisions with the stock’s downturn or look ahead over longer term instead of right now
• Consider a Follow-On Trade
  • Investors treat recent gains like “free money” (kind of like house money in a casino) and become riskier- use caution with this and be aware of this
• Execute a Follow-On Trade
  • Be careful adding more of what you just executed, it can make big changes to your portfolio
  • Stick to the investment process
• Review Long-Term Investment Thesis
  • Complacency can happen, be careful of the status quo
  • You can get inertia in the investment process especially if you’ve held the stock for a long time
• Evaluate a Complete Sale
  • You can use the trick- ask yourself if you would sell the stock if someone gave it to you for free, to bypass the bias of thinking about pain of loss or paying taxes on capital gains. Take the emotion out.
• Sell and Focus on Continuous Improvement
  • Focus on growth mindset when you review your investment process and outcomes. Did you use System 1 thinking or System 2 thinking? Growth mindset focuses more on System 2.

Genymoney.ca’s Verdict

If you’re not really interested in the psychology of investing then this isn’t going to be that interesting to you. This is probably a book more for analysts or people who are really into researching individual companies.

I liked the anecdotes and tips within the book, and differentiating between System 1 thinking (fast, almost automatic thinking) and System 2 thinking (more difficult, meticulous, defined process).

I also liked the quotes in the book. Of course there were quotes by Charlie Munger and Warren Buffett scattered throughout.

For example, I hadn’t’ heard of this quote by Warren Buffett:

“Reaching for yield is really stupid. But it is very human”

It’s not a book that I would read again though.

Have you read Stop. Think. Invest?

What is your Stop Think Invest book review?