Think Well

Thinking, Fast and Slow

Written by a renowned psychologist and winner of Nobel Prize in Economics, Kahneman explores how our mind works and why we are the easiest person to fool. And again, a book that will help you avoid many cognitive biases and improve your decisions and judgments.

Economics in One Lesson

If you enjoy all the big economic news then you’ll like this. A simple book that will make you question everything. So next time when the government announces that they going to stimulate the economy by creating jobs, you’ll smell BS before everyone does. 

Superforecasting – The Art and Science of Prediction

A must read for every investor. Tetlock examines some of the best minds in predicting and their thinking process. You will learn some of the great tools such as how to think probabilistically; outside view vs inside view, and be a fox, not a hedgehog.

More Than You Know: Finding Financial Wisdom in Unconventional Places

If you have read Mauboussin’s research papers, you’ll be familiar with this book. More Than You Know takes a multidisciplinary approach to understand how investing works and how you can become a better investor by incorporating fundamental knowledge from other disciplines. It covers a range of topics from investment philosophy, psychology, innovation and competitive strategy, and science and complexity theory. Most of the ideas are counterintuitive. You will find some similarities here with other books such as focus on process over outcome; think probabilistically; psychological misjudgment; and inside versus outside view. Overall an easy book to read and should get you interested to start thinking in multi mental models.

The Demon-Haunted World: Science as a Candle in the Dark

What does a science book has to do with investing? Plenty. Carl Sagan puts it better than me:

“Science is more than a body of knowledge; it is a way of thinking. The scientific way of thinking is at once imaginative and disciplined. It invites us to let the facts in, even when they don’t conform to our preconceptions. It counsels us to carry alternative hypotheses in our heads and see which best fit the facts. It urges on us a delicate balance between no-holds-barred openness to new ideas, however heretical, and the most rigorous skeptical scrutiny of everything – new ideas and established wisdom.”

It is this kind of thinking, a balance between openness to new ideas and the most rigorous skeptical scrutiny of everything, that should be the spirit of investing. Investors often get caught up trying to validate their own hypotheses by finding supporting evidence, or worse, develop hypotheses that cannot be disproved. Having a healthy skepticism and self-criticism helps you avoid accepting things at face value, which I believe is the only solution to how investors can prevent themselves from making simple yet costly mistakes. You’ll see how Sagan uses his clear thinking to expose pseudoscience. And how that can equally apply to the stock market to detect nonsense and B.S.

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

While The Drunkard’s Walk approach randomness through maths and science (Leonard Mlodinow is a mathematical physicist), Nassim Taleb looks at it from the eyes of a trader and philosopher. You’ll learn how randomness can fool us; why we’re not wired to think probabilistically; and why the things that didn’t happen, alternate histories, are just as important as what happened. You’ll also understand how news is like french fries; it keeps us satiated while slowly killing us from the inside (but we don’t see it). A required reading for those that say “If I had listened to you, I would have lost money”. This is the same group that believes everything you say when you tell them your past 10 predictions are correct. Fooled by Randomness is a hard book, but packed full of wisdom. Drawing examples from the stock market, medicine to philosophy and biology to explain what we think we know can be dangerous. It will change your perspective as an investor.

The Checklist Manifesto: How to Get Things Right

Most investors are concerned when the next crisis is going to hit. This is understandable given the magnitude of losses one can potentially suffer should such an event occur. But it’s not as important as you’d like to think. The main reason why most investors lose money isn’t that of some unpredictable global crisis. But rather silly, preventable mistakes that we make every day. Atul Gawande looks into why simple mistakes can happen under different complex situations from surgical, construction to aviation and investing. And how having a checklist can reduce or prevent most of them. You won’t get an exact way on how to build a checklist in this book. But you’ll appreciate the importance of checklist, why it isn’t only for amateurs and how slowing down your decision making process can make a huge difference.

The Most Important Thing: Uncommon Sense for the Thoughtful Investor

Most would be familiar with Howard Marks. Read his memos if you have the time. Otherwise, this book is a good place to start. It encapsulates all the key concepts that are critical to become a successful investor. You probably heard of Pareto Law or the 80/20 rule. In short, the rule shows that a few things tend to determine the bulk of the outcome. So, it can be a few stocks that explain the return of a portfolio or a few activities that determine the success of an investor. In investing, you have to get the big things right. Or in Mark’s words, the most important thing. The 20% that drive 80% of the result. Trying to find the next profitable stock matters the least if you don’t get the big things right. From a total of 20 chapters, Howard Marks spent 5 chapters on market fundamentals; 6 on risk and not losing money; and another 5 on psychology. That tells you a lot what are the big things in investing and where you should put your time into. Ironically, they are also things that not many talks about.

Psychology of Intelligence Analysis

In investing, we can be right for the wrong reason. Our return, or the outcome of an investment, is heavily influenced by the role of luck. Therefore, using it as the basis of judgment whether you have made the right decision can lead to wrong feedback and more mistakes down the road. A better way is to focus on the thought process – how you come to a conclusion by evaluating the logic and reasoning behind it. Drawing from studies in political, social sciences and clinical settings, this book looks into the psychological aspects of how we make decisions. The limitation of the mind, cognitive bias, and tools for better thinking. It then introduces a systematic framework to develop hypotheses, examines evidence and draws tentative conclusions. While most of the examples are associated with intelligence analysis in the political landscape, they are practical for any work concerning the analysis of information. If this is good enough to be the manual guide for CIA, it is certainly good enough for investors.

Thinking in Systems

Systems are like Russian nesting dolls—a system that has its own subsystems is also part of a larger system which is part of another larger system. As an example, a supply chain consists of many different industries where within each industry, sit hundreds of companies. Each of these companies is further made up of multiple business units, which every single unit is again composed of several divisions and so on.

System thinking is about seeing things as a dynamic whole. Instead of studying the events generated by a system i.e raw material cost increase, lower selling volume etc, focusing on the system structure and the behavior it generates will make you a better thinker. You’ll understand why systems work so well (i.e a 100 years old company), why it surprises us (i.e market crash), and how each part of a system interact with one another to create nonlinear behavior.

Thinking in Bets

Life, or investing, is not that different from a game of poker, we are trying to choose the best course of action (out of many) to improve our future payoff, which, of course, is fraught with risk, uncertainty, and luck. Annie Duke shows how we can make a smarter decision by thinking in bets, why relying on the outcome is dangerous, and tools that can help us think in a more rational way.

Deep Survival

Laurence Gonzales explores the question of why someone survives while others die in a disaster. This book is far relevant to investing than most people thought. Gonzales looks into the psychology on what makes people take risk, the role of hubris, the unpredictability of complex systems, and the importance of self-control. The ingredients of staying alive in a disaster are not that different from survival in the stock market: a good dose of humility, have a prepared mind, know what you don’t know, and an open-mindedness (beginner’s mind).

How Not to be Wrong

Jordan Ellsberg examines the simple yet profound mathematical tools for solving problems. Mathematical thinking is more than just numbers or precision, but as a hidden structure to good thinking. You’ll learn how to avoid common sense mistakes such as linear thinking (more is better),  jumping to conclusion (seeing pattern out of randomness), and start thinking in expected payoff, what could have happen instead of what happened, and be more like the fox (knows many things) than the hedgehog (know one big thing).

Risk Savvy

Less is more. Similar to Blink, Gerd Gigerenzer explains why a simple rule of thumb beats complex algorithm when making a decision in an environment that is highly uncertain where information is limited. Gigerenzer then shows us how using a rule of thumb and gut feeling can help us make a better decision in investing, finance, health, and even relationship.

Range: Why Generalist Triumph in a Specialized World

One of the best books I’ve read so far this year. Investing is about problem solving. The problem is “Which company is going to deliver the return I’m after over the next 10 years?” David Epstein shows why a generalist – a person that knows a bit of everything – is more creative at finding connections and coming up with solutions compared to a specialist who only know one subject in depth. Epstein’s message echoed Charlie Munger’s advice to have as many mental models in your repertoire. It also reminds me of Philip Tetlock’s analogy of be like a fox (who knows many things) rather than a hedgehog (who knows one big thing).  

The Signal and the Noise: The Art & Science of Prediction

How do we differentiate the signal from the noise in data? If a company decided to venture into a new business, is that an indication of high future growth or is it a sign of management complacency? Silver looks into the nature of weather, earthquake, economics, and disease to understand what makes them unpredictable. In part, they are dynamic systems that can create butterfly effect; a small changes can lead to large effects. And there’s 2 levels of complexity. Weather is complex but we can improve our forecast as our tools get better. That is level 1. The stock market falls under level 2. Similarly, it has many variables but unlike the weather, which doesn’t care about our predictions, market learns and adapts. The act of forecasting it changes the outcome. But there’s hope. Silver offers Bayesian thinking as a way to get closer to the truth by constantly updating our view. Apart from learning how to avoid common mistakes in making a prediction, you’ll come away from this book with an appreciation on uncertainty and the advantage of thinking in systems, which, to me, are essential in investing. 

Where Good Ideas Come From

What do coral reefs and big cities have in common? They’re the innovation factories. Coral reefs are teeming with life diversity just as big cities produce more ingenuity inventions than small towns. Steve Johnson identifies the seven key principles of innovation and how to get more of them. Although I haven’t tested this hypothesis, there’s reasonable ground to believe that these seven principles can be applied to how we can discover more investment ideas overlooked by others. 

Black Box Thinking

We all know that failure is an invaluable source of learning opportunity, yet the stigma of failure often prevents us from embracing it. Matthew Syed looks into the culture of failure and explains how we can change our mindset and use failures as the stepping stone for success. He emphasizes that success, creativity, and innovation can only be realized through testing, failing, errors and making mistakes. 

Antifragile: Things That Gain from Disorder

Antifragile explains the more we try to ‘stabilize’ or control something to make it safe, the more unstable, dangerous or fragile it becomes. If you put out every small, localized fire in a forest, you increase the chance of a large scale firestorm. Similarly, the more a government tries to ‘shore up’ the economy to prevent a market recession, the more fragile the economy becomes and increases the chance of a big scale crisis. 

This also means if shielding things from randomness or shock makes them fragile, a certain amount of exposure to randomness improves it. For example, some (but not too much) stress is productive; some physical work is good for the bones; some fasting is good for the immune system etc.

On the information/knowledge level, we can think of constantly exposing our ideas, beliefs, investment thesis to a certain level of contradictory information that makes them less fragile. Since you’re always updating and calibrating your perception with reality, you’re less likely to be ‘caught by surprise’.