How to Be a Great Investor, Part Five: Think Probabilistically

Whenever you come up with a new investment idea—whether it’s a new security to buy, a new factor to consider, or a new strategy to implement—you naturally ask yourself whether this new idea will increase your portfolio returns or cause you to lose money (and, of course, how much). Thinking probabilistically involves assessing the probabilities and coming up with a reasoned answer.

How to Bet: Correlation, Mean Regression, Expected Returns, and Position Sizing

Understanding the rules of probability—how to bet—can be a valuable asset for investors. Every day I come across investors who think that regression to the mean has nothing to do with correlation, who don’t bother to think about odds, and who take wild stabs at position sizing. Until relatively recently, I was such an investor […]

Alphanomics: The Study of Security Mispricing

I just finished reading Alphanomics by Charles M. C. Lee and Eric So, published by a small academic press in 2015. The subtitle is The Informational Underpinnings of Market Efficiency, but that doesn’t really give a sense of the book, which essentially summarizes the last five decades of academic research into market pricing mechanisms. I’d […]

How to Be a Great Investor, Part Four: Compare Effectively

Investors compare all day: stocks versus bonds, active versus passive, value versus growth, stock A versus stock B, and now versus later. Humans are quick to compare but not very good at it. Perhaps the most important comparison an investor must make, and one that distinguishes average from great investors, is between fundamentals and expectations.