Richard Thaler’s work on behavioral economics won him the 2017 Nobel Prize.His 2008 book nudge Very influential, helping shape public policy that helps people save more and make better decisions in finance, health and many other areas.
in a brief interview Morning Star Earlier this month, he discussed several lines of wisdom. Investors looking to improve their financial decisions (who isn’t?) should follow his advice. Here are three must-read sentences for the interview.
1. About timing market
“We don’t know if this period is the beginning or the end of the so-called correction.”
This S&P 500 It has fallen more than 20% since peaking at the start of the year, matching the dictionary definition of a bear market. But there’s no way to know if we’ve reached a market bottom and stocks will start to move higher, or if we’re still a long way from the bottom.
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Investors who wait for better prices tend to fail. Thaler noted that in the late 1990s, with the rise of the tech bubble, people “knew” these stocks were overvalued. Still, the stock rose throughout the 90s, with a correction not seen until 2000. In other words, there is no way to prove when a stock is overvalued or undervalued.
2. About the history of the market
“There doesn’t seem to be any evidence that we actually learned [from the past]. “
History is full of examples of how major events affected economies, stock markets, and human behavior: wars, health crises, government debt crises, inflation, asset bubbles, and more.
But in the face of these events, humans tend to make the same mistakes over and over again. When markets crash, we go into madness and panic. Sometimes we really hurt ourselves when we think the good times will last forever. Was it wise to keep refinancing and getting out of home equity in the early 2000s? Is it wise to use cryptocurrencies as loan collateral in 2021?
Still, many investors fail to connect the past with the present, or at least act on the lessons of the past (“this time is different” syndrome). Thaler said many of his students at the University of Chicago today don’t understand the tech bubble of the ’90s. When he mentioned the 1987 Black Monday crash, “Nobody knew what I was talking about.”
Taylor’s words echo what Warren Buffett once said: “What we learn from history is that people don’t learn from history.” Buffett’s point is that it doesn’t matter how smart you are — it’s a matter of discipline , and make decisions you know you should make in the face of uncertainty. And Taylor stressed that this is a very difficult process.
3. About the best way to invest your money
“For most individual investors, they’re better off using the rules.”
Using the rules (it doesn’t matter what the rules are) will prepare you for a successful investing career. If you set the rules for your investment decisions when the market is relatively calm and your finances are healthy, you’ll have a solid framework for how to invest in turbulent times.
If you build a diversified portfolio, have guidelines on how to maintain that portfolio, and add money to it over time, you’ll do well.
On the other hand, if you invest based on gut feeling, you may end up underperforming. Worse yet, you never know if your gut-based investments are successful because they were right, or if you were just lucky. A good outcome doesn’t mean you made a good decision. It may take you years to know if your decision was the right one.
To make good investment decisions, study history, establish a solid set of rules, and stop trying to time the market.
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Adam Levy has no positions in any of the stocks mentioned. The Motley Fool has no positions in any of the stocks listed above. The Motley Fool has a disclosure policy.