Highlights of Chapter 1 – The Mindless Investor

In the introductory chapter of The Mindless Investor, Tyler Bollhorn sets up several important ideas and goes through some common pitfalls of most self-directed investors. Here are three key points from chapter 1.

Key Point #1: Most Stocks Don’t Beat the Market

The first and most important theme of the first chapter is about overcoming being average.  According to Tyler, realizing that most of the stocks don’t beat the market most of the time is essential to getting beyond average returns. Getting away from being average means doing things that may seem to go against the “common wisdom”.  It is exactly that conventional wisdom, however, that Tyler puts forward as the enemy to most individual traders.  Despite what many think, smaller traders have several advantages compared to the larger participants.  The key is to understand how to use their size appropriately.

Key Point #2: Don’t Get Emotionally Attached

A second important theme of this chapter is being in the right frame of mind to be a successful trader. Successful traders are those who don’t get emotionally attached to the stocks they trade, they simply focus on what matters most – whether they have managed their risk and whether the stock is performing as it should.  Learning how to win and lose correctly are critical skills.  They start with understanding that winners have to be allowed to run, and that losing is part of trading.

Key Point #3: Use a System to Pick Stocks

Lastly, having a system to navigate the choices out there is important to staying ahead of the curve.  Since a big part of trading depends on the analysis of potential opportunities, having a simple and efficient way to filter through stocks is crucial for smaller investors who simply don’t have the time or resources to conduct the kinds of research that their larger counterparts can.

 Important Jargon:

“Beating the market”: have your portfolio or trading performance exceed than that of a particular benchmark, such as the performance of the S&P 500, over the timeframe of interest.  For a fuller definition, click here.