Highlights of Chapter 2 – The Mindless Investor

Three key points that are covered in this chapter of The Mindless Investor all revolve around investors taking responsibility for their financial decisions. Understanding that trading is a battle, that the market is filled with competing interests and that “the market” itself can be a source of information are key for self-directed investors to ingrain into their perspective of markets.

Key Point #1: Trading is war – Be prepared to defend your money

The first powerful bit of insight is the way in which Bollhorn frames trading as a war.  In the case of trading or investing, a conflict of opposing beliefs about the future of a stock happens with every trade.  It makes total sense, therefore, that the participants in the market are out to make money from other participants and why protecting your capital should be taken seriously.

Key Point #2: Be skeptical – Ask how the providers of information make money and from whom

The market also has many moving parts – entire industries are built around bringing companies into this market and attempting to influence the purchasing (or selling) behaviours of its participants.  Brokerages, and the analysts they employ, have a tendency to be optimistic about everyone they either do work with or want to work with. As a result, there is a high degree of self-interest (and possibly “contrapreneurship”) that sometimes line up with investors’ goals but more often than not runs contrary.  The best ‘defense’ in this environment is a healthy dose of skepticism. Asking “how the source of my investment information is being compensated” is a simple but powerful way to decide whether your goals and that of your source are aligned.

Key Point #3: Learn how to listen to what the market is saying

The chapter concludes with a section that explains what “the market” is really all about.  This is probably a section that most investors ought to consider thinking about because it nicely positions how all the different sources of information that investors typically access measure up to the market itself as a source of information.  Ultimately the market is an amalgamation of all of the different opinions, biases and motives of its participants.  As a result, as Tyler puts it, “the market” is “the one source of information that you can completely trust”. It is not a person, it does not owe its participants anything nor can its participants expect anything from it.