Have you ever experienced this?
- Bought a stock due to a hype, and ended up making a huge loss when the hype ended
- Felt overwhelmed with emotions, and start to panic sell during market drawdowns
- Invest so much precious time in researching companies, but did not take action and start investing
If you are guilty as charged, please read on. I have something to share that might just change how you can approach investing.
Our Greatest Enemy in Investing
You might already know this – the stock market is more than just numbers and equations.
Fundamentally, the market is driven by human beings.
Creatures that are subjected to an entire range of emotions.
So taking a 100% quantitative approach and ignoring human nature would not help us succeed as investors. And guess what? The greatest enemy in investing is often, the person in the mirror.
We fall prey to cognitive biases that sabotages our investment returns.
That is why a huge section of this Mental Models for Investors guide is dedicated to psychology and cognitive biases, one of the more helpful courses that I’ve studied in university.
Mental Models: What EXACTLY are they?
Mental models are key ideas from each discipline (e.g. math, economics, psychology etc). Think of it as frameworks that help you understand how the world works.
Traditionally in school, we are taught subjects in isolation.
Information about each subject is categorized into distinct folders in our brain – Math, Science, Arts etc., often without synthesis.
However, this learning style does not mirror the complexity of the real world. The world is multi-disciplinary.
And investing is about understanding how the world works.
What is in this guide?
This guide includes 50 Mental Models for Investors
- Across various disciplines, from mathematics, economics, psychology etc.
- A brief explanation of each mental model
- My interpretation and application to business and investing, with examples
How to use this guide?
Reading wise – there are no rules. You don’t have to read from A-Z.
Don’t be afraid to hop around the sections. In fact, I encourage you to please hop.
Skip around and you can always come back later. Why?
To become a great thinker, you will have to connect them together and see how they interact.
Charlie Munger calls this the lollapalooza effect.
Essentially, to be an effective problem-solver, we must integrate our knowledge and see the effects of combining multiple mental models.
Taking note of the hyperlinks, such as the one above, can be your starting ground.
As you read on, continue to connect the dots and mental models and form a “latticework”.
Do note that memorising these mental models alone is not enough.
You have to bring them to life and apply them.
Under each mental model, there are “Applications”. This is where I attempt to share my interpretations and how I apply the mental model in understanding business and investing.
This guide obviously does not cover them all.
There are tons of applications that can emerge from one mental model.
Here’s the magic: The rest of the applications are for you to self-discover in your journey.