Jim O’Shaughnessy on the Psychology of Investing

In a September interview on the Off the Chain podcast, legendary investor James O’Shaughnessy shared insights on human nature, psychology, and how they manifest in investing decisions.

Here are some highlights:

  • On cryptocurrency, O’Shaughnessy explained that he doesn’t know enough to be a “bull or bear.” O’Shaughnessy believes that crytocurrency, which is based on a deflationary monetary model, has some appealing aspects and might represent a store of value if it saw less volatility. But volatility causes uncertainty.
  • Fear, greed and hope, O’Shaughnessy argued, have wiped out more wealth than anything else.
  • Human nature has not changed and won’t any time soon. “If you get a really good understanding of how humans are emotionally designed,” O’Shaughnessy said, “you can have much greater faith in saying, ‘It’s going to happen exactly the same way it happened before.’ “
  • The United States, he argued, has one of the “best functioning market systems” supported by a high-functioning democratic system, which protects it from hyper-inflationary forces.
  • Stocks do best, O’Shaughnessy said, under moderately inflationary circumstances. Deflation, he said, “is a scary thing for an economy” because it results in a loss of consumer confidence. People won’t buy cars, he argued, if they know the price will go down in a few weeks or months. “They’ll just hang onto cash.”
  • His firm, O’Shaughnessy Asset Management, abides by a rule-based investment methodology. “In my thirty-plus year career,” he said, “I have never emotionally given in by over-writing a model, and that’s hard” O’Shaughnessy said.
  • He recommends that people keep journals so they have an account of what they are actually thinking during various market events, so you have a handwritten account “staring you in the face. The mind,” he said, “will play beautiful tricks on you.”
  • O’Shaughnessy said that the best financial advice he every received originated with Warren Buffett, who said, “price is my only diligence.”
  • “Good investing is simple,” O’Shaughnessy concluded, “It’s just not easy.”