Essential reading for successful investing, fearless market forecasts, and a simple but solid ETF portfolio | The Globe and Mail

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Now with BlueMountain Capital Management, his latest piece is typically great. In it, Mr. Mauboussin details yet another way the human brain is uniquely ill-suited to investing, specifically how poorly we make comparisons between potential investments.

The paper first recounts a pricing strategy used by The Economist magazine where an online subscription was $59, a print-only subscription was $129 and a combined print edition and online access was $125. At first glance the options make no sense but it’s actually very clever. The only reason for the $129 option was psychological manipulation – it made the $125 print plus online subscription look like a bargain, and it worked to increase sales.

It’s not difficult to apply this tendency to individual stock pickers. Consider a hypothetical situation of three stocks. One has an attractive price earnings (PE) ratio of 10 and an earnings growth rate of six per cent, a second with a PE of 40 and profit growth rate of eight per cent, and a third with a PE of 42 and an annual earnings growth rate of 35 per cent.

The third option looks most attractive compared with the other two, but it still has a PE ratio roughly double the benchmark, and it could very well be a terrible investment overall.

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Essential reading for successful investing, fearless market forecasts, and a simple but solid ETF portfolio – The Globe and Mail.

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