Every investor is unique. Similarly, every investment opportunity is unique. Despite our desires to see otherwise, each situation must be measured on a paradigm of possibilities rather than being pigeon-holed into a structured definition. The irony of these “uniqueness-es” is that as investors we tend to define ourselves, and the investments we make, with standardized definitions which inhibit our potential for achieving success.
“I’m risk-averse.”
“I’m yield-oriented.”
“I’m a risk-taker.”
These are all colloquialisms
that button us up neatly in our mind, or that of our portfolio manager, so much
so that we fail to acknowledge any “margins” or things which deviate from our
comfort zone.
Wait a minute. Don’t I constantly chastise those who fail to
abide strictly to a discipline, any professed analytical science, about
investing? Yes, I am, and yes I do. But what I try also to convey is a moral
imperative about acknowledging what’s right in our universe or what must
absolutely be discarded in order to make probabilities work in our favor. Before we can control our process of investing
we must cultivate a climate of morality in which it exists. For example, banks that engage in marginal
behaviors in order to generate a profit must be defined as unscrupulous
profit-mongers, or be labeled as inconsistent with the norms that make
“profitability” an end-result. What if a
percentage of corporate profit was allocated to eradicating hunger? Charity only goes so far.
Similarly, maximizing portfolio gains at any cost is not how one would
characterize a portfolio strategy, or one’s personal style, unless they, too,
had no perfunctory moral compass. Failure is
acceptable if the alternative is to succeed immorally.
Focus.
Portfolio appreciation is an amalgam
of techniques, processes, disciplines and behaviors which meld into an analysis
of available, and sometimes intuitive, data.
It is the intuitive part that sometimes helps or hinders us. If we find our intuition to be corrosive to
our objectives we can sometimes fall back upon someone else’s opinion (an
analyst, for example) or revert to a “black box” discipline that removes all
thought from the process. But, of
course, that’s no fun. We need
to have emotion and intuition as part of our overall complex. The issue, then, is how much intuition versus
how much data?
One of the benefits of
quantitative statistics, my science, is that the world is constantly feeding us
information, some of which is redundant and repeatable, some of which is
random. As in life, the information we
get about corporations (earnings, P/E, valuations) can either be anticipated
and usual, or highly unanticipated and unusual.
We, as analysts, use our science to quantify the redundancies and to
plan for the exogenous noise. The degree to which we can balance and
modulate the risks, and to diversify the probabilities, is what makes one
manager more “competitive” than the other, even though the common data set is
the same for all of us.
The next profound impact upon
performance, then, is the moral oversight one places upon a fast-paced,
never-ending stream of information. What leaves portfolios vulnerable to huge
draw-downs is the reduction of choices we voluntarily impose upon our own
process.
“Greed” and the “herd mentality”
can either be the bane of one’s portfolio discipline, or forever banished from our
mindset of understanding how best to use intuition, science, and random noise
to make us happier and wealthier.
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