Like it or not, investing is about making calls.
Many of us resist this fundamental truth. And with good reason. We are inundated with financial pornography. With the perfect clarity of hindsight, look how much you would have made if you put $1,000 in this one amazing stock. People love mocking this stuff. Rightfully so. At best it is schlocky infotainment. At worst, it encourages people to be donkeys, and to make stupid, dangerous bets they do not understand.
By contrast, some people think they can put all their money in a total stock market index fund and coast, as if they’re opting out of making decisions. This is still a call. Not necessarily a bad call. But a call nonetheless. Every position we take expresses a view. There is no opting out. This is perhaps the most fundamental truth of trading and investing.
Now, that doesn’t mean we need to express a view on everything under the sun. What matters is we understand the particular game we’re playing, and focus on the things that matter in the context of that game.
If you are investing on the basis of a strategic asset allocation over a 30-year time horizon, it doesn’t matter what the 10-year treasury yield did this week. Hopefully your strategic asset allocation framework is designed to accommodate longer-term, enduring shifts in the economic regime and cross-asset class correlations, should those shifts materialize. (If not, maybe look into that)
If the game you are playing is trading interest rate and inflation expectations with ZROZ… well… in that case short-term changes in the 10-year yield matter. They are, like, the entire point.
If you are contemplating an investment strategy, or a specific investment, a good question to ask up front is, can I reasonably expect to get this right? Answers will necessarily differ across individuals and firms. Knowledge and resources vary significantly across the spectrum of market participants.
For my part, I believe I can reasonably expect to implement a strategic asset allocation. I believe I can reasonably expect to pick stocks such that running a speculative stock sleeve alongside a strategic asset allocation is a +EV proposition (the jury is out on whether I can reasonably expect “outperformance.” Check back in 20 years and we can look at the data together). More recently, I think I can reasonably expect to spot opportunities to make certain, very simple options trades. This options bit is a new game I am learning, where I am currently a donkey.
Other questions worth asking:
How do I know if I’m wrong?
If it turns out I’m wrong, what is my exit strategy?
My professional experience has been that inertia dictates a surprising number of investment decisions, even (perhaps especially) within optically sophisticated and well-resourced organizations.
A wise man once said: losers average losers.
I have watched investment committees waffle as funds underperformed, bled assets, lost staff, underperformed more, lost more staff, bled more assets, underperformed more, and then ultimately liquidated. The whole way down, the debate at the committee level is whether redeeming out would be “selling at the bottom.” Then, amidst the shattered wreckage of the investment, the committee comes back and asks how the analysts could have done a better job flagging the issues.
This failure mode is not an analytical failure mode. The red flags are trivially obvious to everyone. Rather than an analytical failure, this is a failure of nerve and of will. A sad fact of life is people who think of themselves as smart and successful would often rather lose money than admit they were wrong. This is especially true in the context of group decision-making processes and organizational politics.
Still, there is a silver lining. These people make for wonderful counterparties.
Losers average losers.
I realize this post has been short on the zen vibes. So I leave you with the following story, taken from the book Zen Flesh, Zen Bones:
Zen in a Beggar’s Life
Tosui was a well-known Zen teacher of his time. He had lived in several temples and taught in various provinces.
The last temple he visited accumulated so many adherents that Tosui told them he was going to quit the lecture business entirely. He advised them to disperse and to go wherever they desired. After that no one could find any trace of him.
Three years later one of his disciples discovered him living with some beggars under a bridge in Kyoto. He at once implored Tosui to teach him.
“If you can do as I do for even a couple of days, I might,” Tosui replied.
So the former disciple dressed as a beggar and spent a day with Tosui. The following day one of the beggars died. Tosui and his pupil carried the body off at midnight and buried it on a mountainside. After that they returned to shelter under the bridge.
Tosui slept soundly the remainder of the night, but the disciple could not sleep. When morning came Tosui said: “We do not have to beg [for] food today. Our dead friend has left some over there.” But the disciple was unable to eat a single bite of it.
“I have said you could not do as I,” concluded Tosui. “Get out of here and do not bother me again.”Zen Flesh, Zen Bones