The chief virtue all beautiful investment portfolios share is parsimony. Each line item serves a purpose. Intentionality is evident in the position sizing. There is a clear awareness of risk/reward tradeoffs.

Ugly portfolios are clueless.

Ugly portfolios are tentative.

We’re going to talk about these failure modes today. And because it’s spring, we’re going to do it using golf metaphors.

First, cluelessness. Individuals seeking financial advisors frequently show up with clueless portfolios. People end up with retirement accounts scattered across a bunch of old employers. Maybe some rollover IRAs. They forget about accounts. They make incorrect assumptions about how old accounts are invested. Aggregate the holdings and you find the portfolio is 50% cash. It has been for years. This is not uncommon. The explicit and implicit costs of cluelessness can be immense.

Then there are clueless portfolios that are more or less rudderless. They have no overarching philosophy or strategy. They are invested based on financial news media reports. Financial professionals sometimes display a more sophisticated form of cluelessness, based around an entirely subjective interpretation of macro commentary and sell-side research. There is nothing inherently wrong with discretionary trading and investing. But a discretionary strategy should have some demonstrable efficacy. There should be some underlying rationale for its repeatability.

Cluelessness is a technical failure mode.

In golf terms, you don’t know how to swing. You misjudge distance. You don’t know your game well enough to judge risk/reward across your shot repertoire. Maybe you don’t think about those risk/reward ratios at all. All these issues can be addressed with education, training and equipment.

Tentative portfolios are a different matter. A tentative portfolio is an uncommitted portfolio, which is NOT to be confused with a conservative portfolio. Both conservative and aggressive strategies can result in uncommitted, tentative portfolios.

A tentative portfolio fails the same way as a tentative golf shot. Say you’re playing your second shot on a par five with a creek to carry. You can play a conservative, high percentage shot you’re almost certain will carry the creek and leave you a wedge into the green. Or you could play an aggressive, low percentage shot to go for the green in two. Visions of eagles dance in your head.

A common failure mode is to choose an aggressive shot but not commit to the swing. You’re afraid of mishitting the ball (it’s a low percentage shot after all); the potential for a mishit begins to dominate your thoughts; you take a tentative swing and all but guarantee yourself a poor shot. Perversely, you’re more likely to end up in the creek.

Say you do end up in the creek. Now you’re frustrated. You KNEW you should have hit the more conservative shot but instead you’re lying three next to a goddamn creek that shouldn’t even have been in play. Now you CAN’T play a conservative shot. Now you have to get up and down just to have a shot at par. So you load up for another high risk/high reward, low percentage shot. The cycle repeats.

Tentativeness leads to frustration leads to anger leads to playing on tilt. You will never win anything playing on tilt. Not in golf. Not in the market.

It is not necessarily a mistake to play the aggressive shot. Depending on the round, the juice may be worth the squeeze. The real mistake is choosing a shot you are not committed to executing. And sometimes it is better to play a lofted club to get back on an even keel.

Tentative portfolios take tentative shots. These are equity-centric portfolios with a five percent allocation to VC access vehicles, a five percent allocation to gold, and a three percent allocation to tail risk. These are the portfolios we joke about as contra indicators, that are only invested when it feels good then massively de-risk at the first hint of trouble. They hedge “opportunistically” (read: overpay for downside hedges at the wrong time).

For financial advisors, tentative portfolios often result from principal-agent problems. The client is afraid of hyperinflation, so you add a little gold. The client has FOMO, so you add a bit of VC. The client is a Taleb stan, so you throw in some tail hedging. Taken to extremes, you end up with The World’s Most Expensive Index Fund. A hundred line items and an R^2 of 0.90 to the S&P 500.

A wise man once said of career risk: it is better to fail conventionally than succeed unconventionally.

I would respectfully amend that: it is best to fail conventionally while doing Very Smart Things.

At the principal level, tentative portfolios reflect an unwillingness to accept the risk/reward tradeoff inherent in a strategy. You’re going for the green in two but worried about a potential mishit. So you start doing little things inside the portfolio to make you feel better. Some of them work, some of them don’t. The degenerate form of this is repeatedly whipsawing yourself, in size.

Unlike cluelessness, this is an emotional failure mode.

It’s easy for professional investors to dismiss emotional issues as normie issues. However, all the spectacular blowups I’ve witnessed and studied have had a significant emotional dimension to them. For the professional, getting tilted is more insidious. It’s easy for us to reframe emotionally biased decision-making in optically objective, rationalist terms. Confirmation bias is a hell of a drug.

I’m fond of the golf metaphors because the mental and emotional aspects of golf are quite similar to the mental and emotional dimensions of trading and investing. In both cases, improved performance requires an honest, realistic assessment of your game and a process-oriented mindset. Which is all very zen. If you are a 20 handicap, don’t select shots as if you were a 5 (though it helps to learn to think like one). This is also very zen.

Understand the shots you have at your disposal.

Be intentional about selecting shots to play.


Note: I can’t post this note without reference to two of my favorite golf books. Much of this note is based on the material in these books, which is applicable not only to golf and investing, but daily life.

Every Shot Must Have a Purpose by Pia Nilsson, Lynn Marriott and Ron Sirak

Golf is Not a Game of Perfect by Dr. Bob Rotella and Darren Clarke