A wise man once said: there are decades where nothing happens and weeks where decades happen.
This is true in all areas of financial life. There are long periods of relative inactivity. Automated savings programs do their thing in the background. Everything hums along. Then there is a major life change requiring critical decisions be made in a short span of time. You sell a business. You inherit a large lump sum. Someone gets sick. You lose a job. Suddenly a whole bunch of decisions need to be made all at once. When it rains, it pours.
This is particularly true of investing. Investments have their own peculiar tempos. Much of this is a function of investment strategy. Volatility trading is high tempo. “Permanent equity”-style fundamental discretionary investing is low tempo.
You can think of tempo in terms of the velocity of critical decision-making a strategy requires.
Volatility trading requires lots of critical decisions at frequent intervals.
Fundamental discretionary equity investing requires fewer critical decisions at less frequent intervals.
Tempo varies further at the level of individual line items. If you are buying a Class 1 railroad because of the industry structure and potential for excess returns on capital over decades, you are looking at a classical low tempo investment. The cadence of decision-making and information processing should match a multi-decade investment thesis. For investments like this, you might make one or two decisions per year (usually whether to average down or not). You might read an annual report and a couple quarterly earnings reports in detail. You’re going to spend a lot of time thinking about capital allocation. You’re going to spend hardly any time thinking about quarterly earnings beats or misses.
Dumpster diving is a higher tempo activity. If you are buying a deeply cyclical stock early in a recovery with an eye toward a quick double or triple, you will have more decisions to make on shorter time horizons. Here the quarterly beats and misses will matter more. You may need to watch daily newsflow and price action. You should probably trade the position actively.
A pet theory of mine is that high tempo investments and strategies offer the potential for returns less correlated with broader market averages. In theory, these are wonderful return streams. However, they are higher cost in terms of time, energy, resources and degree of difficulty. It’s a higher brain damage approach.
The ultimate low tempo investment strategy is diversification within a strategic asset allocation. Here you rarely need to make any decisions at all, beyond a rebalancing discipline. You’re just harvesting broad market risk premia. The advantage to this approach is that it can be done cheaply and easily. The downside is you’re hostage to broad market risk premia. Broad market risk premia are neither guaranteed nor static.
There is no “right” tempo to maintain in a portfolio. What matters is awareness. Being in sync with the natural tempo of each investment. Don’t fight this! Fighting it is a good way to make yourself crazy. It will also destroy your returns.
In my experience, the more common failure mode is going too fast, and trying to pull large returns forward. There is a human itch for portfolio activity. Sometimes we simply get bored. For professionals, there are business pressures agitating for activity. Investors in funds want to know you’re “doing something” with that management fee. Unfortunately, there isn’t a 1:1 correspondence between “stuff done” and “returns generated.”
Another pet theory of mine is that the best money managers know this, and much of what they sell to investors and consultants under the guise of “process” is just elaborate theatre. Look at all this “stuff” we’re doing with that management fee! Obviously we’re taking all this Very Seriously. Would you like to talk top positions now?
The best way to develop an intuitive understanding of tempo is to spend some time meditating. You don’t have to get all woo-woo about it like me. Any old secular mindfulness routine will do. The important thing here is the experience of observing the activity in your mind from a distance. If you meditate with some regularity, you’ll begin recognizing different states of mind.
Some days you’ll find your mind engaged in constant, unfocused activity (meditators call this “monkey mind”). At other times you’ll find the mind fogged with sleepiness. On occasion you’ll find your mind in a relaxed, yet oddly focused state of readiness. When I’m “in the zone” in this way, directing attention to particular mental objects and holding it there is trivial. Almost effortless. This is what in-tempo investing feels like to me (in-tempo golf, too).