Author: demonetized

Fear

This is post will not have much to do with finance or investing. It is a personal post. If you are not in the mood for that sort of thing, you ought to skip this.

As you may know, I have not written much or engaged on social media much for several months. I feel as though I owe readers an explanation. Also, there is a certain catharsis to be gained from writing about tough times.

For the past six months or so I have dealt with significant mental health issues. Specifically, severe anxiety and panic attacks. I will spare you a play-by-play of the experience, but suffice it to say at my lows, in early February, I was essentially non-functional as an adult human being. Fortunately, I am much improved since then. In the last couple weeks, I have finally regained the energy and confidence to think about writing and engaging online again.

I wasn’t sure whether I wanted to write about this experience. In mentioning it, I am not looking to drum up “sympathy clicks” or anything like that. Rather, I want to send a message of support to anyone who is struggling with mental health issues. In particular, I want to address professionals in business and finance. I believe widespread stigma remains around openly discussing mental health issues, despite the fact they are extremely common. Most of us are aware of this stigma on some level. What does not get much attention, in my experience, is how hard those of us suffering with mental health issues can be on ourselves. I suspect this is particularly common with high performers in any professional or creative field.

At the nadir of my own experience, I was certainly experiencing depression alongside the anxiety and panic. Am I just being soft? I would ask myself. Doesn’t everyone feel this way sometimes? I’m just being weak. I’ve lost it and I’m never going to get back.

Fortunately, I was never at risk of harming myself or anyone else. However, in my worst moments, I absolutely understood the chain of thoughts and feelings that ends in suicide. It is deeply disturbing to connect with with that state of mind. It feels like drowning in despair.

My message to anyone reading this is simple: be kind to yourself. Allow yourself the time and attention you need to get help. It takes an incredible amount of strength to get through a significant mental health episode. At the time, you may feel you are weak. You may feel you’ve “gone soft.” But that is just the depression/anxiety/panic talking. Please. Please. Do not let those feelings discourage you from getting help. You can feel better. In fact, you almost certainly will feel better, if you reach out for the help you need.

I have a sneaking suspicion that professionally, high performers are actually more susceptible to anxiety, panic and depression than poor performers. A certain level of anxiety is healthy, after all. A certain level of anxiety enhances performance. However, in highly competitive industries and work environments, where you are used to working through a certain level of background stress, it can be difficult to identify when you have crossed into unhealthy territory. I dealt with increasingly severe symptoms for months before I realized I was in over my head.

If you are struggling, talk to someone you trust. Talk to your primary care physician about what you are experiencing. I am not going to sugar coat this. Mental health issues take time to work through. The timeline can be months. Years. An entire lifetime. It is not at all uncommon to go through a number of doctors and/or therapists before you find a team that “gets” you, and that you trust. It is a hard road. But don’t give up on yourself! Things can get better. They almost certainly will get better. But it will take time.

My hope is someone who is struggling may see this post, or have it forwarded to them, and receive a boost of encouragement. Maybe that boost helps motivate someone to talk to a doctor. Maybe it helps her feel just a little less alone and afraid. Whatever the impact may be, I hope it helps.

Baggage

We all have baggage.

We’re used to thinking this in the context of relationships and personal hang-ups. In recent years, there are more people talking about it in the context of money, though I suspect a majority of “serious” finance people dismiss this as snowflakey, touchy-feely nonsense. The dismissiveness is kind of a LOL for me. I’ve met some fancy investor types who carry pretty heavy bags.

Some argue we should handle money with cold, calculating rationality. Here, financial decisions are reduced to straightforward cost/benefit calculations. Financial problems are first and foremost optimization problems. Some quant and engineer types might get close to this “rational ideal.” But most of us don’t even come close.

Like all baggage, financial baggage is rooted in our formative experiences with money. Childhood experiences with money are particularly powerful.

My own baggage came a little late in life. I graduated into the Great Recession. What I took from the experience was a certain baseline level of paranoia, and heightened risk-consciousness. No one is looking out for you. You are expendable.

To paraphrase a wise man: you can operate within the system; you can respect the system (parts of it, anyway); but you should never, ever trust the system.

For the purposes of this post, it doesn’t matter whether this worldview is “correct” or not. What matters is recognizing it colors my attitude toward financial and career decisions. It shapes my priorities. It’s a background process that’s always running on my internal OS. Some people call these background processes “money scripts.” There is a whole taxonomy of money scripts. Maybe this is the “right” taxonomy. Maybe not. It strikes me as at least directionally correct.

What do we “do” about these deeply ingrained scripts?

It is the wrong question. Ultimately, we’re the sum of our scripts.

What is the “right” set of scripts? Does a dog have a Buddha nature? They’re the same question. They have the same “answer.”

Frugality

I saw this screencap making the rounds on Twitter:

The post reminds me of a favorite koan. The Buffalo Koan.

Wuzu Fayan said, “It is like a water buffalo (an ox) that passes through a window. Its head, horns, and four legs all pass through. Why can’t the tail pass through?”

From The Gateless Gate

One commentary on the Buffalo Koan, from Sitting with Koans, goes something like this… it is awful difficult to get a buffalo through a window. It is as difficult as practicing non-dualistic thinking. But what about the tail? The buffalo’s tail should fit through just fine, if the rest of its body has already gone through. How can the tail get stuck? One way of thinking about the tail is as representing our natural dualistic way of thinking. It is easy to fall into the trap of thinking that non-dualistic, “enlightened” thinking is superior to dualistic thinking. Seeing reality in non-dualistic terms is difficult. It is like squeezing the buffalo through a window. But non-dualistic thinking is not superior to dualistic thinking. Thinking of one way of seeing or being as superior to the other is itself just another form of dualism.

So it is with frugality.

Frugality is a useful way of seeing and being. But frugality is not an end unto itself. Managing money well is a useful skill. It gives you options. But which options should you exercise, and when? A meaningful life lies in answering that question. Sooner or later, all the options we’ve accumulated during our lifetimes expire worthless.

My answer to the Reddit poster is to start living. Funny that something so simple can seem so difficult. You’ve got almost all of the buffalo through the window (a 28-year old with $200,000 has a lot of options). It’s only the tail that’s stuck!

This dilemma is a good example of a psychic prison. We are used to thinking of people becoming slaves to addictions and other compulsions. Frugality can likewise degenerate into addiction. In extremis, frugality is no different from any other compulsion. It’s a fear-based response to scarcity. This degenerate form of frugality creates the illusion of control. It’s pseudo-freedom. Another form of selling your soul.

Frugality is a means, not an end unto itself. The pursuit of freedom can become another kind of prison.

Marshmellows

(apparently the correct spelling is “marshmallow.” I’m not going to go back and change it)

There is a famous experiment called “the marshmellow test.” It is a popular point of reference in behavioral finance circles. Here is a summary courtesy of Wikipedia (footnote annotations removed for clarity):

The Stanford marshmallow experiment was a study on delayed gratification in 1972 led by psychologist Walter Mischel, a professor at Stanford University. In this study, a child was offered a choice between one small but immediate reward, or two small rewards if they waited for a period of time. During this time, the researcher left the room for about 15 minutes and then returned. The reward was either a marshmallow or pretzel stick, depending on the child’s preference. In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI), and other life measures.

A replication attempt with a sample from a more diverse population, over 10 times larger than the original study, showed only half the effect of the original study. The replication suggested that economic background, rather than willpower, explained the other half. The predictive power of marshmallow test was challenged in a 2020 study by a team of researchers that included Mischel.

There is quite a bit of worthwhile material here, from both a philosophy of science perspective and a practical perspective. The philosophy of science is (mostly) beyond the scope of this blog. So we’re not going to open that can of worms here. Instead, I’m going focus on the practical angle.

The practical angle is that this study is often referenced in the context of teaching children, and people in general, about delaying gratification. In a financial context: saving instead of spending. Given the results of replication attempts, and variations on the original study, I’d argue the marshmellow test should be regarded more as a parable than anything.

We’re talking about a marshmellow here.

If someone puts a marshmellow in front of you, and you want to eat the marshmellow, then eat the marshmellow. I don’t care if you’re five or fifty-five. The advice stands.

It is difficult for me to adequately convey the supreme irrelevance of the decision to immediately eat a single marshmellow or wait 15 minutes for some incrementally better reward.

Some decisions matter and some don’t. It is easy to focus on decisions that don’t matter. Decisions that don’t matter are easy decisions. They are marshmellows. People sometimes ask me things like: “should I put 1% of my net worth into crypto?” This is another kind of marshmellow. Sure. Go ahead. Whatever makes you happy.

There is a whole genre of marshmellow-centric “latte finance.” Don’t buy that Starbucks Coffee and you will save $1,200 per year. Compound that out over 30 years, blah, blah, blah. There’s something to be said for getting people to think critically about their purchasing decisions. But in terms of long-term impact, a daily coffee habit is dwarfed by decisions like how much house you choose to buy; what car you decide to drive; whether you send your kids to private school; what you can, can’t, will or won’t do to increase your earnings power.

When we get into things like houses, cars and kids we start to get into territory involving deep-seated emotions around values and status. Much of the consumer debt industry in America is built on a deep reluctance to sacrifice status to save money. If anything, the culture encourages the opposite.

This is not an argument for hairshirt frugality. If you want to live a high status lifestyle, you either need to make a whole lot of money or take on a whole lot of debt.

Treat yourself on the coffee. Save your energy for the tough. stuff.

Luck

Source

Every so often people start talking about investing superpowers. If you could have one investing superpower what would it be?

The power to regularly source and legally trade on material non-public information would be my number one pick. But that’s kind of against the spirit of the game.

So my backup pick is “infinite and overwhelming luck in the markets.” I’d rather be lucky than good. Always. Not trying to get onto any World’s Greatest Investor Lists here. I’ll take my winnings any way I can get them and leave it to you all to fight over multifactor return decompositions of my performance.

If you are a regular reader you will recall that my favorite portfolio shape is “core and explore.” There are different permutations of this, but the basic intuition is a diversified core designed to harvest broad market risk premia alongside a speculative sleeve of public and private investments. In the speculative sleeve, much of what I am trying to accomplish is “putting myself in a position to get lucky.”

What does luck look like?

Luck is when something goes from reasonably valued to wildly overvalued.

Luck is when you own something that turns into a meme stonk.

Luck is when the market bails you out of a position when you’re wrong.

I realize this is fairly trite. Of course it is good to get lucky. Money is money. There is a larger point here though and that is to embrace the role of randomness in investment outcomes. Flow with it. Don’t fight it.

Spending a bit of time gambling can teach you a lot about how you respond to risk. Casino games are dumb in the sense that for the most part they are negative expectation games. One (very) small thing you have going for you, if you don’t play regularly, is the short-term variance of outcomes. The casino’s edge manifests itself over many repetitions, across many players. This goes for advantage players, too. A card counter doesn’t win every night. And in the markets, there is a reason “true” quant portfolios have the shape they do.

Anyway, if you spend some time gambling it will not take you too long to experience streaks. Runs of extraordinarily good luck. Runs of extraordinarily bad luck. Of course, mathematically this is just noise bouncing around a (negative) mean. You’re just riding the output of a random number generator.

But that’s not how it feels. For us human beings, random outcomes don’t feel random. One of the hills we die on here on this site is that working within our evolved biological and physiological constraints will lead to better outcomes than fighting them.

A wise man said of investing:

Life goes in streaks and like a hitter in baseball, sometimes a money manager is seeing the ball and sometimes they’re not. If you’re managing money you must know whether you’re cold or hot, and in my opinion when you’re cold you should be trying for bunts. You shouldn’t be swinging for the fences. You got to get back in a rhythm […] If I was down I had not earned the right to play big and the little bets you’re talking about were simply on to tell me had I re-established a rhythm and was I starting to make hits again.

Another theme of mine is that in investing and trading, different failure modes are common to different “levels” of play. Absolute beginners typically suffer from indiscipline. They have no real strategy or epistemology of markets. They risk shotgunning capital all over the place without rhyme or reason, often at the urging of some online grifter.

More advanced players can develop the opposite impulse: holding too rigidly to a strategy, or epistemology of markets, or specific idea. Trying to “force” returns. A hedgie fund on a cold streak should not be taking her gross exposure up, swinging aggressively. She should be working toward re-establishing equilibrium.

The impulse to double down on losing bets is a strong one. Professionals are hardly immune. What’s more, our susceptibility to this impulse is not constant. It changes with time and circumstance. There can be significant personal and business pressure to double down in the investment game. People fetishize conviction. It’s an anchor point in a frightening, dynamic and random world. There is a fine line between courageously pulling the trigger and recklessly doubling down. Walking this line is part of the game.

Ideas

Let me tell you about an extremely stupid thing I used to do with money.

There was a time, not so long ago, when I couldn’t bear to put money in an idea I didn’t come up with myself. This was dumb. I compounded the dumb with a preference for esoteric, off-the-run stuff with a lot of hair on it. gReEdY wHeN oThErS aRe FeArFuL. nO eDgE iN aNyThInG wElL-cOvErEd. Something like that.

In retrospect this was pure ego. Unearned arrogance.

The small self-directed investor has two key advantages:

Key Advantage Number 1: She has no capacity constraints (there is little slippage when she trades).

Key Advantage Number 2: She does not have career risk to manage.

The small investor is ideally suited to parasitism. The concept of parasitism has a negative connotation. Parasites are pretty gross. (Botflies. Yuck) For Americans like me, parasitism is the antithesis of the whole rugged individualist mythos that is deeply ingrained in our culture. Parasitism is icky.

But for the small investor, parasitism is beautiful.

As a small investor, you can buy almost anything. And you can do it without having to write 75-page diligence memos or pitching positions to investment committees. You are not under pressure to justify a management fee. You are not imprisoned in a small cell in the equity style box. You don’t have to fire yourself for style drift. This is beautiful. It is an enormous advantage.

All you have to do is look for money the big players are leaving lying around.

Then pick it up.

(it’s not that easy, of course, but that’s what it feels like when it’s clicking)

Actually doing this can feel incredibly stupid. Things that can make you a bunch of money are often incredibly stupid. From intellectual point of view, dip-buying large cap equities is super lame. There isn’t going to be a Michael Lewis book about a bunch of pikers dip-buying Facebook to scalp a quick 50% return.

Ignore this feeling of stupidity. The only lame ideas are the ones that lose money!

People expend a lot of time and energy editorializing about how there is no edge in picking large cap stocks. There was a time when I did the same. Now I see it differently. Now, I think an issue is that a lot of strategies are not designed to take advantage of the best opportunities in large cap stocks. Perhaps some of the more interesting opportunities in large caps come from thinking more like a trader than an investor? This is just one silly example.

Muni closed-end funds offer these kinds of opportunities every couple years. The market gets scared. Liquidity dries up. Discounts to NAV blow out. There’s money lying around all over the place, and all you have to do is pick it up. (assuming you’ve got liquidity, of course)

This isn’t to argue that simple ideas are always best, or that complex ideas are never good. This is an argument for maintaining an open mind, and an argument against allowing ego to filter ideas.

Be open to a good idea whenever it may find you! There are no point adjustments for originality or degree of difficulty. It took me too long to realize that and accept it.

Fear

Nothing wrecks portfolios quite like fear.

The fear-based failure mode we know best is the whipsaw. An investor suffers a drawdown. He liquidates his portfolio when the pain and frustration become too much. He just can’t take it anymore. Then the market rallies. Our investor becomes paralyzed by indecision. He is afraid the rally will unwind. So he sits in cash. Maybe for months. Maybe for years. Finally, after a period of stability, he gets invested again. Just in time to eat another drawdown. This is a Behavioral Investing 101 case study. It’s a failure mode strategic asset allocations are intended to mitigate.

Other fear-based failure modes are more subtle.

One I frequently see among professionals is the fear-based tactical trade. At any given point in time, financial product marketers and the financial media are usually pushing at least one major fear-based tactical trade. Right now it’s all about inflation. Fear-based tactical trades are the pro and pro-am version of the archetypical whipsaw. These are highly discretionary trades. They’re usually based on some high attention macro narrative.

Macro narratives lend these trades credibility, and perhaps more importantly, Very Serious optics. But make no mistake. Fundamentally, these are emotional, fear-based trades. They just come with more sophisticated-sounding rationales (and sophisticated-looking charts).

So, it’s not that portfolios shouldn’t be positioned to withstand inflationary regime changes.

It’s that if you’ve never spent any time developing a process for handling macroeconomic regime changes, you’re sure as hell not going to develop one reading “timely,” thinly-disguised sales pieces about such-and-such assets as inflation hedges.

At my day job, I often get emails about whether it is time to add TIPS to portfolios, or gold miners, or crypto. My response is almost always some variation on the following:

What are you trying to achieve here?

What role does this asset play in the context of the overall asset allocation?

What process will you use to size and adjust the sizing of this position over time?

Most importantly, how will you know if you’re wrong?

And if it does turn out you’re wrong, what are you going to do about it?

Making highly discretionary trades with a finger in the air based on salesy whitepapers and/or financial doom porn is not a process.

Fear is natural. Occasional bouts of fear are inherent in risk-taking. As long as fear is not persistent, or debilitating for decision-making and daily living, it is a healthy emotion. In a financial context, fear is a signal to revisit strategy and process. Consider fear in the context of the game(s) you’re playing. Much of the time, you’ll conclude that it’s just part of the game. Occasionally, however, careful consideration may trigger an adjustment.

Risk tolerance is not easy to measure. Nor is it static. There is a dynamic element to it. Sometimes fear signals you are taking too much risk relative to emotional or even financial tolerance.

Fear may also point you to vulnerabilities in a strategy you may not have considered previously. This is an opportunity! The inflation example is instructive here. In my experience, “mainstream” portfolios tend not to be well-balanced to highly inflationary regimes (particularly stagflationary regimes). In this case, fear may lead to some introspection that results in a more robust overall strategy.

Tempo

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).

Mishits

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.

Commit.

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