When developing the Strategy, I built a single spreadsheet which encompassed both portfolio positions and performance measurement. By late 2015 I had recognised that the combination of these functions in a single file may be detrimental to process because it encouraged short term performance monitoring. Whilst it is important to have access to portfolio positions on a daily basis, there is no need for the performance numbers to jump right out at me – every single day. So I decided to separate these functions. By doing so I instantly made performance monitoring an“active” decision, with the aim of avoiding unhelpful distractions. This small step has more significance than it may first appear.
Nassim Nicholas Taleb, in his excellent book “Fooled by Randomness”, considers a hypothetical dentist that is a successful investor earning an average 15% return. Assuming a normal distribution of returns with a standard deviation of 10% (so, 68% of all observations would fall in the return ranging from 5% to 25%), by applying Monte Carlo simulation he calculates the probabilities of positive returns when observed over different time scales:
Table 1: The dentist – probability of success at different scales
Source: Fooled by Randomess2
When we think about these probabilities and we also consider the behavioural finance research indicating the pains of losses to be more than double the pleasure of gains (ie, loss aversion), we can understand why our stress levels rise enormously the more frequently we monitor performance:
“At the end of every day the dentist will be emotionally drained. A minute-by-minute examination of his performance means that each day (assuming eight hours per day) he will have 241 pleasurable minutes against 239 unpleasurable ones. These amount to 60,688 and 60,271, respectively, per year…”
Short term prices are affected by noise, and the shorter the timeframe the more noise inherent in the numbers (this is also elaborated very well in Mauboussin’s work3 ). My process aims to avoid noise and other distractions as I consider them detrimental. Of course I still need to be able to readily calculate the short term performance. The difference now is simply in its availability, and that it now requires my separate “action” to see it.
I do seem to be constantly drawing parallels between my investment process and other life events. Recently I updated my desktop operating system (DOS) to Windows 10. It came pre-packaged with a variety of “default” applications (Apps). So, whereas previously installing these Apps required an “action”, they now simply appear by default – and believe me, they are there to tempt us. And, most of these default Apps actually require considerable effort to remove them! It is not the same simple procedure one does to remove typical third party Apps. However, it was a very relieving exercise.
During this upgrade I also cleaned up my email accounts and took the opportunity to remove myself from most of the numerous email distributions lists to which I had been inadvertently subscribed (or placed on without my consent)4 . I closed all my accounts with brokers, online stores and so forth. This process was also such a liberating experience!
De-cluttering, simplifying, and putting procedures in place to limit unsolicited emails resonate with the “avoidance of distractions” and “cynicism of Wall Street” themes inherent in my process. It also reflects my wish to not allow third party input into my decisions unless I actively seek it. This is an area of life where I can have control – and taking back control feels great.
There are numerous more personal experiences we can draw into the discussion. Recently I had surgery for a broken elbow. I asked the surgeon how many plates, screws and pins were used and he says “I don’t recall”, accompanied with an expression that said “how does it matter?” As far as he was concerned, the surgery was successful so why be distracted by information that no longer adds value.
At a café which I rarely frequent I was pleasantly surprised when the barista greeted me by my name. When asked how he remembered my name, his reply was words to the effect of 5 :
“Stuart – regular flat white – take-away but will sit outside – requests large empty cup for water– a man with a process – I like a man with a process…”
We are all creatures of habits, and inherent in those habits are processes. As we reflect on our own experiences we can increasingly recognize the degree to which processes are inherent in everyday life. This can be both positive and negative. Perhaps our challenge is to find the correct balance where we retain the use of processes for the endeavours in which they add value (and I suggest investing is right at the top of that list) but make sure we discard them in fields where they do not.
Back to everyday life,
1 DOS (Title): Well, Windows 10 but we wanted a “D”.
2 Fooled by Randomness, The Hidden Role of Chance in Life and in the Markets, Second Edition, 2004, Nassim Nicholas Taleb, page 65 – 66.
3 The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, 2012, Michael Mauboussin.
4 I admit that I have maintained subscriptions to some classic car websites.
5 Symeon, the Greek barista (but with a remarkably strong English accent) provided his consent to this reference on 15 March 2016!
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