In investing, focus is important. We have to divide the world into what we can and can’t control.
Will North Korea (snicker) or Iran (no snicker) get nuclear arms? I can’t control that, an I am not sure what I would do if I knew what would happen.
Will the Fed move to inflate goods prices, as opposed to their quantitative easing which mostly affects asset prices? Or will they look to protect nominal values of debt, and deflate?
There are many things that I don’t know; if I did know the future with certainty, I am sure that most other people would know it at at least a lesser level of certainty.
So focus on what you can control, rather than what you can’t.
- You can control your own behavior. You can’t control the behavior of others, whether it is those who invest alongside you, or manager behavior, or that of clients who invest more and less at the wrong times. Optimal behavior might mean buying things out-of-favor after the fury of selling has gone cold.
- If you are a manager, you can guide, but not control client expectations. You can educate them on your willingness to take risk, but you can’t control their emotions.
- As a manager, you can tell investors the mandate toward which you are managing — and then you must manage within it, because your investors expect it.
- You must match the liquidity of investments to the need for liquidity. Value investors must stress patience. Hot money investors must keep things liquid. The same applies to time horizon.
- Market conditions may be depressed or ecstatic. You can’t control movements in the mood of the market, but you can adjust your position so that you can benefit from likely future change, if valuation measures are extreme.
This is one reason why I try to limit the number of decisions that I make, for myself and clients, while trying to make better decisions for all of us.
In general, I think better investment decision-making stems from diversification where you don’t know more than the market, and concentration where you do know better.