Hi Guys,
Earlier today, Ted posted a Josh Brown piece titled The Biggest Threat to Your Portfolio". It is excellent.
Yesterday, Ben Carlson, in his Wealth of Common Sense site, posted an article titled "Placing Constraints on Yourself". It too is excellent. It serves as a companion piece to the Josh Brown work. Please give it a try at the following address:
http://awealthofcommonsense.com/placing-constraints-on-yourself/Both articles suggest that when it comes to investment decision making, we're our worst enemy; the enemy is us.
Carlson lists some of our poorly designed actions and suggests ways to dampen them. I particularly like his useful advice to " Actively seek out opposing viewpoints on your current investment stance".
A few times on MFO, those opposing viewpoints are not kindly accepted and prompt harsh attacks. No need for that overreaction. In investing, it is acceptable to agree to disagree since that's what a market is all about.
Best Regards.
Comments
I know the logic isn't flawless, but for a long time I've wondered...
The average guy gets terrible returns. We have a tendency, on average to buy high and sell low, at least according to what we're told. We even do worse than the mutual fund managers we pay so much to and who we hear often enough find it difficult to beat an index fund. That suggests to me that the majority of our decisions are bad ones, and this article is targeting that idea. It logically follows if you limit the decisions you make/actions you take, then you hopefully get better returns. Fewer bad decisions is a good thing, no?
But why would the average person want to do that? Why shouldn't he/she keep making all the same decisions and just do the exact opposite of his or her decision? If the majority of decisions are bad ones and we do the exact opposite, shouldn't the average guy end up being a superstar?
"I’m not suggesting that every investor has to implement these specific constraints to guide their actions. But all investors do have to figure out which constraints to place on themselves based on their past history and personality traits. Everyone has their blind spots.
>>> = my reply within my own constraints
>>>Yup. We've chatted about this here. Better know who you are and what tweaks you around the edges.
These are a few more examples I’ve seen from others over the years:
◾Don’t invest in anything you don’t understand.
>>>'Course...
◾Stay within your circle of competence.
>>>Not unlike driving an auto, eh?
◾Never pay more than a certain fee level for investment products.
>>>Okay. Pick a number
◾Give yourself 5-10% of your portfolio to speculate to appease your gambling instincts.
>>>At least. But, don't ever forget you're playing with the big kids with investments and may get your clock cleaned too, with particular investments every now and then
◾No more than a certain percentage invested in any one security or asset class.
>>>Diversification I'm guessing. Know thy self again here.
◾Only look at your portfolio value monthly, quarterly, annually, etc.
>>>Holy crap. You'll probably miss sells and buys if you wait long enough. See below
◾Rebalance on a set calendar schedule or when your allocation weights hit a certain band outside of their target.
>>>More of a know thy self or to each his own, eh?
◾Wait at least a week to implement a new investment decision.
>>>Depends how well you understand what you're doing. You should have already been thinking about a new investment; unless you look at your portfolio rarely, as noted just above
◾Talk to an unbiased outside observer about every big portfolio move you’re about to make.
>>>MFO is a good start, unless you have someone near with a known steady brain cell pattern
◾Actively seek out opposing viewpoints on your current investment stance.
>>>Same as above, although their are those here who consider this to be a no-no from a total stranger encountered via the internet, but likely an unbiased outside observer, as noted above
◾Keep a decision journal and review before making any new portfolio moves.
>>>One can't perform this function well if they follow the review plan as noted above
◾Only allow a certain number of transactions per year.
>>>Say what? And this has to do with ??? I suppose this fits into the "look" at your portfolio sequence noted previous...annually.
Now is probably a good time to review your own constraints within your investment plan. Interest rates are low. Stock prices are high. This stage in the cycle can lead people to relax their risk controls and press the issue if they’re not careful.
>>>Is there a special time to review one's constraints? How about very often.
I’m of the opinion that most investors would be better off making fewer decisions and getting rid of any unnecessary clutter from their portfolios and investment process. Placing constraints on yourself is a great way to do this. The first step is understanding yourself and your own flaws, something that’s not as easy as it sounds, since the easiest person to fool is often yourself.
>>>Who is the clutter decider ??? Some folks have considered bond portfolio portions to be clutter over the years. Depends, eh?
And no..........none of this is supposed to be easy.
>>>Lastly, one can always do a VTI and BND, 50-50% mix and go take a long nap. Wait, I already visited this area before. Time to move along. The article is pretty good for the most part and for almost everyone.
Have fun folks.
Catch
Thank you for contributing.
Since you asked, allow me to offer a very simpleminded answer. Making a decision and then doing the opposite is just contrary to human nature and will not be implemented by most folks. It will never happen.
Besides, the referenced article suggested a few things that could improve that faulty decision making process. All is not lost!
Best Wishes.
Thank you for your detailed post.
I really liked your parsing of its various elements. You stated what components you liked and those that you took issue with. You replied within your own blind spots and personal constraints. That's real good stuff.
Prompted by your parsing of the article, I revisited it to examine its nuances more carefully. That was a worthwhile exercise since like you, I agreed with many of its points, but disagreed with others. We all see the world a little differently.
Thanks once again.
Best Wishes.
I don't think there's any question you're right. Even if people tried, they'd make a few decisions, do the opposite, find out it works (hypothetically of course), and that success would mess with their psychology so much that they'd struggle to make the naturally bad decisions with the same consistency they had before.
But aren't many of the constraints suggested in this article asking us to place restrictions on our "nature" anyway?
I'm not suggesting that doing the opposite of what you "decide" is the right way to invest. I'm only suggesting that well thought out "constraints" based on the average guy are not much more useful to each of us individually than my investment logic based on the average guy.
Here's to maximizing our strengths and minimizing our weaknesses!!
LLJB
The day you stop thinking/looking for solutions that is "constraning" yourself you are a loser
and No the biggest threat to your portfolio is NOT yourself, it is BAD advice/information that you ACT on..
trust yourself..you have no one else...believe me...
Thank you all for your enthusiastic replies. I appreciate all of them for their prospective and for their civility.
I believe we all invest with constraints; with some self-imposed set of rules that act as speed governors to control potentially disastrous behavioral biases.
As Dirty Harry remarked in that film series: “A Good Man Always Has to Know His Limitations”. Here is a Link to that terrific scene:
I think good investors do either formally or informally generate a set of operational rules. These rules guide them in making investment decisions.
The rules need not be inflexible and forever cast in stone. Strong adherence to the rules is mostly necessary since frequent violations defeat their purpose. But market circumstances and personal circumstances change, and the final rule should be that change is permissible under evolving conditions. There is much art and just a little science that should dictate when these changes are warranted.
The constraints suggested in the referenced article are not a bad point of departure. Personally, I follow many of them, but definitely not all. Each of you guys likely follow a different subset that more closely defines your own investment philosophy, style, time horizon, financial know-how, and special proclivities.
All of us see investing from differing perspectives. What’s significant to you might be trivial to me. Professional firms follow their own shining guidelines. As a grand illustration, allow me to reference a seminal position paper by Oaktree’s Howard Marks. The paper is titled “The Most Important Thing”. Here is the Link:
http://www.oaktreecapital.com/MemoTree/Most Important Thing (070103).pdf
I hope you find his summary as informative as I did. I love adding some extra value to these exchanges. Enjoy the Marks philosophy.
Marks simply could not consolidate his “most important thing” to a single item. He lists quite a few. When investing there is almost never a single best approach, and any best approach will surely morph over time. Like Marks said: “There are a lot of moving parts in this machine, and many of them are beyond our control.” So both control elements and open-mindedness are essential ingredients for success.
Best Regards.
ADDED COMMENT: The Howard Marks Link is not working on this site. Try this address:
http://www.oaktreecapital.com/memo.aspx
And then click on the 2003 memos for access to the referenced article. Sorry about the problem.