The Four Most Important Things in Investing

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Investing is the perfect example of a complex problem with no known solution. There are no secrets.”

– Nick Magguili (Of Dollars and Data)

So what really matters most in the volatile, uncertain and ambiguous environment of investing?

Better models? Research? Skilled managers? Access to deals?

These things can and do matter, and fortunes have sure been made promoting these ideas. But for the majority of end investors it’s often more fundamental (and basic) wisdom that has the bigger impact. There aren’t any secrets, some of the best advice is simple, but not easy.

Governance and behavior are often understated in importance because they don’t fit neatly into the risk/return models we all learnt about in finance 101 and can’t be readily modelled. But these are things that can have an outsize impact on outcomes over the years.

When it really comes down to it could these be the four most important things in investing?

Direct Attention

The world is noisy and our attention easily distracted to the wrong things, this can be bad. There’s always another macro forecast, a piece of economic data, a political event or an under-performing manager to take our attention. Most of this doesn’t matter in the big picture. Be intentional.

“Nothing is as important as you think it is, while you are thinking about it.”

Daniel Kahneman

Measure what Matters

  • Returns, risk, progress toward your objectives. Don’t get drawn into all the rest of the weeds too often. Be wary of measures turning into targets that aren’t fully aligned with your outcomes.

“In the absence of clearly-defined goals, we become strangely loyal to performing daily trivia until ultimately we become enslaved by it.”

Robert Heinlein

Accept Responsibility

“The people who know the edge of their own competency are safe, those who don’t, aren’t”

Warren Buffet
  • The decisions you take will have an important impact on outcomes, but it takes a lot of work to rid decision of bias. Avoid the table-pounding guru with sweeping powers. Reward dissent, be accountable, divide & conquer, be truth-seeking, deploy diversity well.

Prepare for Uncertainty

“The most important thing about risk is the ability to make decisions under uncertainty”

Peter Bernstein
  • The future will not evolve in nice straight lines as much as we might wish it to. You will lose money at some point and you will be unsure of what to do. Prepare in advance for these moments and manage your own future expectations. Pre-commit. Set yourself up to react confidently to both good and bad news.

There’s a lot of great advice that can live under each of these categories, but at a high level if you are taking heed of these ideas you are well on your way to trying to minimise the behavior gap that exists between the return on investments and the return that investors actually achieve.

This list was heavily influenced by the work of Daniel Crosby and his excellent book – The Behavioral Investor.

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