The Value of Measures

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I’m a big believer in the Strava-or-it-didnt-happen school of running ( see below), but that may just be because I spent a large amount of time in my formative years with half an eye glued to that clock that goes round and round at the end of a swimming pool …

my experience is you get at least an extra 10%+ of everything when a stopwatch comes out (speed, endurance, determination … ). But of course in practice faster, higher, stronger is rarely the end goal. Enjoyment, fitness, better health is probably what we are really aiming at. Even in investing it might not be as clear cut as you think on first pass. Returns? Risk-adjusted returns? Real returns? Something closer to quality-of-life-adjusted returns? So here we see a hint of one of the first of many bear traps in this fraught area: hitting the target but missing the point (hello, portfolio emissions targets).

The analogy to investing here is well made but hard to fully unravel – sometimes when I run I am definitely guilty of over-checking metrics which is not helpful – eg pace looks off but maybe that last 500m was on a bit of an incline? Pace looks fine but heartrate is way out of sustainable zone. Pace is off but feels like I’m pushing as hard as I can. suspect much investment performance-checking falls into that camp. it’s either picking up noise, telling you things that you can’t do anything useful about or giving fodder for narratives to explain things away.

“What gets measured gets managed” is a common mantra, but it’s rarely as simple as that. Another common trap from over measuring includes “the measure becomes the target” (think benchmark- hogging active managers where the index drives holdings far more than it should) .

it’s tempting to say investors should close their eyes and not look at performance. that is probably overstating it. most should probably look at performance less often than they do, but less is not never and no-one sticks a reminder in the calendar and rings a bell at that magic point where the short run becomes the long run. The short/long run distinction itself is probably a false dichotomy. it’s gradual and the path does matter. the market can send important signals that you need to re-evaluate your thesis or your assumptions. I do think that investors could benefit from aligning their performance checking more with actual decisions they could make and things they can control – in running that probably equates to looking more at heart rate (=effort) than pace which is an outcome and subject to other variables.

So what are the usable takeaways for investors –

Most portfolio monitoring would really benefit from recognising that each monitoring point is a decision point, and so starting by asking 3 questions which turn most investment metrics on their head:

  • What’s the actual end goal, and what’s the least-worst way we have of measuring progress on this?
  • What key decision levers do we really have at our disposal here – what metrics would drive us to take one of these decisions?
  • What early-warning metrics are important to try and avoid bad surprises ?

And be wary of –

  • The measure becomes the target
  • Hit the target but miss the point
  • Getting trapped in narratives and
  • Picking up noise

If you liked this you might also like the four most important things in investing. Thanks Duncan Lamont for sparking the line of thinking that led to this with this LinkedIn post!

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