Oftentimes I find myself torn between on the one hand, the desire to act in an almost impulsive fashion, taking fast decisions on investing opportunities and, on the flipside, the call for caution and calm thinking.
Lately, and much to my dismay, the “cautious fellow” approach has been winning the battles, if not necessarily the war. My quest for thorough information in security selection and the methodical, open-ended research effort applied to recent opportunities has resulted in some rather metaphorically “low-hanging fruit” not being picked. To be precise, despite recent and obvious write-ups on a number of attractive stocks (see Zimmer here and BP here), no action was taken on my part resulting in considerable price appreciation being foregone. In the more recent case of Zimmer Holdings (ticker: ZMH, a 25% return could have been attained in the span of just x months!. Ouch!
Many a wise investor with years of experience under their belts have referred to the business of asset management as one where, to use baseball parlance, “no strikes are called”. Indeed, theory would suggest that opportunities abound and one should not be constrained to act on every hunch. As the famed risk expert and author Peter Bernstein once put it:
“Once we act, we forfeit the option of waiting until new information comes along. As a result, not acting has value. The more uncertain the outcome, the greater may be the value of procrastination”
I myself would find it hard to argue with the fact that lost opportunity is preferable to lost capital. And yet, lately I’ve been unable to shake an uncomfortable feeling of almost cowardice derived from my lack of investing commitment.
Perhaps the time-tested advice to “sleep on” difficult decisions, is not one that can be universally applied, at least not to investment decisions, which in my book most certainly fit in the “difficult” category. Gathering valuable, impartial, factually correct information about companies is by its own definition a constant process, where perfection cannot be achieved. At least not without the risk of relying on illegal insider information…
Academic research also points to the risk of ascribing excessive importance to new-found information. A recent study, the aptly-titled “On the Pursuit and Misuse of Useless Information”, suggests that additional information provided late into a decision-making process can have a disproportionate impact on the actual decision, often undermining the solid foundation on which the until-then decision was based.
Stated simply, we remember best and rely on the most, on the last piece of information we receive and process. Clearly this flaw could undermine careful consideration of important decisions; or just as gravely, lead one to inaction. Whilst the opportunity cost of inaction in an investment context is perhaps less severe than in other environments, there is certainly a cost attached to this dithering.
Psychologists, and indeed popular wisdom, points to the admittance of having a problem as the first step is the process of correcting that problem (just think of the famous “my name is xx and I am an alcoholic” lines pronounced at AA meetings…).
For my part, I can see not only the cost of my inaction and its obvious consequences in terms of foregone financial gain, but also the impossibility of obtaining full / perfect information prior to committing capital. And yet, it is a very fine line to tread as the search for value continues. I just hope that experience leads to better act / not act decisions.
Lately, and much to my dismay, the “cautious fellow” approach has been winning the battles, if not necessarily the war. My quest for thorough information in security selection and the methodical, open-ended research effort applied to recent opportunities has resulted in some rather metaphorically “low-hanging fruit” not being picked. To be precise, despite recent and obvious write-ups on a number of attractive stocks (see Zimmer here and BP here), no action was taken on my part resulting in considerable price appreciation being foregone. In the more recent case of Zimmer Holdings (ticker: ZMH, a 25% return could have been attained in the span of just x months!. Ouch!
Many a wise investor with years of experience under their belts have referred to the business of asset management as one where, to use baseball parlance, “no strikes are called”. Indeed, theory would suggest that opportunities abound and one should not be constrained to act on every hunch. As the famed risk expert and author Peter Bernstein once put it:
“Once we act, we forfeit the option of waiting until new information comes along. As a result, not acting has value. The more uncertain the outcome, the greater may be the value of procrastination”
I myself would find it hard to argue with the fact that lost opportunity is preferable to lost capital. And yet, lately I’ve been unable to shake an uncomfortable feeling of almost cowardice derived from my lack of investing commitment.
Perhaps the time-tested advice to “sleep on” difficult decisions, is not one that can be universally applied, at least not to investment decisions, which in my book most certainly fit in the “difficult” category. Gathering valuable, impartial, factually correct information about companies is by its own definition a constant process, where perfection cannot be achieved. At least not without the risk of relying on illegal insider information…
Academic research also points to the risk of ascribing excessive importance to new-found information. A recent study, the aptly-titled “On the Pursuit and Misuse of Useless Information”, suggests that additional information provided late into a decision-making process can have a disproportionate impact on the actual decision, often undermining the solid foundation on which the until-then decision was based.
Stated simply, we remember best and rely on the most, on the last piece of information we receive and process. Clearly this flaw could undermine careful consideration of important decisions; or just as gravely, lead one to inaction. Whilst the opportunity cost of inaction in an investment context is perhaps less severe than in other environments, there is certainly a cost attached to this dithering.
Psychologists, and indeed popular wisdom, points to the admittance of having a problem as the first step is the process of correcting that problem (just think of the famous “my name is xx and I am an alcoholic” lines pronounced at AA meetings…).
For my part, I can see not only the cost of my inaction and its obvious consequences in terms of foregone financial gain, but also the impossibility of obtaining full / perfect information prior to committing capital. And yet, it is a very fine line to tread as the search for value continues. I just hope that experience leads to better act / not act decisions.
Is the act of being conscious that non-action is a decision likely to contribute to evaluating the risks/rewards of non-action with the same intensity that I evaluate the risks of action? I think our ego suffers more when it feels that we are the cause of our downfall... and procrastination never leads to ego suffering over the decision... just a very big painful regret later in life when we see how little we have achieved ;-)
ReplyDeleteVery well put.
ReplyDelete