February 5, 2020

Recognizing Distractions

It’s probably clear to most that the disproportionate amount of advice rendered for anxious stock pickers is nearly always on the side of typical jargon infested theatrics, otherwise referred to as a story, and therefore a compelling reason to buy. Fair enough, but what about when its time to sell? In managing investments there are many conditions ripe for a voluntary sale, but typically one exits a position because either an anticipated event is realized or the original investment thesis is proven incorrect. The investment doesn’t have to simply be at a loss, it could also be at an attractive gain, what the manager doesn’t want it to be, is a distraction.

Distractions are problematic for obvious reasons. When there is basket of individual investments to monitor, the importance of everything from global economic conditions to non-financial external events come into view that can sometimes obscure the fundamental reason for making the investments in the first place. When it comes to a loss the process is easy, except for the fact that human conditioning is often resistant to admitting responsibility for a loss and thereby some often wait for the anticipated gain. Sometimes that works and sometimes it doesn’t, that’s when recognizing a distraction is important. A familiar way in dealing with this scenario is to simply remind one’s self that nobody has ever gotten it right every time, it’s only human.

When it comes to a profit, if the profit is the result of fortunate analysis and investment timing, the position will often seem to glow in the portfolio. It’s generally not a good time for feeding the human need for mental pleasure because the distraction can be just as intrusive as if the position had incurred a loss. Consider the problems associated with what’s often used to make a portfolio seem in better shape than it might be on closer examination. For example, a stock might have had a very good year of earnings, only to stall and have those earnings simply trend. That’s why benchmarks are used in asset management, in order to better see the relationship between investments and the current trends of the sectors that comprise the broad indexes. Just as it’s often a loss of 20% that triggers a sale, so to can a 20% profit risk becoming the kind of greed that fuels distraction. And maybe there’s another investment on the table, or maybe time for no investment.

When it comes to global economics it’s easy to see how a scenario regarding investment decisions can build. When it comes to external events the recognition is a little harder. Consider news on the coronavirus or the recent impeachment proceedings and primary problems. With the coronavirus it was unexpected that some of the most well-known, and overly talkative, economists chose to literally put the fear of you know who into the conversation. On top of that there is much subjective conjecture regarding the impact of big events such as Brexit or impeachment that can capture the attention of some people fairly quickly. In the end, it’s always possible the aforementioned issues taken independently can find no route to quick reconciliation, such as a potential containment of the virus, or the short attention span for click worthy newscasts. But that’s where uncertainty, in my opinion, can be a more acceptable headspace, preferable to holding on to distractions that can often be closed, disposed of, or simply ignored.