It is a never-ending quandary in investing that you can never know enough to create an optimal investment portfolio. If you broaden your search and knowledge, then your expertise in a particular sector will be thin compared to those who specialize in that sector. If you specialize in a sector, then you may outperform others in that sector while completely missing out on other sectors that outperform yours. With enough hubris and in-borne talent you might attempt to know a lot about everything, but even if you succeed, by the time you learn it the knowledge will be obsolete or you will have allowed too much of your life to pass by to enjoy the fruits of your information advantage.
It gets worse. With respect to knowledge about a particular sector or stock, understanding your position in a skill hierarchy is costly. Even when you act within your circle of competence, you must decide either to act with your current level of superior knowledge, or invest more time in refining it further, to beat the competition. Among specialists with which you compete some may have greater talent than you, but in order to know when you are at the top of the game you would need to invest time in learning how much the other experts know and how much they are investing in sharpening their skills. Such an effort would then compete with the time you have to invest in sharpening your skills.
When understanding the broader landscape, the more you search, the more time expended. You can attempt to locate the best performing sector, but at the start there is no guarantee that you will find it within an appropriate level of effort, or that the differentials among sectors will be worth the investment in cataloging their relative performance. Even if you locate an outperforming sector, you must then engage in extracting value from that knowledge, which may involve understanding that sector in at least some degree of detail. You might make the assumption that indexing across the sector would be sufficient, but in order to be sure that the assumption was correct, you would need to expend further effort understanding your selected sector.
Supposing that you were lucky or informed so as to have good breadth of knowledge of sector performance and depth within a chosen sector, you would still have the problem of evaluating the degree to which your knowledge would decay over time. That would control whether the advantage gained from the time invested would actually pay off in greater rates of return for long enough to pay back your time investment.
Systematic Methods
Those in quantitative professions are likely to answer these doubts with a systematic approach. The answer, at least to start, might be to survey, index, and gather numeric data on potential investments. This is certainly preferable to having no information, and in my personal experience, quantitative objective data is far superior to hunches and qualitative, subjective judgment. Still, as described above, there are limits to how much quantitative methods will advance your cause, and it can be costly.
Perhaps the worst quantitative problem was a quip I heard many years ago that I'll loosely paraphrase: "The trouble with quantitative investing is that it finds the biggest flaw in your data and puts all of your money there." This was in the context of automated quantitative investing, which "quants" do.
When I say "quantitative" (vs. "quant") I mean any sort of numeric analysis and comparison method, starting with analyzing the balance sheet, income statement, and cash flow statements, and including fundamental ratios (PE, P/S, margins, ROE), revenue and earnings histories, and more tactical data like same store sales, customer account retention, employee turnover, and market share. It also means comparison of a large number of stocks side-by-side in some fashion, valuation, and comparison to historical values. Though quantitative methods have a tendency to consume lots of resources before they produce results, the large majority of such data is nearly impossible for the human brain to grasp at once. Such data figuratively makes the difference between being blind and seeing trends.
Notice that although I am not including any form of technical analysis in my definition of "quantitative", some aspects nevertheless qualify as objective, numeric, and potentially automated, so as to eliminate bias. In this sense, although I will claim that I make little to no use of technical price and volume analysis, it at least has some advantage over purely subjective methods because of its numeric nature.
Focusing Methods: Theory
Where do you put your attention? Do you even have control of it? This is a deep question of psychology and philosophy, and will lead you to considerations of free will if you carry it too far. If you've read to this point it is probably fair to say at least that you are attracted to the idea of improving investment results by paying attention to something, including the subject of focus.
The focus problem is another quandary, an aspect of the "optimal information gathering" problem described above. For the sake of discussion, I will confine this analysis to what to focus on once you have already allocated attention to the problem of inspecting your investments. There isn't much to be gained in looking at why you don't have time for investments, or can't even start thinking about them. You likely aren't reading this post if you fall into those categories.
To begin, although some prominent people have declared that focus was helpful to their success, it's not clear that a concentrated focus is a critical activity. Too much concentration might lead one to overlook obvious dangers or obvious gains. Too little might lead to inaction. What is the optimal level? What gets the job done? Aside from homespun bromides, I'm not aware of any scientific research, success stories, or compelling common sense that declares that "this level of focus is the right one," whatever that might be. Some clearly non-optimal levels of focus are none and too much.
Nevertheless, focus strongly affects your investments. You can't buy something you aren't aware of, and if you are too aware of your own holdings, you won't have the adverse information and perspective you need to sell them when it is objectively required. There are many, many opportunities for regret, some leading to "analysis paralysis" in which you become so aware of the many things you don't know, and compelled to find out before acting, that the information search prohibits you from taking any action until it is too late.
Though I've come nowhere close to "proving" that there is no optimal focusing method, it seems that this line of investigation is showing that there might not be anything close to an "optimal" focusing method, so instead we turn to smaller measures. We shall be inspired by folklore and common sense here.
Practical Focusing Methods
This section will use a brainstormed list of ideas for maintaining focus, obtaining or re-obtaining focus, or changing focus. Since these are practical and not theoretical methods, the proof of their performance will be in whether they work for the reader.
- making a checklist once, for today, at the beginning of the day, and going through it
- using a canned checklist that contains items that historically have been useful to review, or which at least we think might be useful to review
- looking around to see what catches your attention right now (requires that looking around be slightly more than just doing nothing)
- asking people near you what's new
- looking at an internet-based website that has a feed based on (something)
- meditating
- reflecting on what is more important, perhaps as amplified by a Franklin-Covey planner or similar time-tracking system, and using critical long term goals that can be fed through near term actions
- reading psychology papers, such as Kahneman and Tversky's psychology papers on non-rational thinking, or the behavioral economics literature, and reflecting on how those principles impact whatever it is that you are supposed to be doing today
- just doing it
Is this list satisfying? I would not be surprised if it leaves you cold. Perhaps you are thinking that I didn't really do my homework today, that this list really ought to be different, better, more complete, or more informed by research. If so, please comment.
Using The Force to Jump Outside the Box
This article originally started as the introduction to the BDC survey I published earlier this week. It grew beyond that mission and so became its own article. The focus section was started on twice, resisted being written at least once, and perhaps changed shape overnight after the first attempt. At this moment, as I write this, my own impression is that the topic of focus is probably very misunderstood among practitioners. Nearly every industry business standard or development standard (CMM, CMMI, ISO, Kanban, DevOps, Six Sigma, etc.) involves some of the steps in the list above, with very strong emphasis on doing something, a business practice, over and over again in repeatable ways. What's missing is any sort of approach when you have a problem that is not repeatable.
The first bit of folklore to use to illustrate the problem is "the Force" in Star Wars. Is this a focus trick? It certainly seems to be. The Jedi advice is, roughly, do not plan or worry too much about the future, that rather than have your mind elsewhere, one should focus on being where they are.
"Always remember, your focus determines your reality."
“Your eyes can deceive you. Don’t trust them.”
“Mind tricks don’t work on me.”
“Don't center on your anxieties, Obi-Wan. Keep your concentration here and now, where it belongs.”
Many years ago I spent a day playing a business game called Gold of the Desert Kings. Each team's task was to travel (virtually, via a game board with markers and other game accessories) across the desert, mine gold, and bring it back. Although at first you were given part of the goal of the game, you were not told much about anything else. Rules, options, potential events, and other details were omitted at the beginning. Turns were timed, with hard deadlines. Lots of information was unknown, but you were allowed to ask some types of questions.
After it was over, during the debriefing, we were told a story. Who was the highest scoring team ever and how did they achieve it? The answer, was that the team asked early in the game what was possible, what was the previous highest score? Having obtained that answer, they could then work backwards and deduce other unknown aspects of the game. The lesson seems to have been: Find out what is possible before deciding what to do.
The meta lesson: Jump outside the box before establishing a focus.
This lesson too will be unsatisfying and inapplicable to some circumstances. If we have no free will the question of where to put focus and this answer are meaningless. But perhaps we do have free will, and making an effort to consider the problem is part of the art of obtaining "optimal focus", if there is such a thing. In the process of journeying briefly through the problem of where to put your attention, perhaps we have improved our chances at putting it in places of most utility.
by Daniel Gilbert, a professor of psychology at Harvard University. Although the theme of this book is understanding happiness, it necessarily draws in many conclusions from the academic literature on psychology, much of which is, of course, based on hundreds or thousands of careful experiments on genuine human beings.