Things that Matter / Things that Don't
In this series, Rusty maps out the critical elements of an investing code:
- Know What Matters
- Know What Doesn't Matter
- Know What Doesn't Always Matters...But Does Now
Part 1 of the Things that Matter / Things that Don’t series. Having a World View means having a center – a core set of philosophies about how the world works, what is objectively true and false, and what actually matters.
Things that Don't Matter
Investors spend inordinate time thinking about, debating, and analyzing decisions that won't impact their portfolio results. These are the Things that Don't Matter.
Oh, we all use index funds. ETFs. We all avoid the evils of acting trading, sure. But in the end, we are all active managers, friends. Yes, you, too.
We meet with our fund managers and financial advisers with a goal in mind. But we always end up talking stocks. If you insist on buying the tank, they’ll sell you a tank, folks.
Almost as much as we love stock discussions, we love talking about our favorite fund managers. These discussions are unfortunately almost always a complete waste of time.
For the bored (read: profitable) investor, the bias to action is a constant threat. As we become more passive in our strategies, the moral license to ‘do something’ is exaggerated, and must be curtailed.
The second moral license from a wise emphasis on passive investing is spending inordinate amounts of time on tilts, trades and tactical ideas that will never influence our portfolio results.
Things that Matter
On the other hand, investors spend far too little time thinking about other issues that will be the primary determinants of portfolio success. These are the Things that Matter.
Of all the decisions you make as an investor, how much risk you take outweighs all of them. It is more important than costs, more important than diversification, more important than picking the right stock / fund / investment.
Part 1 of this note highlighted the supremacy of the risk decision in portfolio construction. In this follow-up, Rusty observes that many investors may be assuming that the natural risk of asset classes is “right” for them.
Diversification is clearly one of the things that matter. Unfortunately, most investors pursue the meme of diversification! instead of the real thing, and end up with a false sense of security and inefficiency.
Benjamin Graham famously said that the market is a voting machine in the short run, and a weighing machine in the long run. This is a right-sounding idea. It is also wrong. Behavior matters over every horizon.
The behaviors that influence markets must be considered in context of archetypes, the languages and identities which group investors every bit as much as identity politics groups voters.
The libertarian paternalism of a nudge culture in finance has created an industry of investors who care about fees but have forgotten about taxes, trading costs, slippage and behavioral costs of actively trading passive instruments.