The Independent Market Observer

Using Analysis to Improve Lives

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Feb 26, 2016 2:04:44 PM

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analysisI’m just back from the Commonwealth Chairman’s Retreat conference, trying to digest all I learned there. I usually come away with at least one idea that has the potential to change my life for the better, and this year it was the concept of purpose.

One of the keynote speakers led us through the exercise of defining our purpose. My answer? “Use analysis to improve people’s lives.”

As a start, I’m happy with that. The phrase describes what I try to do and how I try to do it—both of which arise from a deep sense of who I am. This is getting a bit touchy-feely, so let’s look at some examples.

Staying calm in turbulent times

Much of my recent commentary has focused on helping investors stay calm in the face of weak economic data and market pullbacks. Instead of panicking, we need to look at the bigger picture and identify meaningful indicators of trouble, reacting to them instead of the immediate news.

Despite the risks, I've stressed that the U.S. economic foundation is actually quite solid and the market volatility normaland recent market performance and economic news seem to bear that out. By not panicking during these tumultuous times, investors may have avoided shooting themselves in the foot.

Taking a rule-based approach

Another, more general, example is my focus on rule-based decision making, which can be tested over time, with the risks and benefits quantified in advance. By making thoughtful decisions before crisis strikes—and having a good sense of how they will play out over the years—investors can potentially do better, with less risk and less stress.

Focusing on the long term

The reality is that most investors overreact both at the top, by buying too much, and at the bottom, by selling at what is often the worst time. We witnessed the first in the housing bubble and the second in the waves of selling in the stock market in 2009, just as the recovery started.

We may now be seeing another example. Concern about the economy seems to be rising, but my own monthly risk factors have consistently shown that we’re not close to a recession. Today’s economic data, which I will cover in detail on Monday, supports that. Personal income and spending both came in very strong, and a key consumer sentiment survey also moved up, suggesting the economy continues to improve.

All in all, focusing on longer-term factors, rather than short-term bad news, can help us keep stress low and avoid bad emotional decisions—two things that certainly improve my own life.

How can I better help you?

Sometimes listening to emotion makes sense, but even with emotional decisions, applying analysis can help. Longer term, though, the emotional decision isn't usually the best one. For all the talk of “analysis paralysis,” I’ve seen few cases where the problem was a too-thoughtful approach.

My goal with this blog, and in working with investors, is to introduce analysis-based perspectives that may not be commonly used. Ideally, those ideas will improve process, results, and the experience of getting there.

As always, I welcome your suggestions as to how I can better achieve this.

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