The Independent Market Observer

Why Investors Should Ask "Am I Proud of This Decision?"

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 23, 2014 2:25:00 PM

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VolatilityUncertainty_5To follow up on my recent posts, there’s another question I’d like to ask the person (or committee) that decided to outsource Tufts University’s early education program: Are you proud of this decision? Did you go home and announce to your own family what you had done? If the answer is no, what does that say about the quality of the decision?

This is also an important question to ask yourself in an investment context.

Say I decide to buy more stocks just now for my wife’s and my retirement account. How would I explain that decision to her? I might tell her that I bought more stocks because I wanted to make more money for us. Being a thorough and cautious person, my wife might then ask why we could expect to make more money now, as opposed to earlier in the cycle. 

The answer, unfortunately, is that stocks are riskier. While I may be proud of wanting to potentially make more money, am I proud of definitely assuming more risk? And although I may be proud of my decision based on the fact that stocks tend to outperform in the long run, am I acknowledging the fact that we need our retirement funds in the short term?

In other words, am I proud of the full decision, not just what I hoped to accomplish? This is the essence of the long-term versus short-term perspective, of selecting the right map to guide your decisions.

The risks of living too much in the now

I keep harping on this because I see it more and more, this emphasis on the present moment. Today will be gone tomorrow, and focusing on it exclusively can be damaging.

Tomorrow, will I be proud I read the paper instead of going outside and playing with Jackson? My tired body says grab the paper; my better judgment gets me out the back door. My greedy mind looks at recent returns and tells me to buy stocks; my analytical mind says focus on the long term—and keep your asset allocation in place.

Tufts listened to the financial/legal mind, and made a decision that I doubt anyone would brag about around the dinner table. I may be wrong, of course, but I suspect this was presented as the sort of unfortunate but necessary step that tough-minded managers have to take, no matter how much they regret it.

I see the same sort of rationalization in the financial markets, with values being described as really rather reasonable in the context of 1999/2000. Or, similarly, in the “Where else can we put the money?” line of reasoning. Acknowledging (in theory) the shortcomings, these approaches justify themselves by looking at the benefits today instead of the potential costs tomorrow.

Chuck Prince, the former CEO of Citigroup, was rightly excoriated for nearly sinking his bank with the justification “When the music’s playing, you have to dance,” and the spirit of that quote lives in each of these examples. If you make a decision by looking around and seeing what everyone else is doing at the moment, you’re probably creating more problems than you’re solving.

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