Lady's slipper.
Investing in Human Behavior - Be Emotionally
Unattached
Timothy
Brennan
In my last two posts I discussed a few major components
that influence how I manage money.
First, I highlighted
three ideas that broadly frame the rest of my philosophy:
Avoid the Noise - Markets are noisy.
Focus on long-term results and pay little attention to
day to day price movements.
Diversify - To increase chances of success,
make many small bets with favorable odds
rather than few large bets with favorable odds.
Keep an Open Mind - Sometimes markets aren’t
favorable to a particular style.
When that happens, play defense and wait for better
opportunities.
Last week I built
on those core tenants to highlight the biggest drivers
of my behavioral investment style; value and momentum.
I am drawn to behavioral investing for two major reasons:
I have high conviction that human behavioral biases will
always be a part of markets.
I can explain the concepts behind this investment style
to my clients
in a relatively straightforward way.
The Process
The final piece I want to touch on in regards to my
investing is the glue
that holds everything together: the process.
Just because I invest based on behavioral phenomena, doesn’t mean that I
don’t have biases of my own. We all do. The key to taking advantage
of these behaviors is having a rules based process to
manage investments.
Without a process, it becomes too easy to question
yourself and in turn,
investing becomes emotional. Emotions often lead to
irrational behavior,
which is something I want to avoid at all costs.
With very few exceptions, I stay away from
non-quantitative investment strategies.
If an investment manager doesn’t have a clear, repeatable
process behind his decisions,
I’m not interested. I’m much more comfortable
betting on a good idea
wrapped in a strictly followed system than betting on the
emotions and hunches of others.
This means…
I don’t invest in a company because there’s a good
story.
I don’t invest in a company because I really like
it.
I don’t invest in market fads.
The company name doesn’t matter to me. All that
matters is how the investment
stacks up based on numbers and the process. This
allows me to be emotionally unattached
to all investments and clearly make decisions based on
the evidence in front of me.
Last weekend, I met somebody at a wedding who had a
friend in the financial advisory business.
He told me his friend was always stressed about the
market and really lets it consume him.
As somebody who has spent time trading and worrying about
the daily grind of making money
in the markets, I could not imagine managing client money
that way.
As an advisor, it is my responsibility to have a clear
head and make the best decisions possible
for my clients. Dealing with constant stress from
investments certainly wouldn’t put me in a position to perform the job I’m hired to do.
I’ve spent a great deal of time researching and building
an investment process
that I have high conviction in. The process allows
me to stay the course.
Am I disappointed when my clients are losing money?
Definitely.
But does that affect how I will make my next investment
decision? Absolutely not.
This is a long-term game and I do everything I can to
make sure my clients understand that.
Client education plays such a large role in my success
because I believe
the better a client understands how I invest, the more
comfortable they are with their investments. Helping clients achieve that peace
of mind is not only beneficial for them,
but having an informed, unstressed client also makes my
job a lot easier.
I hope my thoughts over the last three weeks have painted
a clear picture as to how I view investing. I’ve laid out the major themes that
have shaped my investment style
without getting into the granular details that would bore
many.
My goal was to introduce people to a different way of
thinking about investments.
While there are countless ways to make money in the
markets, quantitative behavioral investing
has resonated most strongly with me. There is
little doubt in my mind that this style
will be a major part of investment philosophy for years
to come.
This is part 3 of a 3 part series on Investing in Human Behavior
https://www.linkedin.com/pulse/investing-human-behavior-emotionally-unattached-timothy-brennan
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