We analyze our surroundings, then form a perception. From that perception, we determine a course of action. Our perception is often dramatic—a characterization of what we see that leads to a distorted sense of the corresponding action. We overreact.
Turn on CNBC or Bloomberg, or read the Financial Times. Bitcoin is up—should we go all in on Bitcoin? Then, two days later… Is Trump going to crash the market with tariffs? Should we pull all our money out of the markets? Everything sounds very black and white, boom or bust, all in or all out.
The truth is, situations in which such dramatic action is the “right” move—or even the mathematically most profitable—are incredibly rare. These are vast outliers. We should put practices in place to ensure we don’t act with such fervor.
When I read these types of financial articles or consume content from these news sources, I like to imagine wearing “blue blocker” lenses to dull the brightness. Viewing them through a moderating filter is helpful. If we perceive events with reservation and moderation, we can react with reservation and moderation.
“It’s just a matter of calibrating your behavior between defensiveness and aggressiveness. When things are a little high, as they are (Dec 2024), be a little more defensive. But this notion of ‘risk on / risk off’—‘in or out,’ buy or sell—that’s all too black and white. It does not fit the world in which we live. Getting ‘out’ is a big step that, most of the time in my career, would have been a mistake.” — Howard Marks
As Howard infers, history can be our perception’s “blue blocker.” The more we read and understand historic data, past occurrences, and the perceptions of those eras, the better we can grasp today’s reality and determine how best to react.
We need backstops to remind us where we are and where we want to go.
Ray Dalio uses principles, and so do I. This can be a very useful technique to bring us back to reality. Writing out our core investment principles—and referring to them before every investment decision—reminds us of our longer-term goals and overall direction. Write yourself a list of core questions to ask every time you analyze an opportunity or consider an investment maneuver.
These Are Mine:
Is it within my circle of competence?
Do I understand the business?
Do I understand the balance sheet?
Do I understand the debt?
Am I buying it below its intrinsic value?
Am I buying a dip or a temporary downturn?
Macro considerations
Where is the market right now in terms of valuation?
Are we in a bull or bear market run?
Check historic indicators.
Should I be buying right now?
Portfolio makeup considerations
Am I spending cash I need to hold to keep my portfolio open to opportunities?
Is this correlated with my other investments?
What about sector relationships?
Does this trade maintain overall portfolio balance?
ALWAYS ALWAYS ALWAYS… What is the risk/reward?
Measure the downside possibilities.
Understand the risk.
Understand the upside.
Is the risk worth the possible return?
Consider game theory.
Look at the probability spread.
Do I believe in the company and what it does/stands for?
For example, if you don’t agree with Philip Morris’s product, don’t invest in it.
Don’t invest in anything you don’t want to see grow—they will use your capital to expand operations.
Charlie Munger says there are a thousand ways to make money. Choose carefully!
Stay true to your core principles and invest in the world you want to see, but be rational with your optimism.
Are you speculating, or are you investing?
It’s okay to speculate; just don’t do it with money you haven’t specifically set aside for speculation.
Keep your investment accounts and speculation accounts separate so you can’t be forced to sell long-term investments. You don’t want to be compelled to make a move that doesn’t align with your long-term goals.
Test speculation with paper trading first.
HOW THIS APPLIES TO MY APPROACH TODAY
As of December 2024, I’m adopting a more defensive posture—though not completely risk-off. I’m still looking for bargains (which are fewer and farther between). I remain steady in contributing to the portfolio, allowing more cash to build up (in short-term treasuries and money market instruments capturing around 4-5%) while waiting for a reprieve from our high-priced environment, to can capture more bargain opportunities.
I’m bullish on India and on the United States, thought recognizing we have had great growth in the past 2 years. NKE and BABA are key current larger market bargains in an otherwise high-priced market. These two come with a fair amount of margin of safety.
See my article on Focal Bias for more on our perception against historic data,
and see my investment review video on NKE at my youtube page!
Onward and Upward
Gene
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