There was a story before last year’s Super Bowl about Seattle Seahawks coach Pete Carroll and his off-season speaking gigs. In his talks with CEOs, coaches and investors he usually begins with a question for the audience: “Raise your hand if you have a philosophy for your team or organization.” Of course, everyone in the room always raises their hand. Next, Carroll follows-up by asking, “Can you describe your philosophy in 25 words or less?”
At this point everyone’s hand goes down.
In my new book, I state that every investor should be able to explain their investment philosophy in a 60-second elevator pitch or short paragraph. I spend an entire chapter in the book talking about the importance of defining your philosophy because I think it’s an important first step that not enough investors spend their time considering. Everyone simply wants to find the best tactics and strategies to implement without first figuring out what their overarching philosophy is.
A portfolio is not a philosophy. A strategy is not a comprehensive plan. These are important distinctions. Without an underlying philosophy, it’s nearly impossible to implement an investment strategy because philosophy is what holds it all together when things aren’t working out the way you envisioned.
Over the past few weeks, I’ve given a few talks and interviews about my book and I’ve been asked a number of times what my philosophy is. From the book and my many posts on this blog you could probably piece together my big picture philosophy, but I decided to put it all together in one place. These are broader issues I take into consideration and not minor decisions such as how much money to allocate to certain strategies or asset classes. This is something of an extended version of my 60-second pitch:
- I believe an understanding of human psychology and the behavior of both myself and the actions of others is one of the most important aspects of a good investment process.
- I believe an understanding of my personal time horizon and risk profile is necessary before making any investment decision.
- I believe portfolio construction and risk management are far more important than trying to consistently identify profitable investment ideas.
- I believe diversification by asset class, geography and strategy is a one of the best forms of risk management.
- I believe that knowing what you’re doing also helps reduce risk.
- I believe in creating an emotionally intelligent portfolio strategy and process.
- I believe time arbitrage is my greatest advantage over other market participants.
- I believe in creating a repeatable process that takes into account my lesser self to remove emotions from my decisions.
- I believe any good investor has to always be learning.
- I believe in having a legitimate reason for every change I make to my plan and every single investment included in my portfolio.
- I believe self-awareness, humility and having an open mind will help me avoid blowing up my portfolio.
- I believe in using empirical evidence when creating an investment strategy with the understanding that historical results give you a better sense of risk than future returns.
- I believe in finding an investment process that meshes well with my personality.
- I believe the process of making good decisions is more important than the short-term outcomes they produce.
- I believe in avoiding unnecessary complexity in my portfolio and process.
- I believe asset allocation is one of the most important decisions I need to make over time.
- I believe less is more.
- I believe in reducing the frictions related to high costs, taxes and unnecessary portfolio activity.
- I believe patience, discipline and common sense are under-rated.
- I believe in admitting my own limitations.
- I believe negative knowledge — removing bad ideas — is one of the best ways to figure out what works.
- I believe a search for the perfect portfolio is a waste of time.
- I believe in focusing only on what is within my control.
- I believe in planning for a wide range of potential market outcomes.
- I believe in doing nothing the majority of the time if that’s what my investment plan calls for.
I’m may have missed a few things but that about covers it.