Allowing Deep Knowledge To Work In Your Favor
I detest multiple guess tests. In college, my biology professor who loved them, told me life was a series of multiple guess situations. If all situations were black or white, I would agree with him; but much of life involves a lot of grey.
We live in an age of disruption where technology is changing the way we live our lives. It aids some businesses and harms others.
Asset management is one of the areas that has been disrupted. Machines are coded with algorithms to make investment decisions. No subjectivity, no deep fundamental analysis — just black-or-white, buy-or-sell decisions.
One of the many problems that arises is asset liquidity — when valuation models change rapidly (because of machine and human algorithms), it creates huge vacuums in the market and sell-offs get overdone, just as we have seen this morning.
Some equities were down 20% on the open, even though their fundamental market position did not change 20% over the weekend. The Dow was down over 1000 points and is now down less than 300 points.
What is the best way to make decisions in light of this world that we live in?
One: Don’t be surprised. This is the world we live in and we will see this type of movement again and again — it is one of the characteristics of disruption.
Two: Take the time to know a portion of your investment portfolio on a deep level. When you see this type of move, you should be either very comfortable with your asset holdings or very nervous.
Three: Always have a few companies that truly interest you and for which you have a “fair value” gauge. We have discussed on a couple of occasions how we like closed-end mutual funds because market distortions allow you to buy these assets at a discount to their asset value.
Four: Invest in quality.
Five: Invest for the long term.
Six: Know your brain; at times, it will function at a higher level than an artificial neural network.
Seven: There is always something we don’t know. Do not allow that to prevent you from making a decision — make decisions with the information that you do know.
Eight: With every challenging event, there is an opportunity. Search out the opportunities.