Mistakes Happen

“Every great mistake has a halfway moment, a split second when it can be recalled and perhaps remedied.”  — Pearl Buck

I think the quote is particularly revealing.  It certainly describes accurately what many of us know intuitively.  But not so many mistakes are recalled.  Why?

Recalling the mistake requires a course change.

Most people dislike change.  Changing a decision or action may involve admitting the early decision was flawed and for some, the ego cost is too high.  Ego and image are expensive luxuries.

I have, in the past, referred to a an Advanced Management Program study at Harvard that found that good managers do not make better decisions than weak managers except in one case.  Good managers stop flawed processes sooner.  Think back to the mid-80s and “New Coke.”  Did not work; killed quickly.

Many people do not change because they have not noticed the need.

Every decision or project must have a measurement system.  It does not need to be numbers but it must be there.  People must check and make new decisions.

Part of the reason for not noticing is not wanting to notice.  Data mining.  Emphasize the good, minimize the bad.  It is difficult to be objective with a pet project, but many pet projects have failed and at great cost.  Persistence is a value but it does not always solve the problem. Rethinking an opportunity sometimes prevents great loss.

Be objective.  The choice is to answer the question, “If I was not doing this already, knowing what I know, would I start?” You would be surprised how often the answer is “No!”  There are two “No” possibilities.  1) I would not start, and 2) I would start but with these variations.  If the second answer appears try the variations.  Evolve a right answer.

Sometimes a problem is so complex that there is no right answer, but someone has created one and sold it well.

It is like the economy or climate change or international relations.  The right answer will evolve over time.  Some blind alleys will be tried.  Some assumptions will be thrown aside.  Some new information will come available. But a better answer appears only if the problem or opportunity remains the central focus.  If proving or applying the “right” answer becomes the central focus, then much time and much observable and helpful information will be lost.

There is little value to spinning the facts to save a failing “right” answer. .

No one knows right answers to complex situations.  There are always more variables than their answer uses and some of the things that disappear matter.  Nassim Nicholas Taleb, author of “The Black Swan”  has built a fine and useful career on this point. Build solutions that are workable even when unforeseen events come to pass.  “Antifragile” in his terms.

In personal plans, the same rules apply.  Analyze – Decide – Implement – Review – Reanalyze – Decide again, and so on forever.  Do not expect perfection.  That is why we review and reanalyze.  We missed something the first time.  Learn from objective experience.

Success is not found in perfect answers. It is found in imperfect answers properly modified.

Many problems will tell you how they want to be solved, but they whisper at first.  Listen to them.

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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com

How to Tell the Difference Between Investing and Gambling!

gamblingI saw a question posted on a popular social network. The question was: ‘What is the difference between gambling and investing?” I’m inspired to reproduce (edited with permission) the following excerpt from A Maverick Investor’s Guidebook (Insomniac Press, 2011) which I believe provides as good an answer as one might find.

How to Tell the Difference Between Investing and Gambling!

“How do you develop ‘smart thinking’ and when do you know you’ve got ‘avarice’?”

My instinctive response would be: “You always know when you’re being greedy. You just want someone else to say that your greed is okay.” Well, I’ll say it then: greed is okay. The proviso is that you fully understand when greed is motivating your decision and live with the consequences. Avarice is driven by desire, which is not a trait of an investor.

Remember, it’s best if investment decisions are rational and stripped of emotion. Greed is associated with elation on the one hand, and anger (usually directed at oneself) on the other hand.

When decisions are motivated by greed, I call it gambling. In my mind, there are different sorts of gamblers. Some gamblers place modest bets, and if they win, they move along to another game. For me this might be roulette. There are those who enjoy playing one game they’re good at, such as blackjack or craps, hoping for a big score. Finally, there are those who are addicts. I can’t help those folks, so let’s assume we’re just discussing the first two types.

It’s okay to do a bit of gambling with a modest part of your disposable income. In fact, investors can apply some of what they know and have fun too. Unlike the casinos, financial markets have no limits or games stacked in favour of the house. It’s the Wild West, and if an investor understands herd behaviour and the merits of contrarian thinking, and does some research, the results can be quite lucrative. Whether using stocks, bonds, options, hedge funds, domestic mutual funds, foreign equity or debt funds, or commodity exchange-traded funds (if you don’t know what these things are and want to know, buy a book that introduces investment theory and the various types of securities), applying investment principles will help you be more successful.

gamblerTo put it plainly: counting cards may not be allowed in a casino, but anything goes when it comes to markets. Just don’t forget that most of the financial industry is trying to make your money their money. There’s a reason why a cowboy sleeps with his boots on and his gun within reach.

The fine line between gambling and investing is hard even for old cowhands to pinpoint. Investing also involves bets, but the bets are calculated. Every decision an investor makes involves a calculated bet—whether it’s to be in the market or not at all, biasing a portfolio in favour of stocks versus bonds, skewing stock selection in favour of one or several industry groups, or picking individual stocks or other types of securities.

I met a lady once in line at a convenience store. She bought a handful of lottery tickets, and I asked her, “Aren’t the odds of winning pretty remote for those lotteries?” Her reply was, “The odds are good. There’s a fifty/fifty chance of me winning.” Confused, I asked, “How do you figure?” I laughed aloud when she said, “Either I win or I lose; that’s fifty/fifty, isn’t it?”

A maverick investor knows there’s always a probability that any decision to buy or sell or hold can prove to be incorrect. The objective is to minimize that probability as much as is feasible. It’s impossible to make it zero. This is why financial firms have sold so many “guaranteed” funds lately. People love the idea, however impossible, of being allowed to gamble with no chance of losing. Whenever there’s a promise that you won’t lose or some other similar guarantee, my senses fire up a warning flare.

There’s usually a promise of significant upside potential and a guarantee that at worst you’ll get all (or a portion) of your original investment back. Many investors a few years ago bought so-called guaranteed funds only to find that the best they ever did receive was the guaranteed amount (extremely disappointing) or much less after the fees were paid to the company offering the product. If you think this stuff is new, trust me, it’s not.

guaranteedA fancy formula-based strategy back in the ‘80s called “portfolio insurance” was popular for a brief period. An estimated $60 billion of institutional money was invested in this form of “dynamic hedging.” It isn’t important to know in detail how the math works. Basically, if a particular asset class (stocks, bonds, or short-term securities) goes up, then you could “afford” to take more risk because you are richer on paper anyway, so the program would then buy more of a good thing. If this better-performing asset class suddenly stopped performing, you simply sold it quickly to lock in your profits. The problem was that all these programs wanted to sell stocks on the same day, and when everyone decides they want to sell and there are no buyers, you get a stalemate.

The “insurance” might have worked if you actually could sell the securities just because you wanted to, but if you can’t sell, you suffer along with everyone else—the notional guarantee isn’t worth the paper it’s printed on. Remember these are markets, and even though you see a price in the newspaper or your computer screen for a stock, there’s no trade unless someone will step up to buy stock from you. The market crash that began on Black Monday— October 19, 1987—was, in my opinion, fuelled by portfolio insurance programs. The market was going down, so the programs began selling stocks all at once. There weren’t nearly enough buyers to trade with. By the end of October ’87, stock markets in Hong Kong had fallen 45.5%, and others had fallen as follows: Australia 41.8%, Spain 31%, the U.K. 26.4%, the U.S. 22.7%, and Canada 22.5%.

Minimizing the Probability of Stupidity

If you’re gambling, follow the same steps you would as if you were investing. If it’s a particular stock you are anxious to own, do some homework, or at least look at someone else’s research available through your broker or on the Internet. When I was a younger portfolio manager, there were limited means to learn about a company. I would have to call the company and ask for a hardcopy annual report to be sent to me. When it arrived after several days, I’d study it a bit so I didn’t sound too ignorant, then I’d call and try to get an executive (controller, VP finance, or investor relations manager) to talk to me. If asking questions didn’t satisfy my need to know, then I’d ask to come and meet with them in the flesh. Nowadays, you have all the information you need at your fingertips.

Money.ca is a PRIME example of just one such source of valuable information available to investors today!

Mal Spooner
Mal Spooner

Make Money Decisions a Family Affair

Now that you have chosen your Financial Day and started to get a handle on what exactly is going on in your financial household I highly recommend that you bring the whole family into the discussions and decisions. In most households you have one person who takes on the job of managing the money. They pay the bills, look after the investment decisions, take care of the taxes, choose the insurance, and generally handle the financial aspects of the household. While this does work in some aspects it misses a few important points.

When we are in a financially committed relationship both people need to know what is going on and where things are. Unfortunately ugly stuff like divorce does happen and it can be financially as well as emotionally devastating. Few things are more painful the being blind-sided on the money subject. Even if the relationship is great accidents and illnesses and death also happen. If the primary “money” person is taken out of the picture is the other person knowledgeable enough to be able to step in and pick up the slack? Having a loved one out of commission is difficult on its own. Add in financial confusion and it is much worse.

Getting input and “buy in” from all the people in the house affected by our financial decisions makes for a happier household. When everyone knows what is going on, what our resources are, what are needs are, and what choices need to be made we feel part of the solution and not left in the dark. Having different viewpoints and ideas brought up help us come up with more creative solutions. If a family wants to take a vacation and everyone knows the family budget ideas for making more money and / or saving money can be put on the table. It is a creative problem solving opportunity.

By bringing kids in on the discussions it gives us an opportunity to teach them about the realities of life. No, money does not grow on trees, and living isn’t free. We have certain resources, certain responsibilities, and with that we have to make choices. Wealthy people talk to their kids about money regularly. It is a fact of life and when we have better knowledge about a subject we make better decisions.

We plan and discuss so many things as a family, but unfortunately leave the financial aspects off the table. By putting them out in the open we have an opportunity to all learn and make better decisions as a unit, and eliminate a lot of stress and grief around the subject of money.

“Many people are in the dark when it comes to money, and I’m going to turn on the lights.”
Suze Orman