HUMMONEY - First things first (Perspective)

- by Greg Lewin

A fundamental misjudgment often applied by investors is the misinterpretation of attribution.  What I am referring to is the assigning of causality to a set of facts and subsequent reactions in the market thereby creating a daisy-chain of future misjudgments which ultimately lead to bad decision making and poor returns.

Human beings are essentially pattern thinkers. We observe, we react and when our action proves in some form positive, we record in memory to once again be recalled when like circumstances again appear. This can either form the basis of knowledge or dangerous habits. Because in today’s fast paced, infinitely complex investment world, informational relationships are in a constant state of flux and the observed/recorded patterns of the past are often no longer accurate predictors of future outcomes.

We saw evidence of this recently in an article published in The Wall Street Journal titled, “Bruised Quant Funds Seek a Human Touch.” This article analyzed the poor performance of the latest (revisited) fashion on Wall Street, computer generated money management. Its conclusion was that the assumption that investor behavior can be modeled and therefore predicted is incorrect. Financial markets are far too complex and fast changing to be mastered by fixed models. Rather they require the added dynamic of the human touch, the ability to evolve and adapt.

My intention is not to leave you with the thought that the problem is too complex for you to trust your thoughts and observations, but rather to help you adjust to be able to better think through the problem of investing. Here are some mental tools I would suggest:

1 – Distinguish fact from opinion. The world is filled with opinion makers who complicate fact by layering in bias and prejudice, and this only gets you further from the truth.

2 – Be careful of habits. This learned pattern formation closes the mind to complete information thereby limiting your knowledge and responses.

3 – Manage ego. Remember when you possess some knowledge or information by definition you more highly value it than other information. This prejudice may be incorrect and harmful to performance.

4 – Challenge all information and thoughts. Always look for the vulnerability, turn the problems inside out. This is the only way you can protect yourself from your natural biases in this fast changing world.

Investing is an incredibly stimulating process which demands a highly agile mind, a focus on facts and an acute awareness of the changing world in which we must adjust and adapt. To succeed we must not only master the world but more importantly how we perceive and process it.

- The views expressed here are of the author, HUMMoney contributor Greg Lewin; currently a General Partner at TLF Capital, an investment management firm. During the past 26 years he has been a senior money manager or partner in Wall Street firms including Neuberger Berman, Charter Oak Partners and Sailfish Capital.