Different problems = different approaches


The distinction between puzzles and mysteries is an important one. If you believe the future is a puzzle, then the obvious way to solve it is to hire more researchers, collect more data, perform more analysis and make more predictions.

If you consider the future to be a mystery, though, you’d have to wonder whether adding to the volume of information will only make it more difficult to invest. With mysteries, a lack of information isn’t the problem. What’s needed is insight. In his book The Most Important Thing, Howard Marks describes insight – or, as he puts it, inference.

“The essential ingredient here is inference… Everyone sees what happens each day, as reported in the media. But how many people make an effort to understand what those everyday events say about the psyches of market participants, the investment climate, and thus what we should do in response?

“We must strive to understand the implications of what’s going on around us. When others are recklessly confident and buying aggressively, we should be highly cautious; when others are frightened into inaction or panic selling, we should become aggressive.”

If you believe – as I do – that the future is both uncertain and unknowable, then asset allocation is a mystery. Instead of collecting more data or performing more analysis, we need to understand what’s happening. Because we’re dealing with the uncertain and the unknowable, our understanding of the future will always be imperfect.

Any insight we may gain will always be subjective and we may find that we have to change our minds often, as new information becomes available. We can only develop insights about the future by making inferences based on our experience and our skill in understanding what is happening around us.

But we don’t have enough time to pay attention to everything. When it comes to insight, not all information is of equal value.


Offence not defence


Time is our most important asset and using it wisely is a competitive advantage.

In his book Best Practices for Equity Research Analysts, James Valentine, a former director of global training for security analysts at Morgan Stanley, describes two kinds of research analysts. “The defensive analyst attempts to digest all incoming information, regardless of its importance in generating alpha, primarily out of concern that something will be missed…

The analyst who is on the offensive learns to ignore most, if not all, of the noise, so as to explore unique avenues that may lead to great stock picks… Successful analysts spend most of their day on conducting research offensively, specifically focusing on activities that help discover unique insights about critical factors.