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The balancing act of investing

Sunday, December 3, 2017

Investors typically face two types of difficulty when trying to understand or make investment decisions: one from not enough skepticism, and the other from too much skepticism.

The first difficulty can arise when an investor seeks out a specific formula to reach a “precise” answer when considering an investment decision.

The issue here is that once obtained, such an answer can essentially have an anchoring effect.

In fact, the very process of computing gives the resulting answer a feeling of credibility in the investor’s mind, which can create a psychological barrier to further, more nuanced forms of thinking.

The “formulaic approach” can make an investor vulnerable to mistakes or outright manipulation as formulas, by their very definition aren’t able to incorporate broader considerations that bounce around the investment universe.

Formulas, while useful guides, tend to narrowly focus on very distinct variables.

Too much skepticism on the other hand, manifests itself whereby an investor may feel that forming reaonably solid investment conclusions is even at all possible.

Complexities around businesses, and the absence of fully formed answers lead many into thinking that analysis of any kind is an exercise in futility.

That said, complexity is not unique to the world of investing.

In fact, a discipline such as medicine, for example, perhaps addresses problems far more complex than investing - investing typically is not life or death, whereas as medical decisions can be.

As in other fields, investing riddles exist along a continuum from the simple to the incomprehensible.

An investor can, however, through diligence, time and effort, gradually move up the ladder of complexity.

All told, the real skill for the investor is finding the “happy medium”

Instead of gullibility or senseless skepticism, investing requires a sensible middle ground where quantitative and qualitative approaches help guide judgements and decision making.

In other words, the shrewd investor is able to recognise - and avoid - circumstances that cannot be solved, and instead, focus on those situations that are accomodating to competent analysis, given his or her skillset at a given moment.

Really, the purpose of analysis is not so much to reduce a decision making process to a “single number”, but rather to get a sense of a situation in its entirety and bring to the fore those forces that may affect a company’s economic worth.

Being able to juggle both approaches is typically what separates the good, from the great.

Andre Worrell