Investment Work

Investment management isn’t like other work. In all cases of physical labour, input is directly proportional to output. When a person decides to dig a hole, the more he digs, the bigger the hole gets. The more people work together at assembly a car, the faster it goes. Intellectual work is different. Because insight arrives all at once, the time spent considering a problem is not proportional to the payoff of the solution.

Investment management, or stock trading, is different again. Although it requires some insight, it is also an interaction with a market. We don’t thoroughly understand the dynamics of a market (it isn’t a case of Brownian motion and doesn’t fit the parameters of Gaussian statistics), so although we can measure the input (time spent in research), we can’t predict the output. How much additional research time (fundamental or technical) will translate into an extra 1% of return? There isn’t an answer to that question.

That doesn’t mean we can ignore our investment portfolio. Because markets are volatile and movement is unpredictable, an investor needs to watch the investment portfolio for a scenario where action is required. Some examples may be a sudden price movement, up or down, that presents a selling or buying opportunity; a surprise announcement by a company, suggesting improved or worse performance in the future; or even an economic development that will favour one asset class over another (eg. increasing interest rates favouring stocks over bonds).

But it isn’t helpful to constantly tinker with a portfolio. Frequent trades rapidly increase costs to the portfolio. Further, it’s difficult to assess the total impact of a small number of actions over a period of time, determining whether the manager is helping or hurting the annual return. On top of that, getting the timing right to buy and sell, over a short hold period, is a lot more particular given that the total return for the trade will be small. Over a longer period, and a larger total return over that period, buy and sell timing will be more forgiving.

As Peter Cundill says in his new book (which I haven’t read yet), there’s always something to do. While I check the market and my portfolio once or twice a day, I really don’t expect to do anything about it. I make all my investment decisions once a week, after Friday’s close, while I have all weekend to calmly reflect. And I don’t act every week. I place trades as market conditions or cash buildup allow, typically less than once a month. For me, this schedule has worked profitably.

Which brings us to the dilemma of professional investment managers. They go to work everyday. They receive generous paycheques. So in order to “earn” their income, they stay busy all day every day trying to find ways to add value to their portfolio. This is not the ideal schedule to follow. Being connected is important, because an opportunity to act might arise any day. However, while there is always something to do, trading should be done on a slow-paced schedule, allowing ideas to mature and prove their worth.