Skills That Separate You as an Investment Manager: Absolute vs. Relative Decision Making
Some of the skills you need to stand out from the crowd as research analyst are obvious: a love of economics, business, and finance; vast knowledge of the preceding; high drive; confidence; persistence; and so forth. But, many of the skills needed for a successful investment management career are not taught in business schools.
My series on these unconventional skills has thus far covered introspection, creativity, intuition, and decisiveness. In this installment, we will discuss absolute vs. relative decision making.
Absolute vs. Relative Decision Making
A lack of decisiveness can be cured by the careful application of a meditation practice that leads to greater intuitive insights. Your outward appearance becomes one of a person making “snap decisions” of the sort that Daniel Kahneman calls System 1 decisions. But inwardly, the architecture is entirely different. It is not prefrontal cortex vs. amygdala; instead it is gamma brain waves vs. beta brain waves. Here your attunement to the environment around you allows you to make absolute decisions, rather than relative ones. Not always, mind you, but in cases when a decision must be made and the facts do not determine your answer.
Put another way, you do not need to reference data, other experiences, or consult others when making your decisions. Instead, you are able to make decisions because you have developed direct perception of the truth. This ability is similar to Isaac Newton’s flash realization of “the calculus,” which then took two years to describe mathematically. The mathematical proof was for all of the rest of us, as Newton already knew he was right.
Of all of the skills I have enumerated in this series, this is the one that is rarest; I have only ever seen a handful of people capable of making decisions of this quality. Let’s be clear, I am not talking about the person walking around firing her decision gun willy-nilly to take on the outward appearance of decisiveness. No, I am talking about the person that routinely makes absolute decisions whose outcomes are verifiably and measurably smart.
Here judgment is purer and free of prejudices and the decision maker is seeing things others cannot see. We have all witnessed athletes “in the zone,” who make decisions absolutely that result in brilliant outcomes. Scientists like to poke holes in the hot-hand fallacy by looking at more extended sample sizes, but one thing that they do not control for are the self reports of the athletes themselves who say that they are “in the zone.” Instead, scientists assume a constant state of mind in the athlete across the entire sample.
Soldiers in combat and police officers in dangerous situations also report similar experiences. Many of these types of heightened “in the zone” experiences are described in the book On Combat: The Psychology and Physiology of Deadly Conflict in War and Peace by Dave Grossman and Lauren Christensen. Through meditation people can develop the ability to tap this deep state of mental awareness in which people report seeing the spin of bullets caused by the rifling of barrels as they come at them. Most importantly, in the state of heightened awareness, many report doing extraordinary things to avoid the danger in which they find themselves. Times such as 9 March 2009, when the global financial markets collapsed, are an example of when the ability to decide absolutely (from heightened awareness), rather than relatively, are critical to long-term outperformance.
Remedy
Other than highlighting the benefits of meditation for making decisions, I am not aware of another way to develop this skill set. On the other hand, self-confessed meditator Ray Dalio of Bridgewater Associates has said that any alpha he has ever generated is attributable to his meditation practice.
Application
In a previous post, I mentioned my purchase of AES Corporation (AES). What I did not state then was that I purchased the majority of the shares on a day in which my trader at Lehman Brothers warned me against buying as it was a day when most of the market feared the company was going bankrupt. In fact, the trader pleaded with me, “Are you sure you want to buy more? You are the only bidder today!”
Behavioral economics folks will tell you that I only remember this story because it worked out for me in the end, that I have buried the pain of other such “guesses” that were failures deep within my subconscious mind. Yet, I keep an investment thesis for every business I do analysis on, including those that I do not buy. Further, I review my decisions, even those I do not purchase, and hence have no opportunity to sell, at least quarterly. My records show that this was one of only a few times I ever acted in this way during my career. This was an absolute decision, as the facts of the day were that AES had released appallingly bad news and that it looked likely that it would go bankrupt. So the decision was not made relative to fundamentals.
My other decisions of this kind were purchases of Bank of America (BAC), General Electric (GE), and a sale of K-Mart. These decisions also turned out to be “correct” decisions as evaluated by future market success and failure.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
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Definitely go to grad school. The CFA exam is curved. A lot of those candidates, including the ~60% of candidates who do not pass, retake the exam. Some say the minimum passing score is re-calibrated to generate future revenue. Others call it a glorified pyramid scheme. Depends who you ask. CFA means you most likely failed twice and spent so much time studying you decided to take the exam again and again. You definitely learn a lot…
According to the CFA Institute, approximately 25% of candidates are not admitted to the exam on exam day by 3rd-party minimally trained proctors (hired by CFA). And no refunds (~$1600/exam + approx 300 hours of study).
This does not include the people accused of cheating during the exam. The exam is not recorded or monitored in any way other than sketchy part-time proctors who barely speak English. If you’re suspected of cheating or “give the appearance of cheating”, you’re SOL. There are more CFA horror stories than successes.
Hi Rick,
I’m not sure what your response has to do with my post, but thank you for volunteering your opinion of the CFA program.
Best wishes for success!
Jason
Rick – Something made you bitter. Let it go.
Achieving the level of absoluteness is the top triangle of the pyramid. It requires a lot of experience and study. Newton was sure of his invention because he had worked hard towards it and analysed all permutations and combinations.
We can afford to make absolute decisions when handling our money. But managing others money makes us accountable, thus forcing us to be a relative decision maker.
Your article reminded me of Ratan Tata’s quote “I take a decision and work towards making it right”.
Hello Puja,
Sorry for my delayed response to your excellent comments and observations! Absolute decision making does require a high degree of experience and study. It is the convergence of these things, plus confidence, surrender, willingness to accept responsibility, wisdom, and ability to translate the world accurately. You are correct that many in the investment management business manage relatively and my piece is not intended as a “get out of jail free card” to make any decision whenever we feel like it. Instead, I meant to highlight the types of decisions that are made under duress where the timing is critical to the successful outcome.
Love your quote! I counsel in my book The Intuitive Investor that a good decision is often >= the perfect decision. We cannot know in advance the perfect decision, so stop scrutinizing every possibility; make your decision; and then manage the consequences. Your quote says it so much more elegantly!
With smiles,
Jason
Love your application/explanation of decision theory in investing. Especially liked your defense of “in the zone” because thought that was a weak area in Thinking Fast and Slow.
Hello Lynnette,
Thank you so much for sharing your thoughts. I think there are many areas of conscious experience not discussed by the financial community at all. Kudo to Kahneman (and Tversky) for initiating this conversation with their decades of work. However, I think there is still much more work to be done, and I find Kahneman’s System 1 and System 2 to be almost as obscuring as it is illuminating. However, his profession, psychology, only recognized that consciousness was a worthwhile area of study in the last 10 years (!). So there is much work to be done. Meanwhile, financial pros rely disproportionately on their minds to do their work. So again, thanks for your praise, as it fuels the engine of these discussions.
With smiles!
Jason
Thanks for inspiring my thinking. Try to get a handle on time scale and if persons can be better at short vs long. If there are differences then what are those differences. Does risk tolerance associate with short/long investing? If one is risk avoiding then do they stay long term? Or the other way around? I am in my spare time thinking about my investments as well as using my exploration into these question to help me win in fantasy football. Enjoy your articles.
Hi John,
Thanks, and you are welcome!
Risk is determined specifically by the choices that you make. If you make choice A then there are risks unique to choice A. If you make choice B then there are risks unique to choice B. So your choice in large part determines which risks to which you are vulnerable.
Yours, in service,
Jason