Thinking about how best to design a more robust investment strategy to deal with the prospect of increased volatility becoming the new normal, the best model that comes to mind is from a sporting context: football (or soccer, to most Americans).
Arriving at conviction is not just a simple matter of overconfidence, as is typically suggested by the behavioral finance literature. Investment managers construct narratives to understand prospective investments and often run the risk of being married to that story.
At the recent CFA Society of the UK Annual Conference in London, Michael Mauboussin, chief investment officer at Legg Mason Capital Management, laid out some best practices, including paying attention to process versus outcome, having the odds in one’s favor, and understanding the role of time.
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