Above The Fray: Creating Serenity by Jeffrey Stacey, Stacey Muirhead Capital Management
Since I began my career as a professional investment manager, I have always spent time thinking about what inputs are necessary to create an ideal environment for optimal investment decision making. While this topic has been getting more attention from investment managers and their clients in recent years, it is still not given enough attention by most in my judgement. While this blog will only scratch the surface of this important issue, let me start by saying that creating an ideal environment involves both external considerations as well the ability for a manager to show some discipline over his or her internal behaviour. While there are many aspects of creating the ideal environment that are common to most managers, I also believe that many aspects are unique to each individual. It is crucial for a manager to figure out these unique considerations about their individual situations and rigorously adopt them as quickly as they are discovered. In my case, I must confess that I have learned too many of these considerations through trial and error, often costly, rather than through a deliberate and proactive process.
Consider the following statement from Warren Buffett:
“I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business. I do it because I like this kind of life”.
Given that Warren Buffett’s primary responsibility at Berkshire Hathaway is capital allocation, he could have just as easily substituted the word investing for business in the quote above.
If a worthy goal is to create an environment where, like Warren Buffett, I can spend a great deal of my time reading and thinking, what is necessary to achieve that? At Stacey Muirhead, it starts with a clear separation between the investment and business functions. I try to abdicate all business responsibilities (or as many as possible) in order to concentrate on the investment process. Fortunately, I am blessed that Mark Eamer, our President and Chief Operating Officer, both understands the importance of this and accepts the responsibility for managing all aspects of our business operations. I also benefit from the wonderful efforts of Rosalie Grosbein and Linda Kawecki who work diligently to divert as many distractions as possible away from my desk. Please do not underestimate the importance of this as the bedrock for creating an ideal investment environment at Stacey Muirhead.
In my immediate office environment, I have taken many steps to deliberately eliminate distractions in order to create a reflective environment where I can just read and think. There is no television with CNBC in my office and no Bloomberg machine on my desk spewing out the latest stock prices. The volume on my computer is turned off so that I am not greeted with that familiar ringing sound (you know the one) each time an e-mail hits my inbox. I try to look at and respond to e-mails only a couple of times each day. While I do not dispute the wonderful productivity benefits of smart phones, like my computer, I keep all of my settings on silent and try to respond to things on my terms rather than being a slave to my device. Be honest, don’t you know someone who simply cannot resist grabbing and looking at their smart phone within a nanosecond of hearing that familiar notification sound, feeling the vibration or seeing the flashing light! This is not helpful to creating a successful “read and think” environment and I have tried to solve this problem by attempting to manage my technology and not letting it manage me!
While this is only a fraction of the things I have done (or ruled out!) in an effort to create the ideal environment for optimal investment decision making, it is also crucial to consider the many behavioral traps that can grab you after you have dealt with the external diversions. While this is a topic that I hope to explore in more detail in future blogs, let me quickly share two of the most frequent offenders that you must guard against in your investment activity. These two considerations are “extrapolating the recent past” and “confirmation bias”. There is a tendency to overweigh recent news in making investment decisions. When the news is all good there is a behavioural tendency to assume that everything will always be good. Similarly, when there is recent bed news about a company, there is a behavioural assumption that things will always continue to be poor. While this can certainly be true in some circumstances, more often than not, reversion to the mean takes hold. With “confirmation bias”, an investment manager tends to consider only the facts and analysis that support the decision they have taken or want to take while behaviourally ignoring or minimizing the facts and analysis that lead to the opposite conclusion. While avoiding these behavioural traps is one of an investment manager’s greatest challenges, at least recognizing their wealth destructive tendencies is the first line of defense.
So, have we created investment serenity at Stacey Muirhead? While it will always be a work in progress, I do know that our investors have and will continue to be well served by the efforts we have and are making to identify the inputs that are necessary to create an ideal investment environment.
“Above the Fray” is a regular blog written by Jeffrey Stacey, Chairman and CEO of Stacey Muirhead Capital Management Ltd., which discusses items of interest related to investing, finance and business. This is not a solicitation