In Investing Focus On What You Can Control

In investing, focus is important.  We have to divide the world into what we can and can’t control.

Will North Korea (snicker) or Iran (no snicker) get nuclear arms?  I can’t control that, an I am not sure what I would do if I knew what would happen.

Will the Fed move to inflate goods prices, as opposed to their quantitative easing which mostly affects asset prices?  Or will they look to protect nominal values of debt, and deflate?

What can past market crashes teach us about the current one?

The markets have largely recovered since the March selloff, but most would agree we're not out of the woods yet. The COVID-19 pandemic isn't close to being over, so it seems that volatility is here to stay, at least until the pandemic becomes less severe. Q2 2020 hedge fund letters, conferences and more At the Read More

There are many things that I don’t know; if I did know the future with certainty, I am sure that most other people would know it at at least a lesser level of certainty.

So focus on what you can control, rather than what you can’t.

  1. You can control your own behavior.  You can’t control the behavior of others, whether it is those who invest alongside you, or manager behavior, or that of clients who invest more and less at the wrong times.  Optimal behavior might mean buying things out-of-favor after the fury of selling has gone cold.
  2. If you are a manager, you can guide, but not control client expectations.  You can educate them on your willingness to take risk, but you can’t control their emotions.
  3. As a manager, you can tell investors the mandate toward which you are managing — and then you must manage within it, because your investors expect it.
  4. You must match the liquidity of investments to the need for liquidity.  Value investors must stress patience.  Hot money investors must keep things liquid.  The same applies to time horizon.
  5. Market conditions may be depressed or ecstatic.  You can’t control movements in the mood of the market, but you can adjust your position so that you can benefit from likely future change, if valuation measures are extreme.

This is one reason why I try to limit the number of decisions that I make, for myself and clients, while trying to make better decisions for all of us.

In general, I think better investment decision-making stems from diversification where you don’t know more than the market, and concentration where you do know better.

By David Merkel, CFA of Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.