Randomness is a hugely distortive force

As the curtain closes to what has been an eventful year, the time has come for many for their end of year portfolio review. Reviews and reflections are handy – in these turbulent times, it is imperative that we remain steadfast in our convictions and beliefs. We also need to learn; for in investments, it is the fastest learner that wins.

Randomness is a hugely distortive force

Here are some questions that you can consider for your reflection/review:

  1. What was your investment return for this year?
  2. How have you organized your portfolio and why is it in this order?
  3. What is your best stock in your portfolio? Why?
  4. Which stock would you like to remove? Why?
  5. What was the biggest mistake you made this year?
  6. What were 3 concepts/things you learn that made you a better investor?
  7. What areas of learning would you like to work on for the coming year?

Amidst all that mental running that you are doing, I think one needs to keep in mind that randomness is a hugely distortive force. With that, comes hindsight bias and we may end up learning the wrong things.

For example, suppose you were considering a U.S defense stock that was already trading at premium valuations. The stock rallied after Trump’s election win. Upon reflection, one may come to the conclusion that “I should have bought the stock”. Assuming you were originally agnostic towards the election results, this would be an erroneous conclusion. The next time you see an expensive stock, you may be more inclined to buy it, to the detriment of your returns.

We need to be minded that investment is an outcome-dependent but process-driven activity. When randomness is at play, we cannot judge our process based on the resulting outcome. Just because a stock goes against your view, does not mean that your process was wrong. There is a tendency to be too harsh on ourselves. Having read many reviews, I am surprised that no one has ever said “this stock blew up, but the decision to invest was a right one”.

Maybe they are being too modest, but just some food for thought.



About the Author

SG Value Investor
I developed my passion for investment management especially equity research at a relatively young age. My investment journey began when I was 20, at a point in time where markets were still recovering from the Global Financial Crisis. My portfolio started from money I saved over the past years and through working during the holidays. I was fortunate to have a good friend with common investing mentality to began my journey towards value investing. To date, we still research and invest in companies together, discussing valuations and potential risks of a company. To date, I manage a fund with a value investing style. Positions are decided upon via a bottom-up approach or smart speculation (a term I came up with when buying a stock for quick profit due to a mismatch in prices in the market due to takeovers/selling of a subsidiary or associate). Apart from managing my own portfolio, I enjoy sharing my research with family and friends, seeking their opinions and views towards the stock. Reading Economics in London, I constantly keep up with the financial news in Singapore & Hong Kong. Despite my busy schedule, it has not stopped me from enjoying other aspects of life. I enjoy a variety of activities in whatever free time I may have – endurance running, marathons, traveling, fine dining, whiskey appreciation, fashion. Lastly, I enjoy meeting new people, discussing ideas and gaining new perspectives towards issues in the world.