Feedback Loops
Investing is a fascinating field because it’s really hard to pinpoint what makes a great investor. It’s not necessarily the person who has the most information, the best math skills, the most discipline, the most patience, the best understanding of the global economy, or any combination of those. And even if someone is the ultimate, optimal investor, they may not stay that way for long because markets are always changing anyways. The good news is that because of this, just about anyone can be a good investor. If you’re reading this, I’m going to assume that like me, you are also striving to improve as an investor. Today I want to cover the question of how you actually do that, with a focus on feedback loops.
Feedback is crucial to improving at anything, but it can be tricky in investing. Depending on the strategy, your feedback loop can be extremely short, way too long, or send the wrong message altogether. A day trader can think they’re an absolute genius, the dumbest person alive, or both within the span of a single day. An allocator focused on venture capital or private equity may not actually know how an investment turns out for close to a decade, which is too long to be of any use. There’s also “resulting,” a term popularized by poker player Annie Duke, which describes how people judge the quality of a decision based solely on the outcome rather than the process, failing to recognize the element of chance.
To complicate things further, it’s often not entirely clear who is responsible for any one decision or where the decision went wrong. Most allocators are part of an investment team with a setup that allows for plenty of different angles to take credit or place blame. For example, let’s say a young analyst who covers US Equities leads the selection of a new large cap fund that performs poorly. What should be the takeaway? Maybe the analyst had a poor process for selecting that fund. Maybe other members of the team or investment committee should have paid closer attention and nixed it. Perhaps the problem is that the investment committee shouldn’t have tasked the analyst with looking for an active manager to begin with. Then again, it could just be that the fund manager has a style that’s out of favor and performance will improve with time.
With all these considerations and more, it requires intentional effort to both receive and interpret feedback that will help us learn and grow. While I still wrestle with the best way to learn from different situations, here are some ideas that I’ve found helpful:
Write it down – Always record (and timestamp) your investment thesis for any investment decision you’re a part of. The more details the better.
Measure results – This should go without saying but I’ve seen many investors fail to specifically quantify their actual results.
Benchmarks – Use appropriate benchmarks – not just the cherry picked ones that will make you look better or make someone else look worse.
Opportunity costs – Follow strategies that you considered but ultimately passed on to see how they turn out. Also follow strategies that you terminated.
Personal account – Pay close attention to your PA since this is usually the purest way to assess yourself as an investor—no restrictions, constraints, committees to approve, or other excuses you can use!
Honesty – Be honest with yourself. For the good outcomes- was it really skill or mostly luck? For the bad outcomes- was it really someone else’s fault or were you responsible? This is undoubtedly the most important one and there is no substitute.
I’m always looking to add to this list so send in any helpful ones that you have!
