{"id":5395,"date":"2014-08-12T08:41:01","date_gmt":"2014-08-12T12:41:01","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=5395"},"modified":"2018-09-21T02:03:51","modified_gmt":"2018-09-21T06:03:51","slug":"skills-that-separate-you-as-an-investment-manager-absolute-vs-relative-decision-making","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2014\/08\/12\/skills-that-separate-you-as-an-investment-manager-absolute-vs-relative-decision-making\/","title":{"rendered":"Skills That Separate You as an Investment Manager: Absolute vs. Relative Decision Making"},"content":{"rendered":"

Some of the skills you need to stand out from the crowd as research analyst are obvious: a love of economics, business, and finance; vast knowledge of the preceding; high drive; confidence; persistence; and so forth. But, many of the skills needed for a successful investment management career are not taught in business schools.<\/span><\/p>\n

My series on these unconventional skills<\/a> has thus far covered introspection<\/a>, creativity<\/a>, intuition<\/a>, and decisiveness<\/a>. In this installment, we will discuss absolute vs. relative decision making.<\/span><\/p>\n

Absolute vs. Relative Decision Making<\/b><\/span><\/p>\n

A lack of decisiveness can be cured by the careful application of a meditation practice that leads to greater intuitive insights. Your outward appearance becomes one of a person making \u201csnap decisions\u201d of the sort that Daniel Kahneman calls System 1 decisions<\/a>. But inwardly, the architecture is entirely different. It is not prefrontal cortex vs. amygdala<\/a>; instead it is gamma brain waves vs. beta brain waves. Here your attunement to the environment around you allows you to make absolute decisions, rather than relative ones. Not always, mind you, but in cases when a decision must be made<\/em> and the facts do not determine your answer.<\/span><\/p>\n

Put another way, you do not need to reference data, other experiences, or consult others when making your decisions. Instead, you are able to make decisions because you have developed direct perception of the truth. This ability is similar to Isaac Newton\u2019s flash realization of\u00a0 “the calculus,” which then took two years to describe mathematically. The mathematical proof was for all of the rest of us, as Newton already knew he was right<\/em>.<\/span><\/p>\n

Of all of the skills I have enumerated in this series<\/a>, this is the one that is rarest; I have only ever seen a handful of people capable of making decisions of this quality. Let’s be clear, I am not talking about the person walking around firing her decision gun willy-nilly to take on the outward appearance of decisiveness. No, I am talking about the person that routinely makes absolute decisions whose outcomes are verifiably and measurably smart.<\/span><\/p>\n

Here judgment is purer and free of prejudices and the decision maker is seeing things others cannot see. We have all witnessed athletes \u201cin the zone,\u201d who make decisions absolutely that result in brilliant outcomes. Scientists like to poke holes in the\u00a0hot-hand fallacy<\/a> by looking at more extended sample sizes, but one thing that they do not control for are the self reports of the athletes themselves who say that they are \u201cin the zone.\u201d Instead, scientists assume a constant state of mind in the athlete across the entire sample.<\/span><\/p>\n

Soldiers in combat and police officers in dangerous situations also report similar experiences. Many of these types of heightened “in the zone” experiences are described in the book On Combat: The Psychology and Physiology of Deadly Conflict in War and Peace<\/a><\/em> by Dave Grossman and Lauren Christensen. Through meditation people can develop the ability to tap this deep state of mental awareness in which people report seeing the spin of bullets caused by the rifling of barrels as they come at them. Most importantly, in the state of heightened awareness, many report doing extraordinary things to avoid the danger in which they find themselves. Times such as 9 March 2009, when the global financial markets collapsed, are an example of when the ability to decide absolutely (from heightened awareness), rather than relatively, are critical to long-term outperformance.<\/span><\/p>\n

Remedy<\/b><\/span><\/p>\n

Other than highlighting the benefits of meditation for making decisions, I am not aware of another way to develop this skill set. On the other hand, self-confessed meditator Ray Dalio of Bridgewater Associates has said that any alpha he has ever generated is attributable to his meditation practice<\/a>.
\n<\/strong><\/span><\/p>\n

Application<\/b><\/span><\/p>\n

In a previous post<\/a>, I mentioned my purchase of AES Corporation (AES<\/a>). What I did not state then was that I purchased the majority of the shares on a day in which my trader at Lehman Brothers warned me against buying as it was a day when most of the market feared the company was going bankrupt. In fact, the trader pleaded with me, \u201cAre you sure you want to buy more? You are the only bidder today!\u201d<\/span><\/p>\n

Behavioral economics folks will tell you that I only remember this story because it worked out for me in the end, that I have buried the pain of other such \u201cguesses\u201d that were failures deep within my subconscious mind. Yet, I keep an investment thesis for every business I do analysis on, including those that I do not buy. Further, I review my decisions, even those I do not purchase, and hence have no opportunity to sell, at least quarterly. My records show that this was one of only a few times I ever acted in this way during my career. This was an absolute decision, as the facts of the day were that AES had released appallingly bad news and that it looked likely that it would go bankrupt. So the decision was not made relative to fundamentals.<\/span><\/p>\n

My other decisions of this kind were purchases of Bank of America (BAC<\/a>), General Electric (GE<\/a>), and a sale of K-Mart. These decisions also turned out to be “correct” decisions as evaluated by future market success and failure.<\/span><\/p>\n

 <\/p>\n

\n

Photo credit: \u00a9iStockphoto.com\/CSA-Images<\/span><\/p>\n

 <\/p>\n

Originally published on CFA Institute\u2019s \u00a0Enterprising Investor<\/a>.<\/em><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Some of the skills you need to stand out from the crowd as research analyst are obvious: a love of economics, business, and finance; vast knowledge of the preceding; high drive; confidence; persistence; and so forth. But, many of the skills needed for a successful investment management career are not taught in business schools. My […]<\/p>\n","protected":false},"author":2,"featured_media":5396,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[12,3,319],"tags":[197,136,233],"class_list":["post-5395","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-best-of-the-blog","category-the-blog","category-skills-that-separate-you-as-an-investment-manager","tag-decision-making-science","tag-investment-decision-making","tag-skills-that-separate-you-as-an-investment-manager"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/5395","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=5395"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/5395\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media\/5396"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=5395"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=5395"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=5395"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}