Author Topic: % of correct investment decisions and % of investment income you spend?  (Read 6138 times)

Jurgis

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Re: % of correct investment decisions and % of investment income you spend?
« Reply #10 on: November 28, 2016, 10:16:55 AM »
How can you determine the number of correct decision you took? Serious question. Many decisions can be totally correct, yet have an unfavorable outcome because of bad variance.

One answer that is promoted by a lot of people is that you only evaluate process rather than outcome. So a decision is "correct" if you followed the process (e.g. if you're a Buffetty investor: ensured that business had moat, was not in decline, trading at reasonable FCF, whatever else) irrespective of what the investment result was.

Of course, the problem with above is that you could have (almost?) perfect process and still crappy results. E.g. you could have bought AXP 5 years ago (arguably good Buffetty process?) instead of MA/V or even SPY and your results would be crap. Maybe not perfect example, but IMO somewhat reasonable one. So at some point you have to evaluate your results too. Or somehow evaluate the process results in comparison with what else you could have done. Not sure how this would work though.
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SharperDingaan

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Re: % of correct investment decisions and % of investment income you spend?
« Reply #11 on: November 28, 2016, 01:59:36 PM »
'That doesn't answer my question. You can hedge against X, and X doesn't happen. Does that make it a bad hedge? Perhaps X occurring was a 50% probability event, and the coin just landen heads instead of tails.'

If you lost $ - WHEN YOU CLOSED IT OUT - it was a bad hedge.
The hedge itself may have been bang on;  but it was put on too early/too late, lifted too early/late, or the event just didn't occur (as you thought it would). As with any tool, there is a cost to using it, & the skill is in how you apply it; in 20/20 hindsight you just made the wrong choice.   

But ... if you find that you mostly lose at hedging - either stop doing it, or go to cash.
You hire a plumber for a reason - he/she is good at it, you aren't, and the cost of the repair is a lot lower if he/she does it.

It's a brutal test ... but if you can learn from it, it will serve you well.

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rawraw

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Re: % of correct investment decisions and % of investment income you spend?
« Reply #12 on: November 28, 2016, 03:22:37 PM »
If a hedge is insurance, shouldn't it be a small cost to prevent large left tail risks?  Perhaps I'm thinking about this too literally, but the effectiveness of hedge trades (I'd assume) should manifest in the volatility of the portfolio vs the index.  No?

Also, process is more important than outcome IMO.  But not all process will produce good outcomes.  My process could be go overweight every time it is a full moon.  I could never break it but get terrible outcomes.  So the results should be holistically viewed not as just a bunch of outcomes, but also a function of the process.  Ideally the process should increase your success rate and you can tweak it over time to get better
« Last Edit: November 28, 2016, 03:24:36 PM by rawraw »

SharperDingaan

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Re: % of correct investment decisions and % of investment income you spend?
« Reply #13 on: November 28, 2016, 04:44:40 PM »
Agreed the hedge is a cost.

But think of a hedge as simply a sell (to protect against a price decline) & a later repurchase of the same number of shares. On entry, the cost of the hedge is unknown - it is the potential loss on repurchase + 2 commissions. However, if the hedge event occurs; the cost becomes negative - it is the gain on repurchase - 2 commissions. A successful hedge is a profitable hedge.

The purpose of process is to produce result, result matters. The question is what is the right metric, & right timeframe, by which to measure. Most would agree with time weighted return, but 1 trip around the sun is pretty meaningless.

SD


If a hedge is insurance, shouldn't it be a small cost to prevent large left tail risks?  Perhaps I'm thinking about this too literally, but the effectiveness of hedge trades (I'd assume) should manifest in the volatility of the portfolio vs the index.  No?

Also, process is more important than outcome IMO.  But not all process will produce good outcomes.  My process could be go overweight every time it is a full moon.  I could never break it but get terrible outcomes.  So the results should be holistically viewed not as just a bunch of outcomes, but also a function of the process.  Ideally the process should increase your success rate and you can tweak it over time to get better

RichardGibbons

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Re: % of correct investment decisions and % of investment income you spend?
« Reply #14 on: November 28, 2016, 06:32:56 PM »
If you lost $ - WHEN YOU CLOSED IT OUT - it was a bad hedge.

This is outcome-oriented thinking that I strongly recommend against.

Don't think of fire insurance as a waste of money, even if your house didn't burn down.


Seahug

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Re: % of correct investment decisions and % of investment income you spend?
« Reply #15 on: November 28, 2016, 07:14:55 PM »
Don't have a perfect answer for scoring. Some obvious ones including for mistakes I still make -

1) Let's say you made a correct call on company/industry with respect to how it would go business wise + 1 and :
a) correctly sized in relation to your targets +1
b) too small position, don't add even if makes sense -1
c) sell too early (fear/panic, too short term, incorrect long term value assessment) - 1 (impact can be a - 10  :)) )
d) something unexpected happens - fraud, delayed earnings, disaster; neutral and it depends how you assess the situation (is it temporary WFC, existential VRX) and what you do; ideally you don't have too many of these 
e) lack of real understanding of value for ex do you invest at the peak of the auto cycle when it looks cheap -1
f) too optimistic, requires some things to go right - 1
g) too much risk/debt - 1
h) right call on industry/company but you bought the wrong company/instrument (debt vs equity for ex) -1

2) Let's say you made a wrong call on the biz/industry - 1 because u failed to:
a) identify problems in the biz model/co or industry - VRX, something probably quite wrong
b) admit a mistake & cut your losses - 1 again; + 1 if you cut
c) understand business/identify value drivers and just buy based on what numerically looks cheap
d) understand or underestimate competition existing + new or technology obsolescence

I guess this is where it makes sense to stick to what you know. I'm not really built that way. I like doing this because I learn new things. Can be maso at times.

3) Not enough homework for ex:
a) liking concept & guessing - 1
b) just following smart guys  - 1
c) overconfident because did really well past few investments - 1
d) don't ask what else could happen (10th man rule - World War Z :) )   - 1
e) relying on rules of thumb vs doing actual work - 1
f) not looking at entire industry chain over time - 1
g) not understanding valuation parameters, real risks, catalysts for business  - 1
h) not finishing analysis, lost opportunity - 1

4) Behavioral lots of these (lack of objectivity, stuck on regret, pride, hope to solve probs, analysis paralysis, d--k for a tick, not willing to stop if wrong, giving up after a few mistakes etc)

5) Overall portfolio errors
a) too many risky bets
b) all in the same industry or business cycle - financials + real estate + construction
c) too levered; scenario where u can go bust or get really hurt
d) don't understand or appreciate all the risks 

Sometimes takes longer to know, but we just do the best we can.

Making the wrong decision and being lucky...is not my karma. I have to work for/earn what I get which is ok and just fair. Lots to be thankful for.

Hedging is something I am maybe at a 4/10 level though I've been at it for a long time. I think there's something there though as I'm losing less on it now. Haha.

Cheers!