In a post last month, Anne Maggisano provided one step towards better investment decision-making: to consider the range of possible outcomes and the probability of their occurrence before making a decision – in other words, to think deliberately about your investments. But you may be asking yourself, “How do I find the time to consider each investment possibility when there are seemingly infinite decisions open to me? In reality, it may sound closer to, “The more I think about it, the more I feel I’m drowning in a sea of information!” Indeed, it is not easy; as human beings, we have difficulty dealing with too many decisions, and can become easily overwhelmed. To elaborate, I’ll turn to a study described in Daniel Pink’s book To Sell is Human: The Surprising Truth About What Motivates Us.
In this study, researchers set up a booth at an upscale grocery store with the purpose of selling jam. During the first week they offered 24 varieties and the second week they offered just six. The study found that, while more customers stopped the first week at the booth with additional variety, an increase in customers did not equate to an increase in sales. Only 3% of customers made purchases the first week, compared to 30% of customers the second week at the booth offering less selection. When overwhelmed by the options, most customers avoided making any decisions.
The title of a 2004 book by Barry Schwartz says it all – The Paradox of Choice: Why More is Less. Schwartz discusses an alternative reaction to that experienced in the jam study. When overwhelmed by choice, people may make poor decisions – and lots of them. In our May 2007 issue of The View from Burgundy, titled “Reflections from the Funhouse,” David Vanderwood, Senior Vice President and Portfolio Manager for Canadian equities, applied Schwartz’s ideas to the general investor. “Having almost unlimited options encourages people to make too many decisions, and to feel worse about the ones they have made. In turn, this propels people to change their minds a lot, leading to a vicious cycle of change and regret. Mr. Schwartz’s book focuses on daily life and its many decisions, but it has obvious applications for investors and corporate managers.”
So how do we learn to step back and consider the outcomes of each decision amid an ocean of possibility? At Burgundy we break the cycle by having a clearly defined philosophy and process that narrow our scope, eliminating the noise caused by all those inconsequential decisions floating around the markets. Our attention is focused on what is most important, offering us the clarity, time to deliberate and confidence to know that we have narrowed our scope to only the most critical of decisions. Furthermore, this focus, clarity and confidence allows us to act without hesitation when opportunities present themselves.
From an individual investor’s perspective, if this amount of decision-making still makes your head spin, you can narrow your choices further, down to just one: which firm you will hire to manage your investments. Yes, there is much work to do to assess possible managers before making a selection (and you should continue to monitor your manager on a yearly basis), but once you have selected a manager you trust – with a philosophy and approach aligned with your own and a focus first and foremost on your long-term objectives – you should be able to sleep easy knowing that the critical decisions are being made on your behalf.
To learn how to assess your manager, see our recent View from Burgundy, “Surviving Success: Investment Management and Value Added.” For more on decision-making, I recommend reading “Reflections from the Funhouse.” When you feel the waters rising around you, it can act as a life preserver and provide perspective.