Play your own game.
Play your own game, even if it means creating one that does not yet exist.
One of the most efficient ways to deal with kids’ temper tantrums is to have them choose between two outcomes. The offer is usually a tiny sample vis-à-vis what is possible, but the act of choosing gives children a sense of control, even freedom, and helps parents achieve a result. Like children, investors must often choose. Pouring money into redundant business models in search for yield and because the risk-free rates are low, trading at someone else's price, having to compromise between the financial and social value of an investment are all examples where one must choose better.
Uncomfortable but necessary.
Learning and practice enable consistency, and mistakes are the prerequisite of learning.
The consistency of execution and learning from mistakes set apart professional from an amateur – performance, acknowledgement and pay usually follow as a reward. To become a good decision-maker, create an environment, for yourself and others, where one can safely fail, manage associated risks, and learn from the experience. A single mistake, however, should never threaten the performance of the portfolio or the business, nor should it compromise the integrity of the person who makes it, or the team.
Honesty and conviction.
Reflect on how many things you know well.
Honesty about conviction levels will inform the number of choices you make as well as the ones you choose to scale. Conventional wisdom, and the modern portfolio theory, suggest that higher diversification leads to lower risk, but investors can also regret making some of the choices. Good diversification should never mean buying more problems, and when the size of the trade outweighs one’s conviction, it is closer to gambling than investing.
Learning compassion.
Compassion and finance rarely show up together in the same sentence.
Life lessons, which we experience personally are most remembered, but we can also choose to learn from others. Empathising with someone else’s struggle without judgement can make their experience ours. Those lessons are most valuable – they are instantly relevant, infinite in number, rich in content, and generous in detail. Empathy and compassion make lives more fulfilling and financial journeys more exciting and far less expensive. Do not be discouraged if compassion does not come naturally, it is a skill one can learn.
Managing limitations.
Best investment ideas do not live in perfect models but in their limitations.
Building investment portfolios, trading, attributing risks, designing products, perfecting sales, empowering people, combating the effects of climate change, and making an impact are all examples where knowing one’s limitations, and managing the breakevens, is far more important than chasing an ideal solution that does not work.
Cheapness is fiduciary.
Structural and tactical cheapness differ from one another.
The former is based on the long-term value, while the latter is more prone to change. Crowds’ behaviour and exclusive reliance on the relative value arguments can often compromise valuations and create unintended consequences. Structural cheapness is fiduciary - it is endogenous to investment and tied to its liabilities. Clients’ goals and performance expectations must drive the suitability of risk, return, and impact of any investment. Financial, social, and environmental risks all matter in this context, irrespective of whether the investees explicitly disclose them or not.
Price of a bond is the price of its hedge.
The price of an interest rate swap is the price of all cash flows associated with its perfect hedge.
This simple principle can help evaluate all investments. Finding an ideal hedge for some assets may be difficult, but one can always improvise to get close enough. Not finding a hedge has its own invaluable signalling merits. As a general rule, if you cannot sell anything more expensive than your ‘cheap’ asset, reconsider buying.
Liquidity is a function of knowledge.
Liquidity is the ability to change your mind.
You will always need another to complete a transaction. Various factors will matter, but inevitably, both parties must be able and willing to trade. Knowledge is the key to unlocking the will. Balance-sheets always appear if assets are cheap enough, but they never do when investors do not know what they are buying.
No such thing as too little money.
Unlike equities, bonds transact over the counter, and price discovery in fixed income is no easy task. Yet, the price is the most crucial and all-encompassing piece of the puzzle one will need to make an investment decision. Information is the real asset in finding a price, and it can be obtained by observing even the smallest trade.
The most expensive word in finance.
Reality is the most dangerous word in all decision making.
Language is a primary method to describe ideas - nouns, verbs, and adjectives are its tools. For precise objects, we use nouns, and to explain concrete actions, we use verbs. Adjectives are descriptive but imprecise - they invoke a feeling, trigger an emotion, and can be easily manipulated. Calling something reality is the quickest way to sell an idea or a product. Reality is an adjective disguised as a noun; it bypasses logic and triggers a feeling of trust and safety because people rarely question what is real. Sound investment decisions are never based on emotions, but on facts and logic, which are best described by nouns and verbs.
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